Once again the government's flagship rice-pledging scheme has returned with a vengeance to the front pages and public debate, as the cabinet approved a budget of 405 billion baht to extend the programme into its second year, until September 2013. Conditions remain essentially unchanged.
One of many rice mills in Ayutthaya which has joined the government’s rice pledging scheme. But investors rather than producers look to be the beneficiaries of the programme.
Thus far, Thailand has already spent 260 billion baht on subsidising rice prices. About 26 million tonnes of paddy is expected to enter the new pledging round.
The scheme's longevity is disconcerting. Preliminary outcomes of its first-year implementation have shown several adverse consequences. The short-term effects are worrying enough. Huge fiscal losses are by design unavoidable. Perhaps the government can justify to taxpayers _ and I hope they soon will _ how this fiscal burden is considered a small price to pay for farmers' income security and improved quality of life.
Whether or not the intended beneficiaries do indeed gain from the scheme, its long-term effects can induce structural changes in the rice business and market mechanism and must be rigorously analysed and debated as part of the national agenda.
For the short-term outlook, price competition is of major concern. The government guarantees to purchase from farmers at 15,000 baht per tonne for white rice and at 20,000 baht per tonne for jasmine rice. This is driving the prices of rice exports 30-40% above those of Vietnam and India, effectively making Thai rice the world's most expensive. Rice exports have declined continuously since late last year at the onset of the pledging scheme. Over the first seven months of this year, the volume of rice exports dropped by 46%. Both India and Vietnam are set to overtake Thailand as the world's largest rice exporters for the first time in three decades.
About one-third of the previous in-season crop went to the programme, compared to about 90% of the recent off-season crop. Going forward, nearly all rice output is expected to take advantage of unrealistically high prices. At the same time, rice in the government's stockpiles is deteriorating in quality.
It is inevitable that Thailand will soon face huge losses when it releases the massive stocks, with the government potentially realising up to 100 billion baht in losses. The second round of government purchases could be bigger while the global rice supply forecast is higher _ causing an even greater loss.
Longer-term consequences are a gradual departure from traditional small-scale rice farming, and the declining quality of Thailand's rice production. We as a nation should decide whether these structural changes are desirable.
Under this mechanism, the government becomes the largest rice buyer in the market, bypassing middlemen and agents. Farmers and rice millers who participate, in effect, are state employees.
In addition, rice farming has become a business that creates large profits for investors, rather than one that essentially supports the livelihood of those engaged in traditional small-scale farming. Investors can reap benefits from the high subsidised prices. They can easily rent or own land for rice cultivation and conduct a rice-trading business. In such cases, does this scheme truly target the right beneficiaries?
The more worrying issue is the degradation of rice quality. Typically, features that define rice quality _ thus impacting price _ include moisture content, purity degree and grain dimension. They are simply ignored because the scheme is designed to accept every single grain without differentiating quality, which is the key element to boosting competitiveness in the long run. Farmers are likely to select short-growing cycle rice in order to maximise output and land productivity. Not only will this shift mean less attention will be paid to developing rice varieties; but it will also affect the fertility of the soil, leading to increasing usage of chemical fertilisers.
The big question is, "What should the appropriate policy be for Thailand's long-term competitiveness in the rice market?". Instead of a quick-fix solution like the rice-pledging scheme, we should focus more on longer-term, sustainable solutions such as improving rice quality and boosting productivity. We need to formulate a clear-cut strategy to develop our rice industry. A desirable roadmap should highlight the following aspects.
More R&D investment is crucial to stay in the game. According to Thailand's Rice Department, Vietnam has spent 15 times the level of Thailand's miniscule budget on rice research of 200 million baht in 2010. Vietnam's rice productivity is at 900kg per rai, in stark contrast to Thailand's 450kg per rai _ among the lowest in Asean. Despite two-fifths of our labour force being in the agricultural sector, funding for agricultural research in Thailand is substantially lower than that of developed economies, albeit with their smaller agricultural sectors.
This urgently calls for an agricultural research system for new breeds with higher yield and pest-resistance qualities, as well as premium-grade rice _ taking advantage of the demand for organic and naturally nutritious rice from increasingly health-conscious consumers.
Rice-based irrigation systems and logistics efficiency require a serious upgrade. About 80% of rice fields in Vietnam are located in irrigated areas, compared to 25% for Thailand. Besides the irrigation system, resources should also be allocated to improving the water transportation network as water transport is the cheapest way to transport heavy goods and bulk cargos such as rice and grains. The logistics costs for rice production in Vietnam are about 10% lower than Thailand because of the reliance there on water transport.
Producing more rice experts is key to innovation and technologies for rice farming and value-added products. From 1967-1997, Thailand produced only 50 new rice researchers, an average of fewer than two persons a year. The situation has not improved since. The lack of research capability hinders us from developing more novel, high-value products from rice (such as rice snacks and rice wine), and from penetrating into niche consumer groups.
Failure to develop the Thai rice industry will result in greater setbacks come the official launch of the Asean Economic Community in 2015. Besides Vietnam and India, which have surpassed Thailand as the main rice exporters this year, many economists are already predicting that Myanmar, amid the rapid opening of its economy, will eventually regain its lead of many decades ago as a top rice exporter.
The Asian Development Bank (ADB) believes Thailand may regain its position as the world's leading rice exporter if the rice-pledging scheme ends soon.
That is a pretty big if, given the recent extension of the scheme. Whether one agrees with the ADB's prediction or not, the long-term view does not look rosy for the Thai rice industry. Is it not time to consider reallocating resources from this costly short-term response toward longer-term solutions for a more sustainable and competitive industry?
Dr Sutapa Amornvivat is Chief Economist and Executive Vice President at Siam Commercial Bank. She has international work experience at IMF, ING Group and Booz, Allen, Hamilton. She received a BA from Harvard and a PhD from MIT.
About the author
Writer: Sutapa Amornvivat