(ARTICLE THE FINANCIAL EXPRESS 25.02.2014)
LEARN FROM THAILAND'S MISTAKES
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THAI - RICE LESSONS FOR INDIAN SUGARCANE PRICING
Thailand produces about 20-21 million tons of milled rice and India processes 23-24 million tons of sugar annually. The largest single denominator between the two commodities is that while Thai Government fixes paddy price unrelated to rice’s marketability, States Governments in India determine assumed cost of sugarcane irrelevant to the tradable value of sugar. Such policies of electoral populism have backfired in both countries. Net effect is that Thai Government is accumulating stockpiles of paddy and facing farmers’ wrath for non-payment of arrears of paddy while Indian sugar millers are exposed to payment of outstanding amount to sugarcane growers with inventory of sugar that can be disposed of at loss only in domestic /export markets.
In 2011, Thai Government headed by the Prime Minister Yinglik Shinawatra decided to pay farmers about $500/mt for paddy (un-milled rice), 66% above market value of around $335/mt as a well thought of strategy of political compassion. She imagined that world prices of rice will climb up in tandem with her wishes and that Thais will rule like raja in global rice trade. But exactly the opposite transpired. Prohibition on Indian rice exports was lifted in Sep, 2011 and rice prices tanked, including that of Vietnam. Thus, Thailand became the highest price payer of paddy anywhere in the world.
Paddy from neighbouring countries like Vietnam, Cambodia, and Myanmar also landed in Thai warehouses through unholy nexus of farmers and middlemen to earn a fortune. From the world’s largest exporter, Thailand became virtual importer of rice. Local millers also sold their stockpiles of paddy to Government through farmers. Farmers laughed their way to the bank.
Price parity of Thai rice exports was derailed. Traditional export business came to a halt. Some traders switched sourcing to third countries to salvage their on-going agreements. Paddy processors dependent on exports of 8 million tons of rice have argued with Government to terminate the scheme but with little success.
The current rice export price is significantly lower than the acquisition cost. These shipments are made from blend of pilfered paddy and cheaper poor quality illicit entries through borders, while most of official holdings remain intact on paper. What a mess? Trade distortion has made WTO worried too.
In last two years, paddy equivalent to milled rice of 15 million tons (with bare cost of $7.5 billion) is lying rotting. Efforts to export high priced rice via G to G MOUs have hardly materialized. Government funds stand blocked. Selling at lower values to exporters implies underwriting losses and facing investigations. Banks are refusing to lend to “caretaker” Government and farmers remain unpaid this year.
This scheme of financial/ economic unsustainability has expired end February 2014. Farmers have tasted blood. Should the Government fail to extend the scheme, local prices are bound to crash. That will lead to global fall in rice prices—affecting India, Vietnam, Pakistan and others.
Unreasonable support or subsidies once dispensed cannot be easily withdrawn. Farmers are furious for loss of their promised earnings and are threatening suicides. This is the vengeance of misplaced political compassion and Indian authorities must draw logical conclusions even for Food Security Act.
Replace paddy with sugar cane; swap huge inventory of paddy/milled rice with excess sugar of 9-10 million tons; substitute political masters from Thai PM to Indian Chief Ministers (CMs) and the scene shifts from Thailand to India. Earnings of sugar cane farmers—as per CACP- are currently 55% over the comprehensive cost. Sugar cane production remains over incentivised. Such an irrational sugarcane pricing is decided by CMs of various states, while market realization is much below the cost of sugar production. Indian sugar mills are trending to sickness. Even overseas market is less than supportive.
CMs treat farmers as electoral islands without realizing mills capacity to service the price to the farmers. Central Government is evasive in rectifying this distortion. A partial quick fix solution is recently found to debit the Sugar Development Fund for arrears and export subsidy.
Apparently banks are not convinced of any viable financial improvements of mills by ad-hoc measures. They are reluctant to lend as is the case with Thai banks for paddy. Soon the Central/state governments will shift to “caretaker mode” for coming elections. Ministers, CMs or secretaries will become inert for next six months. Export subsidy is also in breach of WTO’s compliance. Short term interventionist mechanism of somehow finding funds to keep industry in survival mode by oxygenating it when gasping is no remedy.
Reducing cane prices will also have withdrawal syndrome and growers can also threaten retribution as seen in Thailand. Political will is needed to provide input-output equilibrium for all stakeholders. One can hope that coming regime delivers the right medication before chronic infection of price irrationality becomes cancerous, mills close down while farmers let the sugarcane rot and India becomes a net importer of sugar by political and policy-negligence.