July 4, 2013 / 6:12 AM / 4 years ago

COLUMN-Thailand's rice scheme moves past the ridiculous: Clyde Russell

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

By Clyde Russell

LAUNCESTON, Australia, July 4 (Reuters) - Once you've gone from the sublime to the ridiculous, where do you go next? If you are the Thai government's rice intervention scheme you go to the absurd.

After earning widespread praise last month for finally seeing some economic sense and cutting back on the subsidies paid to the nation's rice farmers, the government of Prime Minister Yingluck Shinawatra promptly reversed course.

On July 1 the amount paid to farmers was supposed to be cut to 12,000 baht ($387) per tonne of paddy rice from the previous 15,000 baht.

Not only did Shinawatra blink in the face of threatened protests by farmers in scrapping the reduction, it fired Commerce Minister Boonsong Teriyapirom, replacing him with Niwatthamrong Bunsongphaisan, a government spin doctor who was given the additional position as deputy prime minister.

Lots of spin is going to be needed to explain how the government can continue with the scheme, given that it cost an estimated $4.4 billion for the 2011/12 year, the first year it was implemented after Shinawatra swept to power in 2011 on a promise to support the rural poor.

It has also resulted in a mountain of at least 17 million tonnes of milled rice building up in warehouses, which are now reported to be so full there is little space left for the next main harvest, which will start in November.

To put that figure into context, Thailand exported a record 10.6 million tonnes in 2011. Since then it has surrendered its position as top rice exporter, being overtaken last year by both India and Vietnam, with exports dropping to 6.9 million tonnes in 2012 as the scheme rendered Thai rice uncompetitive.

Exports were 1.56 million tonnes in the first quarter, which puts Thailand on track to export about 6.24 million tonnes in 2013, well short of the government's target of 8.5 million.

In the confusion over the scheme and the threat it poses to the global market for rice, the staple food of about two-thirds of the world's populace, a few things are becoming clearer.

The first is that Shinawatra appears to view the intervention as a necessity for her political popularity and survival, given how quickly she caved in when faced with the unhappiness that the subsidy price would be lowered.

This makes it more likely that the scheme will continue, and probably at prices that will ultimately place too much pressure on the government's budget.

The second observation is that there may be a slight change in direction about what to do with the rice stockpile.

The ousted commerce minister was a bit of a laughing stock for making unrealistic claims that he was selling rice in government-to-government deals, which were denied by the so-called buyers.

However, the new commerce ministry leadership is talking a different story, saying it will meet with traders to look at ways of selling down the stockpile.

If the government does decide to get serious about selling, it will put further downward pressure on prices.

Thai 5 percent broken rice RI-THBKN5-P1 was quoted at $480 a tonne on Wednesday, down from $520 last week, and 16 percent below its 2013 peak of $575, reached in February.

However, this is still well above the equivalent Vietnamese grade RI-VNBKN5-P1, which stood at $390 a tonne on Wednesday.

If the Thai government does start to sell meaningful amounts from its stockpile, it's likely that Thai prices will fall toward those charged by Vietnam.

Both grades may decline further if millions of tonnes comes onto the market, and even a controlled release of Thai inventories threatens to overwhelm demand, especially if top exporter India maintains its volumes.

Lower prices will only serve to exacerbate the losses the Thai government is facing.

Paying 15,000 baht for a tonne of paddy works out to about $743 a tonne for milled rice, a premium of 90 percent to the price of Vietnamese rice.

The Thai government may lose up to $350 for each tonne of rice it sells under the scheme, based on current prices.

If it does drop the payment to farmers to 12,000 baht, that reduces the loss to about $200 a tonne, a level still likely unsustainable over the long term.

The scrapping of the cut in the subsidy payment so far only extends to the end of the 2012/13 year.

For the next main crop due at the end of the year the Thai government faces increasingly stark choices.

Keep paying 15,000 baht and run the risk of increasing the economic damage, or cut the payment and run the risk of losing political support.

Given the twists and turns of this saga, nothing would surprise me now, but if I had to hazard a guess, I would imagine the government will view political support as its top priority. (Editing by Muralikumar Anantharaman)

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