The Rice mortgage scheme: The Real Story


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by Vuttiphol Wanglee, Assistant to Managing Director, Production & Purchasing, Chaitip Co.,Ltd.

On the current burning debate in Thailand, Khun Vuttiphol will give an industry expert explanation on the pros and cons of the rice mortgage scheme, corruption loopholes in the system, and an overall perspective on the rice subsidy program in the long term.

Khun Vuttiphol is the Assistant to the Managing Director in Production & Purchasing at Chaitip Co. Ltd. Previously, he worked at Ayudhya Allianz C.P. Life PCL and Allianz Insurance Management Asia Pacific Pte Ltd. He was educated at Babson College and New York University Stern School Of Business.

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The Rice mortgage scheme: The Real Story

  1. 1. Rice Mortgage Scheme: The Real Story Vuttiphol Wanglee
  2. 2. Part I: Prelude to Rice Mortgage Scheme
  3. 3. Source: FAO Market Monitor • World rice supply has outstripped demand for the past 7 years • Closing stocks is at 12 year high • More supply -> cheaper price • We have been in the buyer’s market for the past 7 years • Farmers get poorer in this market condition Facts About World Rice Industry
  4. 4. Price trend reflected abundant supply Lower Price, Lower Income
  5. 5. Conclusions: • Without government interventions, Thai farmers will be poor (88 Baht/day income*) • To tackle this problem: – Democrat Party uses Income Guarantee Scheme – Puerthai Party uses Rice Mortgage Scheme *From government publishing: ‘Deep and Real Understanding of the Rice Mortgage Scheme’
  6. 6. Part II: Subsidy Programs
  7. 7. Farmers Farmers Rice Mortgage SchemeIncome Guarantee Scheme Assumption: Government guarantees income at 10,000 Baht/Ton Assumption: Government guarantees to buy from farmers at 10,000 Baht/Ton Comparison Get 5,000 Baht ExtraSell 5,000 Baht/Ton Rice Mill Buys at 5,000 Baht Government pays 5,000 Baht extra Farmer sells to government and get 10,000 Baht/Ton Government buys at 10,000 Baht/Ton Rice Mill has to buy at 10,000 Baht/Ton Government sells G2G, private companies, or release to domestic market Export Profit/Loss depends on world rice price Source: Thairath
  8. 8. Objectives of Subsidy Programs Rice Mortgage Scheme • To lift Thai farmers’ well being • To create stability of Thai economy through increased domestic consumption • To increase Thai rice price • To control world market price Income Guarantee Scheme • To lift Thai farmers’ well being • To create stability of Thai economy through increased domestic consumption • To allow market mechanism to dictate rice price • To encourage export Source: Department of Internal Trade
  9. 9. Part III: Outcomes of the Rice Mortgage Scheme
  10. 10. Successfully Maintain Farm Income at Historic High Level Source: Bank of Thailand
  11. 11. Successfully Increased Thai Rice Price Source: Oryza Thai fragrant rice is 135% more expensive than Vietnamese fragrant rice Thai white rice is 36% more expensive than Vietnamese white rice
  12. 12. Miss export value target Vietnam India Thailand Value Decline: 23.7% in 2012 10.26% in 2013 Source: TDRI
  13. 13. Export Volume Ranking Down to # 3 Source: USDA -35% -13%
  14. 14. Rice stock at highest level causing quality to deteriorate Source: USDA
  15. 15. An Expensive Scheme Source: Krungtaep Turakit Loss 136 Billion Baht
  16. 16. 1. Some people uses farmers’ right to mortgage rice 2. Rice Mill/Farmer mix low quality rice 3. Rice Mill cheats farmers by wrongly measure moisture 8. Corruption through rice sell Corruptions Increases Source: Thairath
  17. 17. Conclusions Pros: • Successfully maintains farm income at high level • Successfully stimulates economy in the rural area • Successfully increase Thai rice price Cons: • Export volume and value decline significantly • Quality of rice decline (milling, storage, and mixture of sub- par rice) • Expensive budget • Level of corruption has increased – Millers gain profit through using farmers’ rights – Millers gain profit through mixing low quality rice to mortgage – Only well connected firm gets warehouse rice cheaply
  18. 18. “If any government thinks they are living above the market, they are living in a fool’s paradise,” - Tejinder Narang, an advisor to one of India’s largest grain exporters, Emmsons International “I do not know a single independent economist who thought Thailand’s rice plan would work” - David Dawe, a senior economist at FAO
  19. 19. Part IV: Corruption Evidences
  20. 20. 1. Smuggled Rice into Government Warehouse Source: Cambodia Rice Exports Association Source: Reuters (Insight: Smuggling rice to Thailand - like coals to Newcastle) Thailand has become Cambodian top importer through smuggling Over 750,000 tons of rice smuggled to Thailand every year
  21. 21. “Up to 300,000 Tons of paddy were smuggled into Thailand in 2012” - Thon Virak, director of Cambodian state-owned rice exporter Green Trade "Clearly shipments (to Thailand) started going up since the intervention scheme started. It is highly attractive for the neighboring countries to try and get as much rice across to Thailand as possible and supply into the scheme.” -Darren Cooper, Senior Economist at The International Grains Council in London
  22. 22. 2. Favor well-connected firm Company S Export Volume VS Thailand Rice Export Company S Export Source: Thai Rice Exporter Association: Exporter Ranking
  23. 23. • The increase capacity is equal to 1.3 Million Tons/Year (20% of total Thailand export) Source: Buhler e-mail 19/6/2013 While Thai Rice export volume is coming down, the company is expanding at the fastest pace
  24. 24. Evidences suggesting an influential person in the ministry of commerce is using a car belong to that company Source:
  25. 25. Conclusions • The scheme has its merit in helping farmers increase their income and stimulate rural economy • But need to address the following issues: – How to encourage rice export – How to maintain good quality rice in storage – How to reduce corruption from top down – How to solve long term problem of expensive production cost My Personal View: This scheme will work only if: • We can limit production/export volume among major rice producing nations • Rice can be stored like oil with no effect on quality