In October of 2011 Thailands new government of Prime Minister Yingluck Shinawatra instituted a Paddy Pledging Program for white rice with prices 50 percent above market prices and fragrant rice prices 30 percent above the market. This was an attempt to short the world market for rice and drive incomes higher in rural areas that have lagged behind income growth in urban areas. Incomes have increased, but government stocks have increased sharply. Thailand lost its position as the worlds largest exporter of rice and likely faces WTO challenges.

Agriculture accounts for 41 percent of the nations labor force, but only 13 percent of GDP. Like many developing countries, agriculture remains a residual employer as productivity continues to increase in urban industrial and service jobs. For the 2011/12 rice crop, about 1.3 million rice farmers, 34 percent of total rice farmers, participated in the program. According to the U.S. Agricultural Attach in Thailand, the program increased domestic prices by about 30 percent from a year earlier for white rice, and 10 percent for fragrant rice.

The previous government had a Price Insurance Program that protected incomes, but allowed Thai rice to compete in export markets. The current program provides a low interest loan to farmers based on the quantity of rice harvested and the loan rate. The loans can be repaid at the loan rate plus interest or, with the harvested rice. According to export estimates by the Foreign Agricultural Service of USDA, in the last three years Thailand had about 29 percent of global exports of rice. That share fell to 18 percent for the 2011/12 marketing year and is expected to recover to 22 percent for 2012/13.

The program could have had a chance of working if one or more producers had smaller crops in 2011/12, but just the opposite happened with the world crop up 15.8 MMT, 3.5 percent, to 465.3 MMT. Only 7.7 percent of rice production, 35.9 MMT, is expected to be internationally traded in 2011/12, but among major exporters Indias production was up 8.3 MMT and Pakistan 1.5 MMT. Bangladeshs imports were down 1.0 MMT because of a large crop. FAS projections for 2012/13 have global production down only marginally at 464.2 MMT, but Indias production down 6.3 MMT. Thailands production is expected to be up 0.6 MMT to 21.1 MMT.

India chose to sell off some of its stocks and is the largest exporter for 2011/12 at 8.0 million metric tons (MMT). It exported 4.6 MMT in 2010/11 and 2.2 MMT in 2009/10. Vietnam continued to hold the number two position at 7.0 MMT, and Pakistan was fourth largest at 3.8 MMT. For 2012/13 FAS projects Thailand to return as the number one exporter at 8.0 MMT, down 25 percent from its 2010/11 peak of 10.6 MMT and closer to the previous two years of 9.0 MMT and 8.6 MMT. Vietnam is expected to export another 7.0 MMT, India 6.5 MMT and Pakistan 4.0 MMT.

Stocks accumulation for Thailand has already become a major problem. Thailands end-of-year rice stocks were 6.1 MMT at the end of the 2009/10 marketing year, 5.6 MMT in 2010/11, 9.4 MMT for the marketing year that ended on September 30 and are projected to increase to 12.1 MMT at the end of 2012/13. About 13.7 MMT (milled rice equivalent) from the 2011/12 crop have entered the pledging program. The government sold old crop stocks to make room for the new crop in 2012/13.

The government will use the same program for the 2012/13 crop that is just beginning to be harvested. The intervention prices remain unchanged at $444$482/MT for un-milled white rice and $579$643/MT for un-milled fragrant rice. According to the Agricultural Attach, farm-gate prices are $370-$386/MT for un-milled white rice and $476514/MT for un-milled fragrant rice. The target is 17 MMT of milled rice, about 80 percent of the crop, at an expected cost of $13 billion.

The pledging program has increased the costs of feed for the growing livestock industry. Despite a good corn crop in 2011/12 and 2012/13, corn prices remain high due to tight supplies and high prices for feed stocks such as tapioca, with its own pledging program, and rice. Imported feed wheat and wheat flour are increasingly substituting for corn in the feed rations of poultry and swine.

The rice pledging program is reminiscent of farm programs the U.S. and EU had in the 1950s and 1960s when commodity price support programs were used to support income. Market prices were set by the loan program, carryover supplies were burdensome, and market distortions were common. Exports were not a major issue in those years because trade was limited. As trade expanded in the 1970s, export subsidies became an issue along with distorted production decisions.

The pledging program has attracted attention at regular meetings of the WTO Committee on Agriculture. At a late September 2011 meeting, the Philippines, a major buyer of rice, expressed concerns on the impact on members’ food security where dependence on rice staples is high, the trade disruptions caused by a major supplier on the thin global rice market, and Thailand’s ability to keep its Current Total Aggregate Measure of Support (AMS) within its commitment level. The U.S. also raised issues about moving the government stocks into export markets.

The assumption in the industry is that Thailand will sell additional inventories in 2012/13 to finance the new crop pledging program and clear warehouse space. On September 28 58,000 MT were released from a September 19 tender. Unless rice markets strengthen in coming months, taking procurement discounts and quality premiums for Thai rice into account, the government would likely lose $100 150 per ton in the 5% grade white rice market. That is just the opposite of the governments intentions and would look like an export subsidy even if the rice did not have to be sold for export.

No one can begrudge a country for trying to improve farm incomes that are lagging behind urban levels. There are ways to do that are consistent with WTO commitments and ways that are not. This program appears to be full of potential violations of WTO domestic support and export subsidies. WTO member countries should take action sooner rather later before other countries follow Thailands lead.

Ross Korves is an Economic Policy Analyst with Truth About Trade and Technology