Thai rice industry under heavy pressure

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rice+paddyThe steadily appreciating baht, a farmer subsidy scheme that is distorting competition and a build-up of the biggest-ever stockpiles have put Thailand’s formerly flourishing rice industry under enormous pressure.

The country, which used to be the world’s biggest rice exporter over decades, is struggling to sell its rice on the world market without losses as the government’s rice pledging scheme for farmers, a programme of the populist Pheu Thai government, is far from reflecting real market prices. As a result, Thai stockpiles are set to double to 11.6 million metric tonnes in the 2012-2013 harvest season from two years ago, according to data from the US Department of Agriculture. Milled reserves may jump 40 per cent to 18.2 million tonnes in 2013, according to the UN Food and Agriculture Organisation.

While the government has been eager to sell huge amounts of rice under government-to-government contracts, rice purchasing countries are increasingly turning to other sources.

For example, the Philippine government has recently rejected to buy 187,000 tonnes of rice from Thailand as part of its annual rice purchase programme because Vietnam was able to underbid Thailand by far. While Thailand priced one tonne of rice at $586, Vietnam offered rice of the same quality at $459.75, which saved the Philippine government $20.24 million in the deal.

“This can’t go on,” a rice dealer in Bangkok told Inside Investor under condition of anonymity.

“At these rates, we can’t even argue anymore that Thailand’s Jasmine rice is tasting better than the rest and customers have to pay a premium. It’s nothing but a fairy tale.”

Rice pledging scheme to be continued

Prime Minister Yingluck Shinawatra’s administration began buying rice from farmers at above-market rates in 2011 to boost rural incomes. While benefiting growers, the programme has spurred the build-up of huge stockpiles. However, the government plans to extend the rice pledging scheme for another season (2013/2014), drawing heavy criticism from traders and domestic economists.

The agricultural sector in Thailand makes up 12 per cent of the GDP, but employs around 57 per cent of the coutnry’s overall workforce. While this reflects an extremely low productivity in the sector, it also represents a large number of voters for the Shinawatra administration.

Currently, the  government pledges to buy unmilled white rice at 15,000 baht ($510) a tonne, and premium-grade fragrant rice at 20,000 baht a tonne. That is as much as 50 per cent above world market prices, according to data from the Thai Rice Mills Association.

Adding to this, Thai farm exports may drop as much as 8 per cent in 2013 as the strong baht makes them more expensive, the state-backed Office of Agricultural Economics said on April 25, with the effect that any success in offloading stocks will result in heavy losses for the government.

Thailand spends more than $10 billion baht a year to build up the inventories and has purchased more than 22 million tonnes of milled rice since 2011, government data show.

Last year, Thailand sold about 8 million tonnes from the stockpiles, most to governments and the balance to state agencies and local buyers. For 2013, the ministry maintains an export target of 8 million tonnes, with at least 5 million tonnes to be sold to governments including China, South Korea and South Africa.

In 2012, losses from sales of stockpiled rice in the first year of the pledging programme were about $2.7 billion. The government argues that this was “less than the income generated from boosting domestic consumption and an increase in value-added-tax income from farmers.”

Indeed, the rice pledging scheme together with the new daily minimum wage of 300 baht (around $10) has led to higher purchasing power especially in the agriculture-dominated Isaan region in the Northeast, an area among the relatively poorest in Thailand where people are either farmers or migrate to Bangkok to take up informal jobs in the tourism and entertainment industry or as day labourers.

“I have indeed noticed a change in spending behaviour”, a British expat who lives in the Isaan town of Surin with his Thai wife and two children running a motorcycle shop, told Inside Investor.

“When I see the farm helpers come to the convenience store after work to buy their daily booze, they don’t ask for the cheap Sang Som rum anymore, they now buy 100 Pipers blended scotch.”

 

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Reading Time: 3 minutes

The steadily appreciating baht, a farmer subsidy scheme that is distorting competition and a build-up of the biggest-ever stockpiles have put Thailand’s formerly flourishing rice industry under enormous pressure.

Reading Time: 3 minutes

rice+paddyThe steadily appreciating baht, a farmer subsidy scheme that is distorting competition and a build-up of the biggest-ever stockpiles have put Thailand’s formerly flourishing rice industry under enormous pressure.

The country, which used to be the world’s biggest rice exporter over decades, is struggling to sell its rice on the world market without losses as the government’s rice pledging scheme for farmers, a programme of the populist Pheu Thai government, is far from reflecting real market prices. As a result, Thai stockpiles are set to double to 11.6 million metric tonnes in the 2012-2013 harvest season from two years ago, according to data from the US Department of Agriculture. Milled reserves may jump 40 per cent to 18.2 million tonnes in 2013, according to the UN Food and Agriculture Organisation.

While the government has been eager to sell huge amounts of rice under government-to-government contracts, rice purchasing countries are increasingly turning to other sources.

For example, the Philippine government has recently rejected to buy 187,000 tonnes of rice from Thailand as part of its annual rice purchase programme because Vietnam was able to underbid Thailand by far. While Thailand priced one tonne of rice at $586, Vietnam offered rice of the same quality at $459.75, which saved the Philippine government $20.24 million in the deal.

“This can’t go on,” a rice dealer in Bangkok told Inside Investor under condition of anonymity.

“At these rates, we can’t even argue anymore that Thailand’s Jasmine rice is tasting better than the rest and customers have to pay a premium. It’s nothing but a fairy tale.”

Rice pledging scheme to be continued

Prime Minister Yingluck Shinawatra’s administration began buying rice from farmers at above-market rates in 2011 to boost rural incomes. While benefiting growers, the programme has spurred the build-up of huge stockpiles. However, the government plans to extend the rice pledging scheme for another season (2013/2014), drawing heavy criticism from traders and domestic economists.

The agricultural sector in Thailand makes up 12 per cent of the GDP, but employs around 57 per cent of the coutnry’s overall workforce. While this reflects an extremely low productivity in the sector, it also represents a large number of voters for the Shinawatra administration.

Currently, the  government pledges to buy unmilled white rice at 15,000 baht ($510) a tonne, and premium-grade fragrant rice at 20,000 baht a tonne. That is as much as 50 per cent above world market prices, according to data from the Thai Rice Mills Association.

Adding to this, Thai farm exports may drop as much as 8 per cent in 2013 as the strong baht makes them more expensive, the state-backed Office of Agricultural Economics said on April 25, with the effect that any success in offloading stocks will result in heavy losses for the government.

Thailand spends more than $10 billion baht a year to build up the inventories and has purchased more than 22 million tonnes of milled rice since 2011, government data show.

Last year, Thailand sold about 8 million tonnes from the stockpiles, most to governments and the balance to state agencies and local buyers. For 2013, the ministry maintains an export target of 8 million tonnes, with at least 5 million tonnes to be sold to governments including China, South Korea and South Africa.

In 2012, losses from sales of stockpiled rice in the first year of the pledging programme were about $2.7 billion. The government argues that this was “less than the income generated from boosting domestic consumption and an increase in value-added-tax income from farmers.”

Indeed, the rice pledging scheme together with the new daily minimum wage of 300 baht (around $10) has led to higher purchasing power especially in the agriculture-dominated Isaan region in the Northeast, an area among the relatively poorest in Thailand where people are either farmers or migrate to Bangkok to take up informal jobs in the tourism and entertainment industry or as day labourers.

“I have indeed noticed a change in spending behaviour”, a British expat who lives in the Isaan town of Surin with his Thai wife and two children running a motorcycle shop, told Inside Investor.

“When I see the farm helpers come to the convenience store after work to buy their daily booze, they don’t ask for the cheap Sang Som rum anymore, they now buy 100 Pipers blended scotch.”

 

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