Government returns to rice trade
2011-07-22 16:12:16
Will active government buying, storing, selling rice, using it as collateral for state bank loans, avoid the corruption of the past?
The Pheu Thai Party will leverage the agricultural futures market and government stockpiles to help push rice prices higher in line with the party's campaign promises.
Pheu Thai will push for the small Agricultural Futures Exchange of Thailand to be merged with the much larger Stock Exchange of Thailand to improve liquidity in the futures market.
The party is pushing an ambitious plan to more than double market prices to 15,000 baht per tonne for rice paddy and 20,000 baht per tonne for hom mali rice. It also vowed before the July 3 election to scrap the Democrat Party's price insurance programme in favour of a return to a mortgage scheme where farmers pledge their crops as collateral against loans from state banks
One Pheu Thai executive said the state-owned Bank for Agriculture and Agricultural Cooperatives (BAAC) and the Marketing Organisation for Farmers would be the main instruments to help manage rice supplies.
Rice mills and exporters will be able to bring their orders to sell into a new futures market for rice, minimising the potential financial risks for the two state agencies in serving as an intermediary in the market.
Pheu Thai will also push for the merger of the Agricultural Futures Exchange of Thailand, the country's main agricultural derivatives market, with the much larger Stock Exchange of Thailand to improve liquidity in the futures market.
The party's crop management strategy hinges on the government serving as a main buyer in the rice market. When market prices are low, the government will purchase rice directly to build up official stockpiles and remove supply from the market, thereby influencing prices
"This strategy also is a way of building up the country's food security. If the country lacks rice, where would we buy it from, considering that Thailand already is the largest exporter in the world?" the Pheu Thai executive said.
As a result, building up a stockpile of 4-5 million tonnes is critical for our food security. And once we build up these stocks, rice in the spot and forward markets will rise as well.
Under the Democrat-led government of Abhisit Vejjajiva, authorities moved away from being direct players in the commodities market in favour of a price insurance scheme under which farmers are compensated for any gap between market prices and fixed benchmark prices. Officials insist that price insurance is superior to the previous mortgage schemes in terms of market efficiency, while it minimises costs for the government in terms of logistics and storage
Pheu Thai insists that its plans, which will tie in bank credit to specially issued, interest-free credit cards usable by farmers to purchase farm inputs such as seed, fertiliser and chemicals, will ultimately prove superior in terms of raising farm income.
At the same time, domestic consumers will be shielded from higher rice prices, as the Marketing Organisation for Farmers will sell rice directly in the retail market at, say, 120 baht per 5kg bag, cheaper than existing prices of 140 to 150 baht per package.
The reason why retail prices are high even as wholesale prices have fallen is because the mills are taking an unreasonable margin. It's the middlemen who are pushing wholesale rice prices down while inflating retail prices for consumers," the Pheu Thai official said.
He said the Revenue Department would also play a role in investigating financial records of rice mills looking to hoard rice in anticipation of benefiting from higher market prices once the new government begins its intervention programme.
The BAAC is already gearing up to play a major role in implementing Pheu Thai's rural development programmes.
In addition to the rice mortgage programme, the BAAC is also expected to lead implementation of Pheu Thai's promises to inject 1 million baht in additional funds for village funds and a new debt suspension programme for small-scale farmers.
Prakit Chawengnirun, an executive vice-president of the bank, said if in an extreme case the bank was forced to mortgage the entire first rice crop, which averages 23 million tonnes per year, it would cost about 345 billion baht.
He said the new government, if intent on bringing back the crop mortgage programme, should consider the lessons of the past and ways of safeguarding against fraud and corruption.
As it stands, the BAAC has some 160 billion baht in outstanding debt held over from past crop mortgage programmes.
Bank debt in the past soared if the mortgage price was set artificially higher than actual market prices, which gave farmers an incentive to transfer rice to the BAAC to cover their loans rather than sell the rice themselves in the market and clear their debt by paying cash.