Price guarantee policy offers farmers more chances

Let me make it clear from the start that I have no objection to some state subsidy for rice farmers. However, the debates are often clouded with more emotions than logic.

A labourer works amid sacks of rice belonging to the government’s rice-pledging scheme at a warehouse in Nakhon Pathom. The subsidy scheme buys paddy from farmers for as much as 50% above market prices and carries a fiscal cost that has made the rice uncompetitive on global markets. (EPA file photo)

There are two points to consider.

The first point is the burden on the state.

Even those who support helping the farmers should still question how much burden there is, and also how it should be financed.

A subsidy financed by tax would not affect the country's credit much. It would be a simple transfer from the richer to the poorer.

But if it is financed by increases in public debt, the country's credit standing may be at risk.

To guard against this risk, the government should provide the public and rating agencies with all the up-to-date figures in a transparent manner.

Without clear facts directly from the government, financial analysts and credit rating firms will have no choice but to do their own calculations. And they will tend to go for the worst-case scenarios.

The stark warning made recently by Moody's can be interpreted by some as a vote of no confidence in this policy, and the only way to avoid further warnings and possible downgrades is to come clean.

The second point is to compare the two methods, rice pledging and the price guarantee scheme to see which should pass more cash to the farmers.

I have to explain this point carefully to avoid giving unintended praise to the Democrats.

Back in 2008, I met Theerapong Tangteerasunand, then the general manager of the Bank for Agriculture and Agricultural Cooperatives, at an academic course. We felt the rice-pledging schemes undertaken by past governments, while posing heavy burdens to the state, did not benefit farmers much.

We therefore proposed an alternative scheme of a price guarantee as a policy recommendation for future governments. The proposal was published in some newspapers.

The Democrat Party later formed a government and introduced a farmers' income guarantee scheme, a departure from pledging but not exactly similar to our proposal.

I don't know whether our idea had any influence on the Democrats' policy or not. I never had a discussion with the party.

Let us now compare which scheme allows more money to reach the farmers. In comparing rice pledging with the price guarantee, we need to start from the same base. We have to assume a similar offer of 15,000 baht per tonne for both schemes.

By sheer logic, the farmers should get more money from the price guarantee just because the work process is much simpler.

The advantages of the price guarantee scheme include cheaper management expenses, no headaches in holding stocks, no worries about deterioration, no concern about rice from neighbouring countries.

There are also no concerns arising about millers being able to unfairly depress prices to farmers by making false claims about quality or humidity; and no irregularities regarding government sales.

However, rice pledging may still win over the price guarantee scheme.

Logically there is a possibility that rice pledging may cause less of a burden to the state. But under what circumstances?

Rice pledging would be better if, and only if, the cornering of rice stocks causes the world price to go up. Supporters of rice pledging therefore aim to grab the profits that previously belonged to exporters and the higher price to be paid by world consumers to pay our farmers.

This is a noble aim. However, that hope depends on the supply from other world producers being low and much less significant than Thailand's.

But nowadays, this is not always the case. Several countries now successfully produce rice for export; among them Vietnam and India.

Myanmar will become a major force in the near future too. Apart from that, rice-storage facilities in Thailand are not of world standard.

Deterioration in quality occurs over time. The longer we keep the rice, the poorer it will become in quality, and the lower price it will fetch.

Even if cornering rice on the market should cause the world price to go up, how long can it last? The larger the amount of Thai stocks, whenever we start to sell, the more it could depress the world price.

This is why the price guarantee has a chance of being better than pledging. The proportion of money ending up in the hands of farmers should be higher.

Pledging is often criticised for money being spilled along the way.

If that happens, not only does it cause a bigger burden to the state than necessary, but it also builds a habit of bad governance among people who derive unfair gains from the scheme.

Thirachai Phuvanatnaranubala was finance minister from August, 2011, to January, 2012.

About the author

Writer: Thirachai Phuvanatnaranubala
Position: Secretary-General of the Securities and Exchange C