How billions will flow into private hands

Written by changthai11 on Monday, October 6th, 2008

M.R. PRIDIYATHORN DEVAKULA

Today, I would like to raise the issue of a huge financial loss on a particular programme implemented by the previous cabinet which must in the end be paid for by taxpayers’ money. Worse is the fact that the current cabinet is prepared to implement a similar programme with a bigger potential loss. It’s an amount too big to be ignored: not billions but tens of billions of baht. In raising this issue, I hope it might make the people involved embarrassed and consider halting or modifying the project.

This is about rice pledging at a much higher pledging price than that of the market. Rice pledging is normally implemented during the harvest period when supply surpasses demand and puts pressure on the price.

Rice pledging does pull a certain amount of rice from the market and prevents the price from dropping. After that, when demand increases both for domestic consumption and for export, the market price will gradually increase and the owner of the rice can redeem the pledge and sell that volume of rice in the market for more than the pledging price and earn a higher income.

Normally, the pledging of rice from the main crop at the end of the year involves 2-3 million tonnes while the the second crop in the middle of year is usually in the hundreds of thousand of tonnes. This year the previous cabinet approved a second-crop pledge as high as 3.5 million tonnes, an unnecessary step since the market price at that time was very high. The average market price of rice in May (when the second crop came out) was as high as 13,297 baht a tonne, compared to 6,230 baht the previous year.

At such a high market price, rice pledging is not necessary, especially for the smaller second crop when there is enough demand for export. But the cabinet forced it through against objections by government officials. More suspicious is the fact that the former prime minister and the former finance minister gave the Bank for Agriculture and Agricultural Cooperatives (BAAC) approval as the sole operator of the rice pledging scheme without the involvement of the Commerce Ministry as normal.

The pledging price was determined at a record high of 14,000 baht a tonne, while the pledging price for the main crop at the end of 2007 was 6,600 baht, The cabinet cited its intention to maintain the market price at 14,000 baht, which is not feasible since the market price is also governed by the world price. The cost of white rice, milled from paddy at 14,000 baht, is higher than the world price and cannot be exported without a loss. It should be noted the market price of rice paddy has decreased from an average of 13,297 baht in May to 11,800 to 12,000 baht in September. It is likely to go down further as upcoming world harvests generate more supply as a consequence of very high prices.

It was no surprise that the higher pledging price attracted a stock pledge of up to 3.5 million tonnes, and it is natural that this amount of stock will not be redeemed and left in the hands of the state agency. The 3.5 million tonnes remains with the BAAC, and if sold immediately at the current price of 11,800 to 11,900 baht would result in a loss of at least 7.35 billion baht.

However, selling this amount of rice will take time. Rushing it onto the market will only depress prices further. Plus, the main crop is due in two months and that will affect prices even more. It is conceivable, therefore, that the financial loss from the sale of the 3.5 million tonnes will be higher than 7.35 billion baht and could top 10 billion baht.

It is not difficult to see that the rice pledging scheme for the second crop this year was not necessary and it is not difficult to foresee that the market price cannot be maintained at the level of the pledging price. Is there a hidden agenda?

A financial loss of 10 billion baht implies there must be something to gain. Does it benefit only the farmers? Or does it benefit middlemen and rice mills as well? There is also the question about the connection between politicians and those middlemen and rice millers. I would leave readers to find out the answers.

The programme has been completely implemented and nothing can be done. The two ministers probably would not take responsibility anyway. Yet, there still are two more similar programmes that the government plans to implement. The first is the proposal of the commerce mnister to expand the rice pledging scheme for the second crop from 3.5 million to 4.5 million tonnes. This is really strange as the second crop came out almost 5 months ago. There should be no rice left in farmers’ possession beyond that for household consumption. The remaining rice should now be in the hands of the middlemen or rice mills.

What worries me is the fact that the cabinet in September approved the pledging price of 14,000 baht even though the market price in September was not more than 12,000 baht. It actually benefits the middlemen and rice millers who had purchased rice at the market price to pledge at the higher price of 14,000 baht - giving them an easy profit of around 2,000 baht a tonne.

It is noted that the approval to expand the pledging target from 3.5 million to 4.5 million tonnes was done in a hasty manner. The proposal was put to the cabinet on Sept 16 after the former prime minister was sacked and before the new PM was installed. The Sept 16 cabinet meeting was chaired by the acting PM.

Up until now, hundreds of thousand of tonnes more have been pledged and it is believed stocks will reach 4.5 million tons very quickly. The additional one million tonnes would make a loss of more than 2 billion baht if sold immediately. But as it normally takes time to sell, the market price is likely to go down with the world price and the loss could finally settle at 3 billion baht. The question is, who approved the programme, and who will take responsibility for the loss which could clearly be foreseen when the pledging price was approved. It should not be difficult to find out.

Another programme in the pipeline could make an even higher financial loss. This is the pledging of the main crop at the end of this year which the National Rice Policy Committee approved with a target of 8 million tonnes, the highest volume ever implemented in a single harvest, and at the again high price of 14,000 baht for rice paddy (and 16,000 baht for jasmine paddy).

It can be expected that the market price for rice paddy at the time of implementation will be around 10,000-11,000 baht, which is higher than ever before and should generate a good profit for farmers. I agree with the pledging programme in order to reduce pressure on prices so they do not go below 10,000 baht. But setting the pledging price at 14,000 baht means those who will benefit are those who pledge their rice. However, the output of the main crop is more than 21 million tonnes. The remaining rice may have to be sold at less than 10,000 baht because the 8 million tonnes in possession of the state agency will naturally prevent the price from going up, or even down, as traders can wait to buy from the government agency instead of the market.

It is quite clear that this stock of 8 million tonnes will have to be sold and it could generate a loss of as much as 24 to 30 billion baht, which will have to be absorbed by taxpayers later on.

It is now rumoured in rice trading circles that the middlemen and rice millers are starting to purchase the future output from the main crop at the current price, which farmers find profitable, in preparation for pledging with the state agency at 14,000 baht.

However, the programme as approved by the National Rice Policy Committee is yet to be approved by the Cabinet. I hope that when this matter is discussed in the Cabinet, the deputy prime minister for the economy and the finance minister, who are scholars and understand the issue quite well, will oppose it and prevent such a massive financial loss. I hope both of them are independent enough to do what’s right.

Finally, I would like to hear from the Administrative Court and eminent legal experts that when politicians make decisions that clearly will lead to an obvious financial loss they can be held responsible.

M.R. Pridiyathorn Devakula is a former finance minister and former governor of the Bank of Thailand.