How El Niño may help Thailand to get rid of its huge rice stockpile

According to Business Insider, the recent heat wave and subsequent drought in Asia may help Thailand to reduce its huge unsold rice inventory.

In 2011, Thailand was the world’s largest exporter of rice, accounting for about 30% of the global market.

But then prime minister Yingluck Shinawatra introduced a controversial rice scheme where the government would pay farmers almost 50% more than market prices.

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The idea was that since almost 40% of Thailand’s labor force worked in agriculture, then it would make the average Thai wealthier while also creating a rice shortage by taking supply off of the market.

Thailand’s rice subsidy scheme was the previous government main populist policy, but within two years of highly subsidised prices it has turned into a political and economic disaster.

Unsurprisingly,  Thailand’s military leader, General Prayuth Chan-Ocha, dismissed the program adding that alternative measures were needed to boost agricultural development and support to farmers.

A two fold plan that never unfolded

The rice subsidy policy, known domestically as the rice-pledging scheme, was a two fold plan. First, the price offered to Thai rice farmers was to be raised through direct government purchase to levels about 50 per cent above the prevailing market price, creating a strong electoral basis for the Pheu Thai ruling party of Yingluck Shinawatra.

Second, the international price was to be raised by reducing Thai exports, as Thailand is normally the top rice exporter in the world.

But the second part of the plan didn’t work so well, and Thailand was left with a huge stockpile of unsold rice rotting in packed warehouses, while India and Vietnam were expanding their market shares betting on lower prices.

Prices didn’t rise as much as the Thai government was anticipating, and then competitors — India and Vietnam — began to flood the market and lower their prices.

That left Thailand with a massive unsold inventory of rice and warehouses filled to the brim.

Thailand’s warehouses could be holding as much as 18 million tons of rice, some of them smuggled from neighbouring rice-producing countries, especially Cambodia, to take advantage of the above-market prices being offered by the Thai government.

But there might finally be some relief in sight. The El Niño of 2015-16 has caused drought conditions across much of China, India, and Southeast Asia.

And while farmers in Thailand and elsewhere in the region are being devastated by the weather, the Thai government has an opportunity to unload a good portion of its stockpile.

Here’s Deutsche Bank (emphasis added):

According to the US Department of Agriculture (USDA), Thailand’s rice inventory is set to drop by almost 50% to 5.2mn MT in 2016 on the back of a projected decline in domestic output to a five-year low of 15.8mn MT.

And the good news doesn’t stop there. Deutsche Bank says (emphasis added):

It is highly plausible, in our view, that Thailand would take this El Niño episode as an opportunity to clear its huge stockpile and regain market share as shipments of rival exporters will likely be curbed by reduced domestic output.