Thais failed effort to corner rice market

Thai Effort to Control Rice Market Backfires
Payment Delays by Government Leave Farmers Deep in Debt

Wall Street Journal | Feb. 5, 2014

BAN NON SON, Thailand—Attempts to steer markets seldom end well.

In this village in northeast Thailand, Thongma Kaisuan's family and neighbors are trying to come to terms with the death of the 64-year-old farmer, who slipped out into his backyard and hanged himself from a tree late last month. The suicide, they say, is in large part due to the Thai government's bid to control the world's price for its best-known export: rice.

Investors and governments often have fantasized about controlling global markets for commodities to drive up prices and profits. In the 1970s, the Hunt brothers, American oil billionaires, attempted to corner the world's silver market, only to see their position collapse. Sumitomo Corp.'s 8053.TO +1.79% chief copper trader, Yasuo Hamanaka, in the 1990s bought up to 5% of the world's copper supply. His position also collapsed, losing $2.6 billion. Other debacles include efforts to corner gold, tin and even onion markets.

Now add Thailand to the list of the world's frustrated speculators.

An attempt to set global rice prices has stripped the country of its position as the world's top exporter, left its prime minister facing a potentially ruinous investigation into the management of the plan, and thrown thousands of farmers like Mr. Thongma into a deep hole of debt.

Mr. Thongma's tale began two and a half years ago. Prime Minister Yingluck Shinawatra launched a gambit to shift more cash into the rural economy by buying up rice from farmers at about 18,000 baht, or $550, a ton, around 50% higher than the market rate.

Ms. Yingluck and her advisers also reckoned they could drive up global rice prices by storing the grain they bought from farmers in vast warehouses, withholding it from the global market.

The plan relied on the fact that only 7% of the world's rice output is traded cross-border. That means that a disruption in one place can have a dramatic effect on international prices. In 2008, some countries such as India and Vietnam, worried about rising rice prices at home, temporarily restricted rice exports. That sent global prices soaring from $300 a ton to a peak above $900, according to the World Bank, triggering food riots and protests from Haiti to the Philippines.
Ms. Yingluck's rice program succeeded on one level: Many villages in rural Thailand were suddenly flush with cash.

Across the country, Thais started to buy new televisions, along with smart-phones to tap into the 3G networks springing up across the country. Household debt crept up past 80% of gross domestic product, a dangerously high level, according to the central bank.

Mr. Thongma, for his part, borrowed 400,000 baht, or about $12,000, from an agricultural cooperative to help pay for a minivan for his son-in-law to start a small transport business.

"We were confident about borrowing the money because the government program appeared to guarantee a stable income," said Mr. Thongma's widow, Thongbai Kaisuan, as Buddhist monks in orange robes chanted prayers for her departed husband.

Rice is piled up for storage at a mill in northeastern Thailand. The government has found itself unable to sell its huge stockpiles on world markets.

Reality quickly sank in.

The timing of the government's rice program could scarcely have been worse. Just as Thailand began withholding rice from the international market, India resumed exports after a long absence. Major importers such as the Philippines, stung by the 2008 price spike, also began producing more rice. Instead of rising, global prices for rice fell from a peak of more than $1,000 a ton in 2008 to the current level of around $390 a ton for the most commonly traded grades.

Thailand was quickly priced out of the market, unable to sell its huge stockpiles for anything close to what it paid. Paper losses in the first two harvests, in 2011 and 2012, reached $4 billion, and former central bank Governor Pridiyathorn Devakula calculates that the total loss could be as high as $12 billion. CIMB Securities reckons it costs Thailand around $9.2 billion a year to run the program—about 2.5% of gross domestic product—while the International Monetary Fund has raised concerns about the longer-term impact on the economy.

The subsidy plan has run short of cash, delaying payments to farmers. It has also fueled protests against Ms. Yingluck's government on the streets of the capital, Bangkok.

The mostly middle-class demonstrators view the rice subsidy as symptomatic of what they see as reckless populism pursued by Ms. Yingluck's elder brother, Thaksin Shinawatra, who was ousted in a military coup in 2006, and continued by her current government.

Thailand's anticorruption agency, which has broad powers to probe mismanagement as well as corruption, is now fast-tracking an investigation that could lead to Ms. Yingluck being impeached for allegedly ignoring the scale of the losses caused by the rice program. If that occurs, she could be sent for trial in the Senate, a process that could lead to her dismissal.

Ms. Yingluck has defended the rice subsidy, saying that it has helped increase rural incomes, while her government blames protesters for causing the delays in payments to farmers.

Some state banks are reluctant to provide funds to finance the program amid the growing political pressure on her administration. A bond issued prior to the latest rash of protests raised less than half the 75 billion baht sought, although a later bond issue helped make up part of the shortfall. On Tuesday, Thailand's Commerce Ministry said the impeachment investigation against Ms. Yingluck prompted a Chinese state agency to cancel plans to buy 1.2 million tons of rice from Thailand.

Now, many farmers are clamoring for their rice to be returned so they can try selling it on the free market. Others have blocked roads to press the government to hand over late payments.
Sa-art Kaisuan, a distant relative of Mr. Thongma, said he used to wait 15 to 20 days for the government to process payments for his rice. This time, he says he has waited four months and has no idea of when the money will come.

"We need to rent tractors and buy fertilizer. Already I'm borrowing money to survive," he says, sitting in a shady spot at the side of the road in Ban Non San. "I suppose we'll just have to learn to live with it."

For some people, the burden appears too heavy.

On Jan. 27, a village headman in Sisaket, some 170 kilometers southeast of Ban Non San, hung himself after failing to secure payments for rice that he and his neighbors had deposited with the government program, according to police, who interviewed his family and neighbors.

Mr. Thongma, meanwhile, whose neighbors describe him as a diligent, hard-working man, found himself running painfully short of funds. The government was four months late in paying for his most recent harvest, he was behind on his payments for his son-in-law's minivan and his savings were quickly dwindling, said his widow, Ms. Thongbai.

"When the payments stopped, he couldn't eat, he couldn't sleep," Ms. Thongbai said, kneeling next to his coffin. "He couldn't stop worrying about it. In the end it was just too much for him."