Contract farming rather than "selling the family rice paddy"

It is no exaggeration to say that the Thai people are a patriotic race. Thus, the thought of selling the family rice paddy to foreigners is an almost unthinkable notion, even though this is a neutral economic transaction. Inevitably such deals trigger much social controversy and high emotions.

In the same manner, the rumor that former Prime Minister Thaksin invited leaders of a Middle East country to view Thai rice paddies to “showcase Thailand’s primary commodity” as well as to attract foreign investors to Thailand’s rice industry inevitably became the talk of the town. Newspapers were flooded with a legion of bitter rebukes and protests, all which shared the common theme, “He has betrayed our nation.”

From an impartial standpoint, allowing foreign investor to own local farmlands cannot always be deemed a “national betrayal.” Many foreign investors have bought Thai properties or businesses but have not been stigmatized as “nation betrayers.” However, the possibility of allowing foreign ownership of Thai rice paddies has generated an overcharged response. Therefore, this type of response seems quite illogical. 

However, in my opinion, the decision as to whether or not the sale of a Thai business to foreigners is national betrayal should depend on its effects on the Thai people. Since the majority of Thai people are rice farmers, any action that maximizes the Thai farmer’s benefit may be deemed “in national interest.”

. The end goal of helping Thai farmers is to dramatically increase the prices for their unhusked rice. One way to do this efficiently is by increasing the number of potential unhusked rice buyers. The more people are trying to buy unhusked rice, the higher its prices will become. And the higher the unhusked rice prices, the more the rice farmers will benefit.

If, however, foreign investors who want to buy rice face no competition, unhusked rice prices will remain low. The new rice paddy owners will become what economists call monopsonists, that is, people who have monopolies on rice buying over their farms. As a result, Thai farmers will not gain any long-term benefit. Furthermore, if a significant number of rice fields are purchased by foreigners, Thai farmers will lack sufficient land for their own needs, and the foreign investors could monopolize the rice industry, which could threaten our national food supply.

For this reason, although transferring rice fields to foreign investors is not national betrayal per se, if it does not yield long-term benefit to Thai farmers, we can only conclude that such a situation is “harmful to Thailand.”

However, I want to make myself absolutely clear. I am not saying that international trade or foreign investment is always “national betrayal.” It can benefit our nation, including the Thai farmers if the terms of the agreement are fair.

Instead of selling rice fields to foreign investors, a situation which may not yield much benefit to Thai farmers, I propose that Thai farmers consider contract farming. In contract farming, Thai farmers remain the owners of their fields. They continue to work the soil, but they negotiate contracts with foreign investors, who will guarantee them a certain rate of return for their crop. The government negotiates with interested foreign investors and helps to maximize the benefit to Thai farmers. In other words, the government ensures that rice prices are maximized while the risk to farmers is minimized.

Contract farming would prevent monopolies because it would force foreign investors to compete against other rice buyers. Then because the contracts would allow farmers flexibility, the farmers could easily switch to the buyers with the highest price. This system would bring much long-term benefit to the farmers.

Some may argue that contract farming will yield benefit to only one group of Thai farmers, those “selected” as contract partners with foreign investors by the government. However, if a significant number of Thai farmers engage in contract farming and the foreigners contractors are new consumers, the supply of rice in local markets will decrease while its demand remain constant. Consequently, rice millers and merchants must compete to buy rice from the farmers, so that in the end Thai farmers may gain benefit from higher rice prices, even if they don’t get as high per bushel prices as farmers outside of the contract system.

However, since balance is a necessary condition of good policy, several issues related to the topic of contract farming needed to be discussed.

First, we must consider national food security. Though we desperately need to raise rice prices, yet we must also guarantee that in crisis times, such as times of war or natural disaster during which the rice crop may be devastated, the Thai people can put first claim on Thailand’s rice crop. In no way do we want foreign contract partners to have first dibs on our rice crop. Therefore, too much contract farming may lead to a shortage of rice in local markets. For this reason, the government must cap the amount of contract farming allowed, so Thailand can maintain a secure food supply.

Another consideration is the effect of contract farming on other groups in the country. We cannot escape the truth that if Thai farmers become more economically prosperous, some other groups in Thailand may suffer. The most affected group would be the local rice millers in areas where contract farming would occur. Another affected group would be the middlemen in rice industry who would inevitably be “cut out” of the business cycle. The last group affected would be the consumers who must pay higher prices for rice. Thus, contract farming must be limited to balance the needs of these interest groups with those of the farmers.

Allowing foreigners into the rice sector may be not be national betrayal, if the rules and mechanisms are properly set. Contract farming but benefit Thai farmers without endangering the national food supply.

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