Mortgage rice price policy in Thailand and its hiding aim

08
Fall
08
Fall

Abstract
Thailand has had a great influence on the global rice market for decades due to its huge stock and export. Hence, the Thai government has intervened in the paddy rice market by introducing the mortgage rice price policy. The policy was first implemented in 1980 in order to resolve the low-price problem in the paddy rice market. However, in the 21st century the government attempted to re-issue the policy, even though the paddy rice market price was already high at that time, resulted in a marketing failure to both domestic and international markets. Furthermore, the cost of the policy was excessively high raising concerns that the main reasons for presenting the policy could not be purely economical. Therefore, I argue that there were political reasons behind the aim of amending the policy in 2001. This essay will examine this argument by providing the process of the policy, the effects and problems of the policy, the cost of the policy and the hidden aim of the policy.

CONTENT * Introduction * The process of the mortgage rice price policy * The rice distribution system * The effects of the policy * The problems and errors of the policy * The cost of the policy * The hidden aim of the policy * Conclusion * References

What was the main reason for presenting the mortgage rice price policy in Thailand?

Introduction Thailand is one of the topflight agricultural commodities exporting countries in the world, especially for rice (Wiboonpongse and Chaovanapoonphol, 2001). In addition, Thai rice has played a significant role in the Thai economy, as there are more than nine million hectares of rice planted area in Thailand (Chomthongdi, 2004). Moreover, in the rice industry, the fact that there are millions of Thai farmer indicate that almost 40% of employment in Thailand is in the rice sector (World Bank, 2012). Hence, rice is economics and political response. In 1980, the paddy rice market price (rice which still has its inedible husk) was low, so the Thai government intervened to help farmers by implementing the mortgage rice price policy. The policy was effective and the paddy rice price increased, following which the policy was abolished in 2000. In 2001 the government launched the policy again, however, but at this time the paddy rice market price trend was increasing (Forssell, 2008). This caused a lot of negative effects on rice domestic market and export market as well. Besides, the cost of the policy was more than 450 billion baht (฿). It was questionable whether economics or politics was the principle reason for amending the policy at the time. The argument regarding the main reason for the government amending the policy has been made at length elsewhere. Therefore, this essay will argue that the government’s motivation for implementing the policy was political rather than economical. This paper begins with the process of the mortgage rice price policy and its distribution system, followed by the effects, problems and errors, then the cost of the policy, and finally, the hidden aim of the policy.

The process of the mortgage rice price policy
Agriculture is the most important sector in the Thai economy. Hence, the Thai government has expressed a great interest in this industry particularly in term of rice production. The history of the Thailand’s rice policy can be divided into two periods. Firstly, between 1980 and 2001 the Ministry of Agriculture and Cooperatives worked with the Ministry of Commerce for the Thailand’s mortgage rice policy. Paddy rice was a consistent low-priced agricultural product. A massive amount of the paddy rice went into the market during the main harvest period, whereas demand remained stable throughout the year. Therefore, the purpose of the policy was to retard the entry of large quantities of paddy rice onto the market, which was the cause of the low-price problem (Forssell, 2008). The principle of the policy was that the government provided low interest rate loans for farmers “against the pledge of rice, with the pledged rice canceling the debt if rice prices do not meet a target”(World Bank, 2008, p. 36). In this case, the government set the minimum price guarantee that farmers were able to mortgage their paddy rice with Agricultural Cooperatives (BAAC). After 90 days, if the market price was higher than the guarantee price plus three percent interest, then farmers had the power to buy back their paddy rice and sold it on the market (Ponnarong, 2008). This policy was rescinded in 2000. The second period started in 2001 and continues up to the present. In this period, the government set the minimum price guarantee higher than the market price, so the entire paddy rice in the country was mortgaged to the BAAC. The difference from the previous policy was that the government had no agent to buy paddy rice directly from farmers. For that reason, farmers sold their paddy rice directly to millers, who cooperated with the government. The next process of the policy was to transform paddy rice into rice (edible rice) by the millers. Finally, private warehouses were rented to stock all the domestic rice products (Ponnarong, 2008).

Figure 1 illustrates the flows of paddy and rice of all varieties.
The rice distribution system
The complete process of the rice distribution system from farmers to consumers and exporters has several intermediaries involved. Due to the fact that almost all planted areas are in rural areas, far from the main city consumption centers, the process of the distribution system from farmers to consumers is lengthy. The system can be divided into three levels. Firstly, the local level contains farmers, paddy traders, central markets, agricultural cooperatives and millers. Secondly, the regional level consists of one principle intermediary; rice brokers. Finally, the country level is composed of wholesalers and exporters (Wiboonpongse and Chaovanapoonphol, 2001). The performance of some intermediaries will be given a brief description below.
As Wiboonpongse and Chaovanapoonphol describe; paddy traders and central markets act as middlemen between farmers and millers. Some farmers do not have an ability to sell their paddy rice to millers directly for some reasons e.g. because they have no truck or they own a small quantity of paddy rice. So, they sell their paddy rice directly to paddy traders or central markets. Paddy traders and central markets are in charge of assembling local paddy rice and sell it to millers later. Agricultural cooperatives are run by a group of farmers and the farmers are the cooperative members at the same time. The cooperatives accumulate paddy rice from the members and sell it to the bigger agricultural cooperatives or millers. Rice brokers are middlemen between millers and exporters because some millers do not have ability to export their rice products resulting in selling their products via the brokers (Wiboonpongse and Chaovanapoonphol, 2001).

Figure 2 demonstrates the price development in the World market from 1961 to 2008 The effects of the policy
As a result of the minimum price guarantee in Thailand was higher than the domestic market price and the neighbor markets price, this incident impacted on exportability; the rice export value decreased sharply because the import countries canceled the orders. Then, the import countries began to import rice from Vietnam since the price was lower than that of Thai rice (Forssell, 2008). Moreover, the policy also had a huge effect on the domestic sector. According to the policy that allowed farmers to mortgage paddy rice as much as they grow, so farmers extended harvest areas to increase more productions. For this reason, farmers concentrated only on increasing the quantity of the production and neglected on the quality (Poapongsakorn 2007). Consequently, the quality of Thai rice was lower than before. As a consequence of the increase in the rice planted areas in Thailand, there was a decrease in planted areas of others agricultural products. This condition led to insufficient supply problems in the others agricultural markets (Thailand development research institute, 2012). As explained above, the rice distribution system had various intermediaries involved and everyone people among the process experienced the effects of the policy. For this reason, unemployment rate increased because almost all wholesalers and brokers in Thailand were not spinning in the rice wheel business anymore as they ran out of businesses. Consequently, the effects of the policy failed the rice market operation and the independent millers could not continue running their businesses because there was no supply left on the market. All the paddy rice in Thailand was mortgaged to the government (Thailand development research institute, 2012). On the other hand, some others stated that the policy affected the price development in the world market. According to figure 2, from 1983 to 2000 the world market price situated not far above from the ground and fluctuation. Then in 2001, the international market price fell to the lowest level. At the time the government launched the policy to solve the low-price problem. The policy was efficient; the market price had an increasing trend after the government presented the policy. Nevertheless, the policy should be abolished after the market price was in an increasing trend. Even though the market price rose to its peak over the last 30 years in the year 2007, the mortgage rice price policy was still dominating during that time. For this phenomenon, Mr. Nipon Poapongsakorn, the Dean of the Economic Faculty of Thammasat University said that, the policy was not effective in the long run but in the short run it worked. However, the policy was implemented when the market price was in good situation, so the net effects of the policy were negative (Forssell, 2008). The problems and errors of the policy
The net negative effect of the policy is not only one reason for asserting that the aim of the policy was political not economical. Therefore, this section focuses on some problems and errors of the policy. First of all, due to the fact that the minimum price guarantee was higher than the market price, so the margin of the minimum price guarantee and the market price encouraged millers to purchase paddy rice from neighbor countries such as Cambodia and Vietnam. As a matter of fact, the government anticipated this problem as a defensive measure. Thai farmers were required to officially register with the government, prior to mortgage their paddy rice. Despite this, government senior officers and millers were implicated in corruption scandals. Consequently, the benefits were given to the millers, who were not the target of the policy (Thailand development research institute, 2012). Secondly, the protocol of the policy was to stock the rice in the warehouses at least a year before export. This process was the cause of poor quality rice, resulting in a great reduction of the rice export volume and value (Chulaphan, et.al, 2012). The cost of the policy
The mortgage rice price policy is one of the highest cost policies in Thailand. Hence, the main focus in this sector is the cost of the mortgage scheme in 2010 and 2011. In these years the government spent approximately 300 billion ฿ on mortgaging the domestic paddy rice. Moreover, the cost of employing the millers and warehouse rent fees amounted to 20.644 billion ฿. There were some operating costs for the government officers involved in the policy, which added up to 5.946 billion ฿ and 5.516 billion ฿ was paid in interest. The process of stocking the rice for years led to a low quality rice problem, which cost 5.532 billion ฿. Furthermore, 112.521 billion ฿ was estimated as a minimum loss due to export low quality rice. To summarize all the expenses of the policy it can be seen that the cost of the mortgage rice policy in 2010 and 2011 was more than 450 billion ฿ (Chulaphan, et.al, 2012). The cost of the policy was very high and it increased neither the market price nor the export value. Therefore, the rationale for re-presenting the policy at the time was extremely poor.
The hidden aim of the policy
The mortgage rice price policy has a dramatic effect on Thai politics. As claimed by, the World Bank, the employment rate in a significant proportion of the agricultural sector in Thailand can reach up to 39 percent. It means that the big populations of Thailand are in the agricultural sector and rice is the largest part in agricultural products (The World Bank, 2012). Thus, launching the mortgage rice price policy in Thailand, in which the main benefit of the policy was given to farmers, can be an efficient method for the government to solicit votes from farmers. The mortgage rice price policy in Thailand is arguably a populist policy. Although, the government claims that the main reason for presenting the policy was to solve the rice low-price problem but due to the explanation above it is evident that the policy has greater drawbacks than advantages.
Conclusion
In Thailand, the rice industry represents a significant part of the economy and that is the main reason why the government gives priority to the rice sector. Hence, the government was concerned about the rice market, as seen by the end of 1980 there was a low-price problem in the paddy rice market, which made the government introduce an effective policy to solve it. The paddy rice market was looking good after the policy was launched. Nonetheless, the policy was implemented once again while the market price was high, and this time the policy demolished both the domestic and export markets. In addition, the policy had raised some problems and errors, which also caused immense damage to the markets. There are a lot of actors involved in the rice industry, so the effects of the policy were felt widely. Some believed that the policy could be able to increase the market price and benefit the farmers. Nevertheless, the policy was efficient in short term only, so after the price had increased the policy should have been abolished. If the government implements the policy in the future it will cause a long-term market failure. Furthermore, the cost of the policy was more than 450 billion ฿ so it is not reasonable enough to claim that the reason for introducing the policy was economical. It seems that the government used 450 billion ฿ to buy votes by using the policy as a method. Hence, the main reason for implementing the policy was obviously political rather than economical. The cost of the entire effects of the policy including the damage from the problems and errors needs to be studied and the limitations of the policy also need to be examined in order to know when the government should implement the policy to make it effective and not diminish the market.

References

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