Column : Learn from Thailands mistake

Updated: Feb 25 2014, 08:18am hrs
Thailand produces about 20-21 million tonnes (mt) of milled rice and India processes 23-24 mt of sugar annually. The largest single denominator between the two commodities is that while the Thai government fixes paddy price unrelated to rices marketability, state governments in India determine the costs of sugar-cane keeping the tradable value of sugar irrelevant. Such electoral populism has backfired in both the countries. The net effect is that the Thai government is accumulating stockpiles of paddy and facing the farmers wrath for non-payment of arrears while the Indian sugar-millers are left to pay the cane-growers the outstanding amounts even as their inventories of sugar keep growing and can only be disposed at loss in the domestic/export markets.

In 2011, Thailands government, headed by Prime Minister Yingluck Shinawatra, decided to pay farmers about $500/mt for paddy (unmilled rice), 66% above market value of around $335/mt as part of a strategy of political compassion. She imagined that world prices of rice will climb up in tandem with her wishes and that Thais will rule the global rice trade like kings. But the exact opposite happened. The prohibition on Indian rice exports was lifted in September 2011 and prices tanked, including that of Vietnam.Thus, Thailand became the highest price payer for paddy globally.

Paddy from neighbouring countries like Vietnam, Cambodia, and Myanmar also landed in Thai warehouses through unholy nexus of the farmers and middlemen looking to earn a fortune. From the worlds largest exporter, Thailand virtually became an importer of rice. Local millers also sold their stockpiles of paddy to the government through farmers. Farmers laughed their way to the bank.

Price parity of Thai rice exports was derailed. Traditional export businesses came to a halt. Some traders switched sourcing to other countries to salvage their on-going agreements. Paddy processors, dependent on exports of 8 mt of rice, have argued with the government to terminate the scheme but have had little success.

The current rice export price is significantly lower than the acquisition cost. These shipments are met from a blend of pilfered paddy and cheaper, poor-quality rice entering illicitly through the borders while most of official holdings remain intact on paper. What a mess! The trade distortion, thanks to the policy, has the World Trade Organization (WTO) worried as well.

Since the last two years, paddy equivalent to milled rice of 15 mt (a bare cost of $7.5 billion) has been rotting in the warehouses. Efforts to export high-priced rice, via government-to-government MoUs, have hardly materialised. The government funds stand blocked.Selling at lower values to exporters implies underwriting losses and facing investigations. Banks are refusing to lend to the caretaker government and farmers remain unpaid this year.

This scheme of financial/economic unsustainability expires end-February. But by then, the country's rice-growers would have tasted blood. Should the government fail to extend the scheme, local prices are bound to crash. That will lead to global fall in rice pricesaffecting India, Vietnam, Pakistan and others.

Unreasonable support or subsidies, once dispensed, cannot be easily withdrawn. Farmers are furious for loss of their promised earnings and are threatening suicides. This is the vengeance

of misplaced political compassion and Indian authorities must draw logical conclusions, even for the National Food

Security Act.

Replace paddy with sugar-cane, swap huge inventory of paddy/milled rice with excess sugar (by 9-10 mt), substitute political masters (from Thai PM to cane-growing states' chief ministers) and the scene shifts from Thailand to India. Earnings of cane farmersas per the Commission for Agricultural Costs and Pricesare currently 55% over the comprehensive cost. Sugar-cane production remains over-incentivised. This irrational sugar-cane pricing is decided by CMs of the various cane-growing states, while market realisation is much below the cost of sugar production. Indian sugar mills are trending towards sickness. Even the overseas market is less than supportive.

CMs treat farmers as electoral islands without realising the mills capacity to service the price to the farmers. The central government remains evasive in rectifying this distortion. A partial, quick-fix solution adopted recently is to debit the Sugar Development Fund for arrears and subsidise exports.

However, banks are not convinced that the ad-hoc measures would cause any viable financial improvement of the mills' condition. They are reluctant to lend, as is the case with Thai banks for paddy. Soon, the central/state governments will shift to the caretaker mode in view of the coming elections. All union ministers, CMs and secretaries will become inert for next six months. Export subsidy is also in breach of WTOs compliance regime. The short-term, interventionist mechanism of somehow finding funds to keep the industry surviving is no remedy.

Reducing cane prices will also have a withdrawal syndrome and cane-growers can also threaten retribution, as was seen with the Thai paddy-growers. However, political will is needed to provide input-output equilibrium for all stakeholders. One can hope that the governments elected in the Centre and the states in the next polls deliver the right medication before the chronic infection of price irrationality becomes cancerous, mills close down while farmers let the sugar-cane produce rot and India becomes a net importer of sugar, thanks to political negligence and flawed policy.

Tejinder Narang

The author is a grains trade analyst. Views are personal