for its agricultural sector which could have significant economic and
political ramifications. The long-standing conventional mortgage scheme
is being replaced with a price insurance system targeting farmers directly.
Regarding the rice sector, which accounted for 90 percent of total
government farm support program, the Thai Government worked through the
rice milling industry to intervene directly in the marketplace by
purchasing rice at prices well above world prices. In the process, the
government accumulated and stored huge stocks and incurred large losses
as they worked through Thai rice exporters to move the stocks into the
world market. In addition to the budgetary burden estimated at over US$3
billion in 2008, few of the benefits fell to the farmers. The current
program suffered from "slippage," made illicit cross-border trade very
attractive, and invited public and behind-the-scenes political
wrangling. Finally the immediate prospect of an open ASEAN rice market
in 2010 prompted Thai policy makers to shift to the price insurance scheme.
The new price insurance scheme represents income support paid directly
to famers. Payments to farmers will be based on the difference between
insured prices and benchmark prices. Before the program was implemented,
farmers registered to participate in the program based on their
historical production. In addition to the revenue earned on the sale of
their crop to the market, farmers will receive a payment directly from
the government based on their registration commitment. The program is
being funded at a lower level than the mortgage scheme (estimated at
US$1 billion annually), but hopes to target farmers more directly.
The change in agricultural support represents a huge shift in the way
government program resources will be spent. (There are significant
political interests involved in the old system's pattern of payments to
millers and exporters). At the same time, the new direct-payment system
is complex and difficult to communicate to farmers. The new program will
be a challenge to administer in light of the huge number of Thai
households (estimated at 3.7 million families) targeted to receive
benefits. Meanwhile the timing of the program shift is in a critical
stage as rice prices are drifting downwards just as Thailand's main rice
crop is coming onto the market. In the future, the government intends
farmers to pay an insurance premium in ordered to be covered by the program.
Initial Program Parameters Established
The price insurance scheme is designed to provide a direct payment to
eligible farmers based on the difference between insured prices and a
benchmark price, regardless of the market prices farmers received when
they sell their crop. The Government finalized the insured prices of
paddy in its cabinet meeting of September 22, 2009. The insured prices
are based on average production costs and a profit margin of 30-40
percent. The first benchmark prices were finalized on October 5, 2009
based on weighted average wholesale prices of rice in Bangkok equivalent
to paddy with less than 15 percent moisture content.
The benchmark price will be set on the first and sixteenth days of each
month. White rice farmers registered in the program seeking a direct
payment during the period October 1-15, 2009 will receive 1,194 baht/ton
of paddy (the difference between the insured price and the price
benchmark). Total compensation for white rice paddy is limited to 25
tons per household or 29,850
baht. The program is designed to benefit all farmers, particularly
small-scale farmers. Compensation will be transferred directly to
farmers by the Bank for Agriculture and Agricultural Cooperative (BAAC).
Farmers will manage the sale decision when to capitalize on the spread
between the insured price and the benchmark price.
Presently, implementation of the new rice insurance program is being
challenged by the traditional beneficiaries of the mortgage scheme,
particularly the rice milling interests.
The Thailand Development and Research Institute (TDRI) estimated that
under the rice mortgage scheme, farmers derived 40 percent of the total
program benefits. The program benefited government agencies (14%),
millers (14%), exporters (24%), and warehouse owners (4%). The shift
from mortgage scheme to price insurance brings with it a sharp reduction
in the total level of planned government budget support.
White rice farmers that registered for compensation for October will
likely receive less income than the insurance price if they sell paddy
during the current period since the market price is lower than the
benchmark price. In general, most white rice farmers, particularly in
the north and central plain, immediately sell paddy into the market
right after the harvest due to limited storage and drying facilities.
Currently increasing supplies of new crop harvest are pressuring
farm-gate prices. The Government was forced by the traditional
beneficiaries of the mortgage scheme to stabilize market prices,
resulting in Cabinet approved measures on October 20, 2009. These
include direct purchases of 2.0 million tons of paddy from farmers at
benchmark prices, financial assistance to millers, domestic and
international market promotion, on-farm mortgage of 1.5 million tons of
paddy, and outreach to farmers for effective communication of the new
price insurance program. Even if temporary, the return of government
intervention and mortgage scheme under these measures will be an obstacle to
implement the new program successfully.
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