Nov05

Why does everyone hate the Thai rice mortgage scheme?

Author // Dr. Sam Mohanty Categories // Sam's rice price and market blog

The Thai rice mortgage scheme continues to receive a fair amount of media bashing even after completing its one-year anniversary on 7 October 2012. The debate on its impacts on Thailand and the rest of the world continues to take center stage at a majority of rice conferences in the region. The media and rice gurus have all ganged up on this scheme because nobody expected this from Thailand. This is the country that remained open for business during the 2007 rice crisis when India and Vietnam banned exports and provided some stability to a market that was chaotic and getting out of control. Despite all the negative publicity and criticism, Thai policymakers remain unruffled and publicly vow to continue with the program.

Questions come to mind: Is this the only country with such a program? Does it really create so much uncertainty in the global rice market?

To answer the first question, let me say that Thailand is not the only country with a price support program. As a matter of fact, most of the rice-growing countries in Asia have some form of price support program for farmers. These have different names and somewhat different operational mechanisms but all of them are designed to provide a guaranteed floor price for farmers. The only difference is that some countries religiously implement these programs and procure all the rice offered by farmers at the announced support price whereas others procure only the amount needed for a strategic reserve. The critical aspect of these programs is the level at which the support price is set relative to the market price. If the support price is set much higher than the market price, the government will end up procuring a large amount of paddy similar to what we have witnessed in India in the last few years and in Thailand in the past 12 months. The minimum support price (MSP) for rice in India made a quantum leap from 2007-08 to 2011-12 by more than 75%, whereas it took from 1994 to 2006 for the MSP to increase by a similar proportion. Similarly, the Thai mortgage scheme was reinstated by the Pheu Thai government at a price support level that is 30–40% higher than the market price.

The end result is that the Indian procurement stocks grew by more than fourfold from 5.5 million tons in October 2007 to 26 million tons in September 2012. The Thai mortgage stocks in the past two seasons have gone beyond 10 million tons of rice. In both these countries, domestic market prices have gone up in response to rising support prices. Despite the steep rise in the MSP in India in the last few years, the level is still less than half of the mortgage price in Thailand. In 2011-12, the Indian MSP for paddy was US$0.20 per kilogram whereas the mortgage price for paddy in Thailand was $0.48 per kilogram. The combination of a lower MSP and weaker currency has enabled Indian traders to price broken and parboiled rice $100–150 per ton cheaper than their Thai counterparts and this is taking away market share from Thailand. For the 2011-12 marketing year, Thailand was dethroned from its rank as the top exporter for the first time in the past three decades and India has taken over the top spot.

In response to the second question, the mortgage scheme does create more uncertainty in the global market because of greater government involvement in the rice business in the sense that the market does not know when mortgaged rice will be released and at what price. This scheme was expected to create some problems in the market in the short run but the unexpected return of India to the nonbasmati export market more than nullified the effects of the Thai mortgage scheme and even brought the market to its knees. However, over the longer term, the continuation of the mortgage scheme is likely to make global prices lower than what they would have been otherwise.

Where do we go from here?

There is no disagreement that this is a populist policy and has been brought back to appease rural voters. But, populist policy is nothing new and there are numerous examples around the world that do not make any sense and cost billions of dollars to taxpayers. I personally believe that the Thai government has every right to support rice farmers if it wishes to. But, the government should be prepared to pay for the rising cost of the program over time. There will be year-to-year fluctuation depending on the global rice production situation. If the global situation is tight, then this scheme may not cost anything. But, the cost will rise quickly if the global supply situation improves.

However, as part of its responsibility for global food security, Thailand needs to take steps to reduce uncertainty in the global market by announcing a mechanism for the release of mortgaged stocks to the market in a way that the market knows when and how the stocks will be released. Another option could be slightly modifying the mortgage scheme so that farmers have the option of either mortgaging their rice or receiving the difference between the mortgage and market price and selling the actual paddy in the open market. This will enable the government to support farmers, avoid an accumulation of mortgage stocks, and become competitive in the global market. This is exactly what the U.S. did in the mid-1980s to continue to provide support to farmers, eliminate government stockpiling, and become competitive again in the global market by reforming its price support loan program, which was similar to the Thai rice mortgage scheme. The Thai government may also want to think about direct cash transfers to farmers that are not linked to current production. Japan and South Korea have recently moved away from price support to direct payments, and the government of India is pondering converting subsidies for food, petroleum, and fertilizer to direct cash transfers to beneficiaries.

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About the Author

Dr. Sam Mohanty

Dr. Sam Mohanty

As head of the Social Sciences Division, Sam recruits and retains quality staff and create a conducive environment for research and professional development and conduct research on all aspects of rice including marketing, policy and trade and impact assessment.

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