We are talking about India and Thailand – the Food Security Bill (FSB) of the first and the paddy pledging scheme of the second. Thailand’s experience should be an eye-opener to what lies in store for us.
Thailand has been a prime exporter of premium quality/quantity of rice in the world market. It exported about 10.5 million tonnes (mt) of rice in 2010-11, which slipped to 7 mt in 2011-12 and around 8 mt in 2012-13, despite annual output remaining unchanged at about 21 mt. Exports constitute about 33-50 per cent of Thai rice output.
India became world’s largest exporter of rice in 2012-13 by shipping out 10.5 mt. Thailand is still attempting to stabilise its position. How the paddy pledging scheme, an interventionist price mechanism, administered by the Thai Government in isolation of market forces, can mess things up is there for everyone to see.
Developments in 2011
In September 2011, when India lifted prohibition on non-basmati rice export, Indian traders commenced contracting 5 per cent broken white rice at $410-430 per tonne fob against Thai quotes of $600 and Vietnam at $575. At that time, Thai “paddy prices” were around $333 per tonne vs Indian $232 . Indian “rice price” was lower by $145-$190 from Thai and Vietnam origins.
India’s entry demanded downward price correction. Vietnam, Pakistan and other origins, “except Thailand” corrected their values and even went below Indian quotes after September 2011. Due to increasing competition from Vietnam and Pakistan, Indian rice export in 2013-14 is projected at 6.5-7 mt.
Thais instead raised paddy procurement price by 50 per cent to $500 per tonne or baht 15,000 in October 2011, against open market trade of $300-333 or baht 9,000-10,000 per tonne. That would make its 5 per cent broken rice at around $850 per tonne fob, almost 100 per cent above other competing origins.
Poll Populism
Thailand pursued a contrary pricing route due to its 2011 poll promise by the current Prime Minister Yingluck Shinwatra of “Pheu Thai Party”.
The party promised 40-50 per cent higher paddy prices under the “pledging scheme” to its peasantry. Since then, the paddy equivalent to milled rice of 17 mt ($13 billion) is stored under a Government-controlled bank. Open market availability of good quality Thai paddy is limited.
The UPA Government’s FSB, offers 90 per cent subsidy on wheat and rice at Rs 2-3per kg to 67 per cent of the population, with an eye on the 2014 general elections. Grain inventory with FCI has surged to 77 mt ($29 billion) against the annual output of about 190 mt, limiting open market availability and raising food inflation and fiscal deficit.
Buffer reserves needed are about 47 mt, according to the Commission for Agriculture Costs and Prices — reflecting a surplus of 30 mt ($12 billion). Both countries lack storage and suffer from significant leakages and rotting cereals.
Paddy Pledging
How are Thais able to export 7-8 mt annually at around $500 per tonne, against estimated an “cost” of $850 per tonne fob?
The BAAC -- Bank of Agriculture and Agricultural Cooperatives of Thailand – collects or hoards paddy as collateral at baht 15,000 per tonne or $500. The amount is paid to farmers against government designated warehouse receipts.
Many warehouses are millers’ premises. Redemption of the collateral (paddy) is at the sole discretion of the farmer.
In reality, BAAC owns the stock-- stuck for two years without any viable disposal policies -- and farmers enjoy the funds.
The Thai system is similar to the procurement undertaken by FCI at MSP— except that the price differential in Thailand is exorbitant, 40-50 per cent higher than the market price. The other difference is that paddy procured “by the miller” from the market may also be pledged “in miller’s warehouse” to BAAC, which is highly remunerative, without de-husking a single grain of rice.
As of June 2013, the price of milled rice -- processed from “comingled” paddy of the bazaar andCambodian-Vietnam illegal inflows and old low quality stock released at discounted prices from Government designated warehouses, with or without official connivance --- is about $490- $500 per tonne fob.
However, cheaper rice cargos from Vietnam, Pakistan, and India are abundantly traded between $350-$430 per tonne fob—lower by $70-$140 or so. Exports are thus tepid.
Since October 2011, the Thai Government has suffered a loss of $4.4 billion in disposing of paddy below economic cost, including damaged or deteriorated paddy.
These losses can further balloon, in case the interventionist profligacy continues. Like India, Thai fiscal deficit is about 5.6 per cent (acceptable limit below 3 per cent).
Unwinding the scheme
With sagging rice exports and sunk investment in paddy, Moody’s has threatened to degrade Thailand’s sovereign rating.
On June 19, 2013, Bangkok attempted to align paddy price closer to international values by notifying payments at a reduced rate by 20 per cent -- baht 12,000 per tonne or $400 per tonne instead of baht 15,000 per tonne or $500 per tonne --- with effect from July 1.
This is the first step in unwinding highly overpriced subsidy. Second, BAAC and Thai authorities have started rejecting new paddy on flimsy quality parameters to limit procurement.
Thai farmers have tasted blood, and are outraged by breach of trust. They want the status quo — claiming that paddy planting this year has been done taking $500 per tonne into consideration.
Political opponents are fuelling the fire. As partial compensation Bangkok is offering cheap loans and credit facilities to farmers — just as in India where first banks provide loan melas followed by loan waivers.
Erroneous assessment
Yingluck mistakenly believed that she could dominate the world rice trade and compel other origins to increase their quotes. But nations have to move in tandem with markets, not the other way round.
UPA also feels that poverty can be eradicated by selling grains at one-tenth the cost under the FSB, ignoring that low priced commodities will crawl back in the market and perpetuate a parallel domestic trade. This is because the FSB is relying on the existing PDS, with about 40 per cent leakages.
Repercussions
Interventionist’s policies may be deemed good for electioneering but are unpardonable on economic grounds.
Policies that are inconsistent with principles of open trade need to be shunned—be it paddy pledging or food security. Thailand and India will be humbled by fiscal deficit caused by vote bank politics.
(The author is a grains trade analyst.)