THAI AGRICULTURAL POLICIES: THE RICE PLEDGING SCHEME

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1 THAI AGRICULTURAL POLICIES: THE RICE PLEDGING SCHEME Dr. Itthipong Mahathanaseth Dr. Kampanat Pensupar Faculty of economics, Kasetsart University Thailand

2 Population works in agricultural sector.

3 Plan No. 1-3 ( ) solving problems of logistics cost for agricultural products building the country's foundation and infrastructure Plan No. 4-6 ( ) started to implement the concept of commercialized agriculture, concentrating specially on production green revolution Plan No ( ) philosophy of sufficiency economy sustainable agriculture environmental quality and the natural resources Agricultural Development under national economic and social development plan

4 Concept of Smart Farmer under Current development Plan ( ) Zoning (land use, land Suitable) Informatio n Center MOAC TV/IPTV 1.Data Access for Utilization 2.Knowledge Base R&D,S&T 3.Planing & feasibility Study Goal Improve Productivity Income (>180,000 baht/household) Balance Demand & Supply Competitiveness Value Creation Logistics Cost Smart Officers/ ID Card 7.Proud to Be Farmer 6.Green Economy Smart Farmer 5.Food Safety 4.Management (production & market) Soft Loan, DC, Seed. Hub, Mechanic center, Cropping pattern Green City reduce reuse recycle recovery low carbon National Surveillance Standardize & Certification, Harmonize 4

5 Crucial Agricultural Policies under these development plans Production policy promoting quality of agricultural products Agricultural Policy crop insurance Price intervention policy Revenue assurance Pledging program

6 Rice is a major crop for domestic consumption and production (6 th in 2011) Thailand is the biggest rice exporting country (10.5 million tons in 2011) Threated by higher production cost and competition from Vietnam, India, Pakistan and USA Overview of Thailand rice production and export

7 Objective: not only to improve income and living standards of Thai farmers via raising domestic rice prices, but also to increase Thai rice export prices. The government believe that Thailand has market power to control prices in global rice market. The rice pledging policy

8 Rice pledging policy Price Supply 500$USD P E the stockpiles of paddy is rising up to 14.7 million tones, and the budgetary spending on the rice pledging scheme for the past full year stood at 300 billion Baht - Petchanet Pratruangkai, The nation, March 14, 2013 Q1 Q2 Demand Quantity

9 The Thai government has two options in handling the surplus rice, which must sell aboard at up to $870 per ton, well above the current market price of $640 per ton, if it is to avoid substantial loss. It can either stockpile rice in hope that the global price will rise, or it can export at below subsidized prices that would cost Thai taxpayers billions of dollar. Michael Richardson, Institute of South East Asian Studies. These (rice) prices are simply the result of political distortion and they are too high to be sustained A sustainable price is determined by the market, not the government. (Sustainable rice prices are set by the market, Viroj Naranong in Bangkok post, 19 June 2013) Some Critics against the policy

10 Can Thailand exploit their market power to manipulate rice prices in their export markets? This study focuses on main rice export destinations including China, Indonesia, USA, and South Africa Statements of the problem

11 Graphical Analysis of competition in rice export market P ex P k S new S old S P 2 P 1 D new D old D old D new Q 2 Q 1 Q ex Thai rice export Rival rice export 11 Q k

12 1. Demand elasticity Necessary good? Differentiated quaility? 2. Supply elasticity Number of sellers Supply response of sellers Sources of market power

13 Theoretical Framework Suppose that Thai rice and competitors rice are heterogeneous products 1 p ex D ex Q ex, p,, p n, Z p k D k Q k, p ex, p j, Z (1) for k, j = 1,2,, n (2) Suppose that Thai rice exporters want to maximize their mutual profit max p Q ec ex ex ex ex Q ex The first order condition is ex n ex j ex ex D D p ex p Q e MC 0 ex j ex Q j1 p Q (3) 13

14 Profit maximizing condition for the k th exporter k k k k k p Q e MC (4) n k k k k ex ex k k j j k when D Q D p p p D p p Q Given that MC f W, Q k k k, we can rewrite (4) as Q k Q ex, p,, p n, e,, e n, W,, W n, Z, k Plug this into equation (2) to get k k ex 1 n 1 n 1 n p D Q, e,, e, W,, W, Z,,, Substitute (5) into (1), we get p D Q p p ex ex ex 1 n,,,, ex res ex N N p D Q, e, W, Z (5) (6) Or (7) Z j1 14

15 The residual demand function 1, e, W, Z,,,, Z p D Q D Q p p ex res ex N N ex ex n Taking log and differentiate wrt. Q ex ex ex n ex k ln p ln D ln D ln p ln Q ln Q ln p ln Q ex ex k ex k1 (8) How much is change in p ex, resulting from change in Q ex (direct effect) How much is change in p ex, resulting from change in competitors sell (indirect effect) The residual demand function 15

16 ex ex 2 ln pmt m m ln Qmt m ln GDP m mt mt m ln PPI mt m ln EXRmt mt P ex mt = Thai rice export price in destination m Q ex mt = Thai rice export quantity in destination m GDP mt = Real GDP in destination m t = Time trend PPI mt = Producer price index in destination m EXR mt = Exchange rate of destination m currency per unit of rival rice exporter currency (VND or INR) Econometric Estimation

17 Note that Q ex is an endogenous variable which is in the RHS of the residual demand equation. COV(Q ex,ɛ) 0 If OLS is used, the estimate of η will be biased and inconsistent. So, we have to use the Three Stage Least Square (3SLS) method to estimate residual demands in all destinations simultaneously. Q ex must be instrumented by all RHS exogenous variables as well as Thailand cost shifters including Thai Baht exchange rate, Thailand s PPI, and Rainfall. Econometric estimation issues

18 Market share of rice exports in 4 major export destinations

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20 1. When consider the overall rice export, Thailand has no market power to influence the export prices in China, Indonesia, USA, and South Africa. Instead, Thailand faces fierce competition from Vietnam and India whose rice exports are very close substitutes for Thai rice. 2. Thailand will ultimately have to liquidate generic rice in warehouses at the world market price which is substantially lower than its pledging price. All losses incurred by the rice pledging scheme will inevitably be borne by the taxpayers 3. An appropriate policy toward rice production in Thailand should be agricultural productivity enhancement through infrastructure development and farmers capacity building such as education and training rather than permanent production subsidy or price supports. Conclusions