As farmers try to recover from the collapse of the government’s rice policy, academics, decision-makers and voters should closely reflect and re-evaluate rice policy and its objectives. However the present-day political impasse is resolved, the next administration will pursue a policy that affects Thailand’s 4 million farming families and its 65 million consumers.
Much has been written about the rice pledging subsidy and the alternative of an income guarantee. But the discussion has been overly focused on the supply side. While this is important, it is critical to examine how consumers are affected and to bring the group into the equation when designing policy.
The rice policy ultimately failed because the government was unable to increase rice prices enough and sell its rice inventory. Corruption and inefficiency are contributing factors. For a brief period in 2011, as the scheme commenced, wholesale and export prices rose. But they declined after a huge surplus from India overwhelmed the market, beginning in December 2011. Without this Indian factor, the discussion would have been very different.
It is important to note that retail prices remained more or less constant in the last three years, based on data from the Internal Trade Department. While the wholesale price of white rice rose as paddy prices increased from 13.7 baht/kg in May 2011 to 18.38 baht/kg in November 2011, the retail price should have risen. But it remained at 28.67 baht/kg throughout the period.
Rice is one of 40 controlled products under the Price of Goods and Services Act. Each product has its specific control measures: for example, the prices of vegetable oil and sugar are subject to an announced price (or maximum price). Changing the prices requires approval from the Commerce Ministry. Although there is no official announced retail price for rice, retailers are informed of the expected price ranges of various types of rice, and this serves as the basis in determining actual prices.
Given the government’s control of the stockpile of rice and increased export prices, the state auctioned or sold rice to wholesalers and retailers at a loss to maintain the low domestic price. This is a consumption subsidy. It may have been necessary to keep consumers contented.
These low rice prices induce wasteful consumption, are biased against farmers and discourage proper investment in the rice market. Furthermore, they benefit the rich and middle-income groups, who could afford higher prices. This also has a regressive income distribution effect, as it imposes a greater burden on the poor than the rich.
Taxing the rice farmer and subsidising rice consumers
Effectively, the rice pledging scheme is not a transfer of income to rice farmers. On the contrary, it is a domestic consumption subsidy. The urban consumer is the biggest recipient of the subsidy, not the farmer. Yingluck Shinawatra’s government and previous governments have been subsidising the consumer.
Most countries keep domestic prices low and subsidise the production of rice to compensate for a low output of price. In other words, they tax the farmers to subsidise the consumer. This systematic behaviour depresses the price of rice in the international market. Indeed, since the 1980s, the price index of rice has been the lowest when compared with other staple food grains.
While rice farmers are the biggest group of producers in the world, they are also among the poorest in many countries. Like the Thai rice farmer, they have been bearing the burden of biased policy.
Killing innovation in the rice market
Keeping rice prices artificially low also discourages investment in research and development in the rice market. This is evidenced by limited innovation in marketing, packaging and product differentiation.
With higher rice prices, we would see a new generation of rice farmers who specialise in high-end rice and related products. We would see students aspire to become rice farmers.
There are more efficient means of subsidising rural and urban poor consumption, such as a rice voucher programme for lower-income families. This approach is more efficient than keeping prices artificially low.
Going forward
The consumption subsidy should be phased out so that market mechanisms can prevail. This would result in a more flexible, transparent and efficient rice market.
In the short run, the government should reduce the rice consumption subsidy by letting retail prices rise. It would be able to sell the rice in the domestic market at some level of profit to generate revenue to pay farmers. A separate consumption subsidy programme can be introduced to assist needy lower-income households.
Thailand needs a clear long-term strategy. As the country continues to develop, rising wages will raise the cost of production and affect competitiveness. The world rice market will be changing rapidly in the next few years as China and India, the world’s two biggest rice producers, increase their role in the international arena. Thailand should play to its strengths of quality rice, advanced milling capability, good infrastructure and ideal geographical location while focusing on product differentiation and innovation.
Rice policy should not divide the country. A strategy for the future of Thai rice will require resources and the minds of all parties, regardless of political affiliation.
Suthad Setboonsarng is president of the NawaChiOne Foundation, which promotes organic rice cultivation. He was recently appointed to the board of trustees at the International Rice Research Institute (IRRI) in Los Banos, the Philippines.