Since Thailand’s government decided in 2011 to support the price of rice substantially above the world market, it has had problems with slow exports and the accumulation of high levels of stocks. The government is now forced to sell stocks going out of condition to raise funds to cover more new crop rice offered to the program. This is a never ending cycle that cannot have a good ending and has failed in many developed countries.
Prior to the 2011/2012 marketing year, Thailand was the world’s largest exporter of rice at 9-10 million metric ton (MMT) per year of milled rice, about half of its annual production of 20 MMT and about 25 percent of world trade of 36-38 MMT. Total global rice trade is a relatively small part, about 8 percent, of world production. The new Thai government had promised higher market prices during the 2011 elections and followed through with a program used in much of the world. Price support loans at above market prices are made to famers with grain as collateral, and forfeiture of the grain to the government occurs if market prices are lower than the loan price.
The program was implemented on the expectation that world market prices would increase to the Thai loan price in the relatively thinly traded market. That may have happened if India did not have a similar problem of accumulated rice stocks and exports under its high price support program. India increased exports from 2.2 MMT in 2009/10 and 4.6 MMT in 2010/11 to 10.3 MMT in 2011/12, 9.7 MMT in 2012/13 and projected by the Foreign Agricultural Service (FAS) of USDA at 9.0 MMT in 2013/14. Thai exports declined to 6.9 MMT in 2011/12 and 7.0 MMT in 2012/13 and are projected to recover to 8.0 MMT in 2013/14 as government inventories are sold at reduced prices.
Thai carryover stocks accumulated under the program as expected. FAS estimates they increased from 5-6 MMT at the end of 2009/10 and 2010/11 to 9.3 MMT for 2011/12, estimated at 12.4 MMT for 2012/13 and projected at 15.5 MMT for 2013/14. Stocks at the end of June were estimated by the U.S. Agricultural Attaché in Thailand at 17-18 MMT, almost equal to one year’s production. The Attaché believes that political issues are holding back additional export sales and putting more financial pressure on securing funds for new loans to farmers. Government officials usually resist selling stocks at a loss until stocks grow hopelessly large. October 1 is normally the official start of rice pledging season for the large summer crop.
According to price data compiled by FAS, the Thai government has spent the last year catching-up with market reality. In August of last year, Thai rice was priced near high quality U.S. and Uruguayan rice at about $575 per MT. Indian, Vietnamese and Pakistani rice was priced at $425-475 per MT. In early August of this year, U.S. and Uruguayan rice had moved up to $625 per MT, but the price of Thai rice had fallen over the previous four months to $500 per MT. Unfortunately for Thai exporters, the other three major exporters’ prices were about $415-435 per MT.
Rice intervention prices for the 2011/12 and 2012/13 crops were $445-484 per MT. Given quality discounts and storage costs, rice is already being sold at a loss. The losses should increase in coming months as Thai prices need to decline further to meet the competitive prices of the other major exporters, which are expected to have steady to higher production compared to last year. The Thai government had recognized reality and proposed lowering by 20 percent the intervention price for the 2013/14 crop to $356-387 per MT. The government has reversed that decision, but lowered the amount that can be pledged per farm to limit program costs.
These policy actions have caught the attention of other WTO members. At a WTO Agriculture Committee meeting last November the U.S. and Pakistan asked how the Thai government could release the rice for export without subsidies when they paid 40 percent above market prices. Thailand has committed to the WTO to not use export subsidies. At a March 2013 Committee meeting the U.S. and others asked again about the export subsidy issues and if Thailand exceeded its limit on its domestic agricultural subsidies. The answers to those questions will become obvious in coming months unless market conditions change radically.
None of these outcomes should be a surprise to anyone with some understanding of the history of farm programs in developed and developing countries. The EU is famous for its ‘wine lakes’ and ‘butter mountain’ of the 1980s when price supports were held well above market clearing prices. The U.S. government had so much grain in government controlled stocks that it gave grain to farmers who agreed to let land lay idle in 1983. That combined with a drought cut carryover stocks sharply, but no changes were made in price supports or stocks policies. By 1985, carryover stocks were burdensome again. The Thai government probably had the best of intensions when it changed policies in 2011, but history predicted the worst of results, which became reality.
The global rice trade may be in for another supply shock from India, the largest rice exporter recently. India’s ruling party proposed and the lower house of Parliament has approved sweeping legislation guaranteeing subsidized grain, including rice, for nearly 70% of the country’s 1.2 billion people. The upper house of Parliament is expected to approve the measure, but the timeline for implementation is uncertain. The plan will undoubtedly reduce the amount of Indian rice accumulating in government warehouses in good crop years, and eventually available for export, and at the extreme may eliminate exports in short crop years.
Rice importers are left to absorb the market adjustments. China is the largest net importer of about 3.0 MMT after years of being a net exporter and having balanced trade for a few years. The next largest importer is Nigeria at 2.4 MMT, followed by Indonesia at 1.5 MMT. Many of the other buyers are developing countries importing to meet rising demand. There is not a close substitute for rice imports.
The U.S. and other countries should ask hard questions at the WTO of Thailand, India and other countries who have domestic support policies that by default drive export volumes. Importers need reliable suppliers meeting their long-term needs, not the uncertainty of accidental export suppliers driven by domestic policies.