FEED Business Worldwide - October / November, 2011
Why feed crop subsidies don't mix well with Thaifeed and livestock
by F.E. OLIMPO in Bangkok
In the campaign for Thailand's July election, ousted Thai prime minister Thaksin Shinawatra described her younger sister Yingluck, who led the new Pheu Thai party, as his clone. When she won and became prime minister in August, Yingluck promised to be her own woman.
But it didn't stop people, especially her critics, from believing her administration would be Thaksin government, part 2. This meant that immediately after she was sworn, the guessing game was whether Thailand would return to a hallmark policy of the previous Thaksin's government: A pledging scheme for key crops like corn, cassava, shrimp and rice.
All countries, industrialized and developing, subsidize their agriculture sectors, although tools and methods used vastly vary. In Thailand, such support comes in two forms â€“ pledging schemes and a price guarantee.
What makes Thailand's two programmes unique is that, like most Thais, they have their respective political affiliation. The price guarantee was introduced by the Democrat party and the pledging scheme by Yingluck's Pheu Thai, and previously by Thaksin's Thai Rak Thai party.
From the time Thaksin was first elected prime minister in 2001 till his ouster in a military coup in 2006, the pledging scheme (a.k.a. 'the mortgage programme'), was the farm support of choice in Thailand. A cornerstone of Thaksin's populist economic philosophy, it supported farmers by allowing them to "mortgage" their produce at much higher rates than the buying rates prevailing in the market.
The whole idea is to provide farmers secured returns for their labor and investment when the market turns bad. The government would keep the "mortgaged" produce at government warehouses. Farmers could redeem them at some future time when prices had improved. Or the government could sell them, preferably overseas, to recoup its investments.
Stabilised feed costs but caused corruption
On many occasions, the government used mortgaged feed grain stocks to stabilize meat and livestock costs. It did so by releasing the stored crops at much lower prices than those prevailing in the market. It did this for example, in 2008, when corn prices reached record highs of over THB12/kg and CBOT corn was over US$7/bushel. And it must be said that such interventions helped to keep the country's export-driven poultry and aquaculture sectors competitive in world markets.
While idea is great, at least on paper, it certainly had its share of problems. According to crtics, Its implementation during Thaksin's made it a massive source of corruption. Because government doesn't have enough warehouses, it had to allow millers, in the case of grain crops, to provide warehouse space to keep mortgaged grain.
With a miller's certification that they had grain stocked in a warehouse, farmers could go to a state bank and receive money. Of course, some mill employees could always be bribed into issuing fraudulent certificates, or certificates for exaggerated amounts of a farmer's grain in storage. The resulting collusion between farmers and millers became the rule rather than the exception.
If a farmer, for example, was eligible to pledge corn for about THB100,000 (US$3,333), part of the grain usually came from millers who bought them cheap from the market and mortgaged them to the government at a value 20-30% higher.
As found out during parliamentary investigations, unscrupulous border traders and millers bought lower-priced grains from neighbouring countries and pledged them to the government to obtain higher grain selling prices. In this way, the program become a corrupt form of inter-border price arbitrage.
The programme became such a big drain on public resources that by 2008, the government was spending over THB160 billion (US$5.3 billion) a year to subsidize corn, rice, cassava and shrimp farmers. On its own, the crop subsidy amounted to 13.3% of the total the farm sector's THB1.2 trillion (US$40 billion) worth.
Price guarantee scheme also breeds corruption
So when the Democrat party came to power in 2009, the pledging scheme was among the Thaksin legacies that had to go. In lieu of it, the Democrat-led government of Abhisit Vejjajiva came up with a price guarantee scheme, which works like a crop insurance. Under the Abhisit model, price guarantees are set for key crops â€“ i.e. THB7.10/kg (US$5.98/bushel) for corn, THB1.70/kg (US$0.06/kg) for cassava or tapioca, etc.
Insured prices are based on average production costs, with a profit margin built in. When prices fall, government pays for the difference between selling price and the insured price. As the system is designed more for small farmers, there are limits on how much yield could be covered by the price guarantee. For corn, the limit is 15 tonnes for each farmer. For tapioca, it is 12 tonnes.
Although carefully designed to be corruption-proof, the model also has its share of irregularities. "Some landlords split huge plantations into small pieces to take advantage of the scheme," says Mr. Prasit Booncheuy, president of the Thai Farmers Association.
"Both income guarantee and pledging schemes can burn through our budget if there are irregularities among involved parties," adds Mr. Sumeth Laomoraporn, president of CP Intertrade Co., who favors the pledging model. The mortgage system, he says, allows government to hold a large stockpile of a particular commodity which can be used as, "a tool in controlling market prices."
In Thailand, the success of any farm subsidy programme is measured by how much it can calm restless farmers, who often take matters into their own hands, often blocking busy roads and highways or occupying government offices, to get what they want.
In the last two years, Mr. Abhisit can proudly claim his government didn't deal with any farm issue-related mass actions, except for some groups of farmers who had joined anti-government protests during his time to press for Thaksin's return. But that's taking undeserved credit. Truth of the matter is that during Abhisit's time in power, both in Thailand and around the worl, feed crop prices, giving farmers good incomes and no reason to leave their farms.
This however, did not mean farmers were happy with the price guarantee scheme. In their campaigns during the last election, Mr. Abhisit and other Democrat candidates waved this form of farm support as the party's flagship achievement in wooing rural voters.
At a time when rice harvests in exporting countries like Vietnam, Burma, India and even among heavy importers like the Philippines are good, the only way one could raise paddy prices is by government fiat. And that's exactly what the Yingluck government intends to do. Starting November, the government plans to buy unhusked rice from farmers at a price 43% higher than the market price.
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