--Clyde Russell is a Reuters market analyst. The views
expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, Feb 5 That Thailand's
controversial rice-buying scheme is now in its death throes is
no surprise, but it does beg the question as to what will
replace it in the world's former top exporter of the grain.
Buying rice from farmers at prices that at some stages were
two-thirds above the prevailing Asian benchmarks was always
going to be a costly exercise doomed to eventual failure.
When Thai Prime Minister Yingluck Shinawatra introduced the
rice mortgage scheme shortly after her landslide election
victory in July 2011, I wrote that the "generous subsidies
planned by the incoming Thai government ... are likely to
collide with some harsh economic realities".
Those realities included the fact that rice buyers were
largely able to switch to competitors, allowing Vietnam and
India to overtake Thailand as the world's top rice exporters.
Since Yingluck's government decided it would rather store
rice than sell it at a loss, stockpiles mounted and are now
estimated at 15 to 17 million tonnes, more than one and half
times Thailand's annual exports of around 10 million tonnes,
achieved prior to the scheme's introduction.
The administration also made itself a laughing stock by
claiming to have sold vast quantities of rice in
government-to-government deals, which were denied by the other
parties said to be involved and by traders in the industry.
As the stockpiles mounted, money to pay farmers ran short,
and part of Yingluck's current problems are related to efforts
to find 130 billion baht ($3.95 billion) to pay farmers for the
To make matters worse, Thailand's anti-corruption agency is
now probing the scheme losses, estimated by the World Bank at
some $6 billion a year.
This has led to China's cancellation of a deal for 1.2
million tonnes of rice, with Thai Commerce Minister
Niwatthamrong Bunsongphaisan acknowledging that the Chinese
state-owned buyer "lacks confidence to do business with us".
Private and state-owned banks have refused to lend
Yingluck's embattled government the money to pay the farmers for
the main crop harvested last October, citing legal uncertainties
given that the government is now in caretaker mode, which limits
This situation may persist for some time, given the
disrupted Feb. 2 general election meaning that the caretaker
administration may continue for months while legal challenges
So, where does this leave the rice market?
It's too early to say whether Yingluck and her government
will survive, be replaced by the military or a military-backed
administration or by some other transitional arrangement, but it
is safer to say that her rice scheme is fatally damaged.
However, there are likely to be months of uncertainty ahead,
and a policy vacuum that may fuel anger from the farmers and
rural communities that form the backbone of Yingluck's support
as they realise that the government's financial support has
For rice markets, it seems unlikely that whoever ends up in
control in Bangkok will have any choice other than to continue
trying to offload the massive stockpile at whatever price can be
This means Asian rice prices are likely to remain under
pressure until the Thai overhang is cleared.
But maybe not for the next few months, or for however long
it takes Thailand to resolve its current political crisis.
Thailand is likely to struggle to export significant volumes
while the political situation remains unresolved, meaning that
buyers may have to look elsewhere.
This could provide a boost to prices for Vietnamese and
Indian rice, or at least a narrowing of the differential to Thai
Benchmark Thai 5-percent broken rice RI-THBKN5-P1 was at
$445 a tonne on Feb. 4, an 11 percent premium to the competing
Vietnamese grade RI-VNBKN5-P1.
Over the longer term, it's likely that Thailand will
continue some form of support for farmers, but it's equally
likely that this will be nowhere near as generous as Yingluck's
Over time this means that Thai supplies are likely to return
in significant volumes, which will keep prices capped while also
pushing the market to return to a greater focus on supply and