Thailand's new crop insurance programme will not affect the country's position as the world's leading rice exporter, say local academics.
Somporn Isvilanonda, an economist with Kasetsart University, said the crop insurance programme was in line with market principles while still reassuring farmers of receiving a fair price.
For years, the government has supported the prices of key crops such as rice by allowing farmers to pledge their crops with the Bank for Agriculture and Agricultural Co-operatives at set prices. If market prices fall below the mortgage price, then farmers can transfer their crops to the state. On the other hand, if market prices stay above the mortgage price, farmers can sell their crops in the open market and pay off the bank directly.
In practice, mortgage prices have often been set to subsidise farmers, resulting in upfront outlays for the government of more than 100 billion baht per year.
The new system is an insurance programme under which the government will pay farmers the difference between market prices and guaranteed prices for a limited quantity of crops. The change will slash the state's upfront costs and indirect expenses such as storing pledged crops.
Benchmark prices will be announced on the 1st and 16th of each month.
Volatile global prices and rising production costs threaten small farmers, which could lead to Thailand's agricultural sector being dominated by large producers, said Mr Somporn.
Mortgage prices jumped from 7,000 baht per tonne of paddy in 2004 to 14,000 baht in 2008 as global prices rose.
But the price rise and the price mortgage programme led farmers to increase production with too little consideration for quality and efficiency, said Mr Somporn. As product quality fell, the country lost competitiveness to countries such as Vietnam, the world's second-largest rice exporter, he added.
Top-quality Thai rice still enjoys a premium of about US$100 per tonne over Vietnamese rice in the global market, he said. But some farmers have been prompted by high pledging prices to cultivate lower-grade, faster-growing strains for quick returns, to the detriment of the overall industry.
Only 40% of the 100 billion baht committed to the rice mortgage programme in previous years is estimated to have actually reached the hands of farmers, he added. In his view, the insurance programme is likely to be much better at directing funds to farmers and at cutting waste and corruption.
Ennoo Suesuwan, the acting president of the Bank for Agriculture and Agricultural Co-operatives, said guarantee prices under the insurance programme would be based on average prices sampled at different markets across the country.
Guarantee prices should be within 5% of market prices, with export prices and Chicago futures prices also being used in the calculation.
Insurance will be offered free to registered farmers for now. But in the future, insurance coverage might be free for up to 25 tonnes of produce per customer, with a guarantee fee being charged for coverage of additional produce, he said.
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