Rice-pledging, price support or?

A rice farmers’ support programme has featured in Thai newspaper headlines for many days now, and has become a controversial issue. While the government plans shifting to a price support programme, farmer rice price demonstrators demand that the government maintain a rice-pledging programme, along with a quota increase.

In my opinion, changing from a rice-pledging programme to a rice price support programme would not help farmers much.

Instead, I propose that a direct subsidization programme would definitely be better than a rice price support programme, being a means by which the government lets farmers sell their rice freely. After a harvest period, the government will calculate farmers’ revenues and costs, establish a subsidy level and then directly transfer the government funds to farmers’ bank accounts.

There are several reasons for the superiority of direct subsidization over a rice price support program. First of all, in a rice price support programme, the government must declare its floor price before the harvest period begins, which may create a moral hazard problem. That is, farmers will not plan and diversify their cultivation areas. Rather, they will try to grow crops whose prices are supported by the government. Consequently, not only will there be excessive support crop supplies, but the government will also have to bear the excess burden for farmer compensation. In direct subsidization, however, the government will declare its floor price after the harvest period, so that the production levels of those crops cannot increase. Thus, the problems of excess supply and budget burden will not happen.

Direct subsidization will also prevent rice millers from depressing the price of farmers’ unmilled rice. If rice millers know floor prices, they will buy unmilled rice from farmers at prices that are too low. They will know that farmers are still willing to sell unmilled rice to them in spite of unfair pricing, because farmers can receive a subsidy equal to the extent of the gap between the floor price and the selling price. Again, the subsidization burden is borne by the government. Thus, in order to let the market mechanism work, it is better that no-one discover the floor price in advance.

Before implementing direct subsidization, ALL rice farmers in Thailand must be registered in the Ministry of Agricultural and Cooperatives database, in which information about farming locations and areas is provided. ANY transaction between rice millers or other buyers must be documented with receipts, so that the quantity and price of unmilled rice sold by farmers is traceable. Furthermore, ALL registered rice farmers must have bank accounts in order to receive government transferred subsidies. In the medium-run, the government should develop a system to satisfy all these conditions.

In the long-run, I think the best solution to help farmers is to develop an agricultural future market systematically. Now Thailand has a future market for agricultural commodities, but small farmers cannot access it – only big farmers and exporters can. To prepare this future market, the government should give knowledge to farmers and help them to access the market. A future market will help to alleviate the impact of world agricultural market fluctuation on farmers, while placing only minimum budget burden on the government.

Dr Kriengsak Chareonwongsak
Senior Fellow, Harvard Kennedy School , Harvard University
kriengsak@kriengsak.com, kriengsak.com, drdancando.com