Thailand rice economics lesson delayed on floods

Written by Clyde Russell | Singapore | Updated: Oct 26 2011, 09:04am hrs
The severe flooding in Southeast Asia has had the unintended consequence of delaying the economic day of reckoning for the rice policies of new Thai Prime Minister Yingluck Shinawatra.

While the loss of rice output across the region and the subsequent jump in prices is bad news for virtually everybody, it does mean that Thailands treasury will be spared, for now anyway, much of the cost of the new governments generous subsidy policy.

Yinglucks promise to pay Thailands rice farmers 15,000 baht ($486) a tonne for rice helped her secure victory in the July general election. But this was a promise that was ultimately going to cost her government dearly, as it was clearly unrealistic to expect that the higher price could simply be passed onto the buyers of Thailands exports.

Since Thailand is the worlds largest shipper of rice, the stable food of more than half the worlds population, it was always likely that prices would rise as buyers would have no choice but to continue purchasing rice from Bangkok.

But they also would have made Thailand the supplier of last resort, as they first bought rice from other, cheaper, producers.

Ultimately, Thailands 10 million tonne of annual rice exports would have slumped, forcing Yinglucks government to buy and store more and more rice, before the cost of this became unbearable and eventually Thailand would have to sell at international market prices. At that point the Thai government would have to pay for the difference between its 15,000 baht subsidised price and the export price out of its budget, or lower the subsidy. But for now all this is a moot point as the floods have intervened and driven rice prices to the point where those Thai farmers still with crops will probably be getting around 15,000 baht anyway.

The price of 100% B grade Thai white rice stood at $615 a tonne at its last fixing on October 19, not far off the year high of $650 a tonne reached on October 5 when the threat of floods became clearer. Thai rice prices surged 38% since the year low of $470 a tonne in April, the gains starting as Yingluck became favorite to win the election and accelerating after her victory.

The price increase has been largely matched by rice traded on the Chicago Board of Trade, where the grain has jumped 35% since its year low in March to $17.165 per hundred weight on Tuesday. This is because Asian buyers, like the Chinese, are turning towards US rice to replace crops damaged by floods in Southeast Asia.

Thailands rice exporters association believes the nations exports could slip 30% this year to between 7 and 7.5 million tonne, partly because of the flooding and partly because the subsidy scheme has made exports pricier than competitors such as Vietnam and India.

But the question remains as to how long rice buyers can stay away from Thailand as the market tightens. Vietnam expects slightly lower exports of about 7 million tonne in 2011, down from 7.5 million tonne, and its also likely that exports from South America will drop in coming months as plantings there have been lowered.

Despite India returning to the rice export markets, its likely that over the next 12 months potential demand for rice will run ahead of supplies, especially if the floods across Southeast Asia take longer to clear and affect the next planting season.

This means rice prices are likely to sustain current elevated levels into 2012, awaiting a return to normal production in Southeast Asia. When this happens, Thailand will once again have the ability to ramp up exports to as much as 12 million tonne a year.But the question will then be whether the new government will continue its subsidies at the cost of reduced exports, or modify the programme at the risk of some its popularity.

The author is a Reuters market analyst. The views expressed are his own.