Thailand not worried by rice mountain, but should be: Clyde Russell

REUTERS
Posted: Tuesday, May 01, 2012
LAUNCESTON: There is a mountain of rice piling up in Thailand as a result of the government's subsidy scheme, threatening not only to blow the nation's budget but also raising the risk of instability in the global market.

Thailand's unmilled rice stocks jumped to a record high of 11.7 million tonnes, according to government and industry officials.

This is more than double what they were some seven months ago, when the government first started paying farmers 66 percent more for their crop than what they would get on the open market.

The huge build-up of stocks is no surprise as Thailand's rice exports can no longer compete with those from Vietnam and India, and the situation is likely to get worse in coming months.

The government of Prime Minister Yingluck Shinawatra is officially putting on a brave face, predicting increased revenue from rice exports this year and saying it will be able to sell its massive stockpile of the grain, which is the staple food for two-thirds of the world's population.

But this is looking increasingly like blind optimism and unless the government changes its policies, Thailand will lose its status as the world's top exporter of rice and the government's budget will be put under severe strain.

Not only that, but the high stockpiles threaten to disrupt the world rice market when they are finally sold.

Thailand's government is targeting a price of $700 a tonne for its rice exports, well above the current $550 for Thai 100 percent B grade white rice, and $500 for the 5 percent broken grade.

Even the lower-priced grade is well above the $430 a tonne that traders pay for similar quality rice from Vietnam and India.

The massive price disparity has resulted in Thailand's rice exports plunging by 45 percent so far this year to 2.04 million tonnes from 3.73 million over the same period in 2011.

Thailand should normally be able to export about 10 million tonnes a year, equivalent to about one-third of globally traded rice.

The U.S. Department of Agriculture estimates that the Southeast Asian nation will ship about 6.5 million tonnes this year, which may be less than regional competitor Vietnam.

Thailand is also losing market share to India and Pakistan, which are expected to boost exports to 7 million tonnes and around 4 million tonnes respectively.

This means India will take second spot in rice exports in 2012, relegating Thailand to third.

Thailand's current stocks amount to the equivalent of about 8.1 million tonnes of milled rice, worth some $4.5 billion at the prevailing price of Thai rice.

It's not just the value of unsold rice that should worry Thailand's rulers, it's the 15,000 baht a tonne ($490 a tonne) it pays for unmilled rice that will be blowing a huge budget hole.

Milled rice's ratio to paddy is typically about two-thirds, so a price of $490 a tonne for paddy works out to about $735 a tonne for milled, or about 70 percent above the price of Vietnamese export rice.

What should be blindingly obvious to the rulers in Bangkok is that their rice policy is going to prove unsustainable.

While it may shore up rural support for Yingluck's party, it will in all likelihood bankrupt her government.

So, what are the choices for Thailand?

The most logical choice would be not to renew the subsidy scheme in its current form for forthcoming crops, although whether that's politically palatable remains to be seen.

The second choice is for the government to cut some of its losses, and allow Thai rice prices to sink low enough to tempt the return of buyers.

The authorities favour increasing government-to-government sales that bypass the market, but while this may save them on the cut earned by traders, it's very unlikely any purchasing government will pay more than what it can pay to get supplies from Vietnam or India.

Government-to-government sales also raise the spectre of corruption and dodgy deals, as is often the case where large amounts of money change hands in an opaque manner.

The worse thing that can happen is for the Thai government to continue to believe it can somehow manipulate the market, resulting in even higher stockpiles.

Eventually Thailand's mountain of rice will come to the market, and the higher the peak, the more disruptive it will be when it happens.

~~Clyde Russell is a Reuters market analyst. The views expressed are his own.