Thailand - Asean commodity prices cause global waves

If one asked the proverbial “man on the street” a few questions about the Asean community, such as “Where is it?” or “What are the member states of the Asean?”- you would be lucky to get correct answers, even in Asean countries.

But when the prices of agricultural-based commodities have sudden prices increases, then the world does take notice. Asean countries produce most of global supply of rice, rubber and palm oil.

Today’s wave-generating commodity is rice- the staple for at least half of the world’s population is yet another example of a domestic policy adopted to win votes that may cause harm to consumers and disrupt the orderly market system.

On July 3, the Pheu Thai party rolled to victory after proposing a number of crowd-pleasing policies that two months later appear to be ill-conceived and poorly thought through.

The “rice mortgage program” is a reincarnation of a similar plan that was initiated by the government of Thaksin Shinawatra, elder brother of current Prime Minister Yingluck Shinawatra.

In October the Thai government will launch the rice mortgage program offering 15,000 baht (US$500) per ton for paddy _ or unhusked _ white rice, and 20,000 ($637) baht per ton for jasmine hom mali rice. These prices are 5,000 baht more than current market prices.

Under the mortgage scheme, rice is pledged as collateral against loans from the state-owned Bank for Agriculture and Agricultural Co-operatives (BAAC). If rice prices exceed the pledging price, a farmer can sell the rice in the market, repay the loan and pocket the difference as profit.

But if market prices are under the pledging price, the BAAC essentially buys the rice, which is then held in government stockpiles and sold at auction to mills and exporters.

What is shaping up is scenario where the price of rice will rise (it already has preceding the start of the program) and the government will be on the hook to pay the farmers a higher price than the market price. Paying, of course, with funds generated from taxpayers.

This vote-getting program comes at a time when there are deep social divisions in Thailand and the plan clearly will upset the urbanites, who are about 40 percent of the population versus the majority rural folk.

A highly respected former deputy prime minister and finance minister, MR Pridiyathorn Devakula, says the project could be the "most damaging in history." But of course, his party did not win this year’s general election.

Previous Shinawatra administrations have proved to be short-lived and poorly conceived programs like the rice mortgage, the crystal ball appears increasingly cloudy for Ms. Yingluck and her political allies.

David Swartzemtruber

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