High rice prices can provide a slam-dunk to victory in a prelude to an election but both intervention models have their flaws.

Keeping rice prices high is a key promise of every political party in its bid to win the hearts of the country's largest group of voters in any election. The devil, however, lies in the details.

To win at all costs, some parties are trying to lure farmers with extremely a high guaranteed paddy price, with little regard to its adverse effects on the overall industry and taxpayers' burden.

The Pheu Thai Party vows to reinstate the rice pledging scheme and promises to pay 15,000 baht a tonne for paddy if it wins. That is 40% higher than the current 11,000 baht farmers obtain from the income guarantee programme, a scheme that has been implemented for two years by the Democrat-led coalition.

Both programmes have loopholes with no safeguard against corruption by players in the rice business, say experts.

Some conditions in the pledging programme open the door to corruption, said Prasit Booncheuy, president of the Thai Farmers Association (TFA).

Under the programme, millers play a major role in providing warehouse space to keep mortgaged paddy since the government does not have sufficient facilities of its own.

Farmers let them keep their grain and get documents as proof to show to a state bank and receive money.
As such, collusion between farmers and millers is not hard to imagine, he noted.

"If a farmer is eligible to pledge rice for about 350,000 baht in value, part of the grain might come from millers who bought paddy elsewhere to enjoy the state subsidy," he said.

High pledging prices also lure border traders and millers to buy lower-priced paddy from neighbouring countries and illegally put it into the pledging scheme to gain profit.

In March 2009, the Thai Rice Exporters Association estimated about 1,000 tonnes of paddy crossed Thai borders every day to enjoy the high price under the pledging system.

Chookiat Ophaswongse, honorary president of the association, has little doubt that history will repeat itself if the Thai government reinstates the rice pledging programme.

Paddy in Cambodia is about 6,000 baht a tonne right now, he said. Cambodia's rice industry is estimated to produce about 9 million tonnes with about 4 million tonnes in surplus.

"The surplus may enter this country to benefit from Thailand's pledging scheme and border traders and millers will be big gainers," said Mr Chookiat.

"There is no doubt that excessively high prices would seriously undermine the competitiveness of Thai rice exports."

The government will also shoulder the huge expense of stocking mortgaged rice as no farmers would want to redeem their rice. Old rice in the stock is usually sold at lower prices and incur losses of tens of billions of baht later.

According to a study by the Office of Agricultural Economics, the government in 2004 used the programme to intervene in the rice market and offered pledging prices at 20-30% higher than market prices. While Hom Mali paddy was 7,000 baht a tonne, the government offered 10,000 baht, drawing a number of farmers to join the programme and inflating the state's stockpile.

During that year, it was reported the government had about 8.06 million tonnes in stock, up from 1.81 million tonnes from the previous season. It became an enormous burden for the government which had to bear the huge costs of more than 800 million baht for storage and grain improvement.

Despite the high expenses, the pledging plan was preferred by authorities, who liked the convenience of having a huge stockpile at their disposal to manipulate market prices at will, the report concluded.

But despite its flaws, some exporters prefer the scheme.

Holding a large stockpile is a valuable tool in controlling market prices, according to Sumeth Laomoraporn, president of CP Intertrade Co.

CP is among a few big companies that won bids to buy rice from the stocks of the government in recent years.
"Both income guarantee and pledging schemes can burn through our budget if there are irregularities among involved parties," said Mr Sumeth.

For the income guarantee model, the number of farmers and amount of farmland eligible for the subsidy has increased unusually since it began. The most likely explanation is that the model is designed to pay small farmers who have no more than 30 rai each.

"Some landlords split huge plantations into small pieces to take advantage of the scheme," said Mr Prasit.

Under the income guarantee plan, farmers receive the differences between insured rice prices and benchmark prices that change every two weeks following market prices.

At present, the insured price is 11,000 baht a tonne of white rice while the market price is declining, so the compensation is a relative high 2,800 baht a tonne.

Pramote Vanichanont, chairman of the advisory committee of the TFA, expects the government might have to spend up to 65 billion baht on compensation, or $2.15 billion, about 38% of rice export income.

The system has to be revised with additional measures if necessary, he suggested. More importantly, he encourages the government to allocate a budget to improve farm competitiveness rather than rely only on huge subsidy.

PROS AND CONS
INCOME GUARANTEE
Pros:
 - Payments reach small farmers directly
 - Less impact or distortion of market prices
 - No stockpiling burden on government
 - Less malfeasance among local authorities and rice millers
Cons:
 - Subsidy payments vary and tend to increase with changing market prices
 - Inefficient management leads to inflated number of farmers enjoying subsidies
 - Government possesses no rice to use for market intervention
 
- No incentive for farmers to improve rice quality as income is guaranteed

PADDY PLEDGING
Pros:
 - Produces immediate results in raising or stabilising market rice prices as about 30% of output enters the scheme
 - Government able to use rice in stockpile as a buffer if needed
 - Farmers pay more attention to improving grain as payment is linked to quality
Cons:
 - Simple system is open to widespread corruption among local authorities, traders and millers
 - High pledging prices distort market mechanism
 - High local payments encourage smuggling of rice from neighbouring countries

Source: Bangkok Post