Thai rice scheme in death throes, but what next?

LAUNCESTON, Australia - That Thailand's controversial rice-buying scheme is now in its death throes is no surprise, but it does beg the question as to what will replace it in the world's former top exporter of the grain.

Buying rice from farmers at prices that at some stages were two-thirds above the prevailing Asian benchmarks was always going to be a costly exercise doomed to eventual failure.

When Thai Prime Minister Yingluck Shinawatra introduced the rice mortgage scheme shortly after her landslide election victory in July 2011, I wrote that the "generous subsidies planned by the incoming Thai government ... are likely to collide with some harsh economic realities".

Those realities included the fact that rice buyers were largely able to switch to competitors, allowing Vietnam and India to overtake Thailand as the world's top rice exporters.

Since Yingluck's government decided it would rather store rice than sell it at a loss, stockpiles mounted and are now estimated at 15 to 17 million tonnes, more than one and half times Thailand's annual exports of around 10 million tonnes, achieved prior to the scheme's introduction.

The administration also made itself a laughing stock by claiming to have sold vast quantities of rice in government-to-government deals, which were denied by the other parties said to be involved and by traders in the industry.

As the stockpiles mounted, money to pay farmers ran short, and part of Yingluck's current problems are related to efforts to find 130 billion baht (S$5 billion) to pay farmers for the latest crop.

To make matters worse, Thailand's anti-corruption agency is now probing the scheme losses, estimated by the World Bank at some $6 billion a year.

This has led to China's cancellation of a deal for 1.2 million tonnes of rice, with Thai Commerce Minister Niwatthamrong Bunsongphaisan acknowledging that the Chinese state-owned buyer "lacks confidence to do business with us".

Private and state-owned banks have refused to lend Yingluck's embattled government the money to pay the farmers for the main crop harvested last October, citing legal uncertainties given that the government is now in caretaker mode, which limits its powers.

This situation may persist for some time, given the disrupted Feb. 2 general election meaning that the caretaker administration may continue for months while legal challenges are heard.

So, where does this leave the rice market?

It's too early to say whether Yingluck and her government will survive, be replaced by the military or a military-backed administration or by some other transitional arrangement, but it is safer to say that her rice scheme is fatally damaged.

However, there are likely to be months of uncertainty ahead, and a policy vacuum that may fuel anger from the farmers and rural communities that form the backbone of Yingluck's support as they realise that the government's financial support has gone.

For rice markets, it seems unlikely that whoever ends up in control in Bangkok will have any choice other than to continue trying to offload the massive stockpile at whatever price can be achieved.

This means Asian rice prices are likely to remain under pressure until the Thai overhang is cleared.

But maybe not for the next few months, or for however long it takes Thailand to resolve its current political crisis.

Thailand is likely to struggle to export significant volumes while the political situation remains unresolved, meaning that buyers may have to look elsewhere.

This could provide a boost to prices for Vietnamese and Indian rice, or at least a narrowing of the differential to Thai prices.

Benchmark Thai 5-percent broken rice RI-THBKN5-P1 was at $445 a tonne on Feb. 4, an 11 percent premium to the competing Vietnamese grade RI-VNBKN5-P1 .

Over the longer term, it's likely that Thailand will continue some form of support for farmers, but it's equally likely that this will be nowhere near as generous as Yingluck's scheme.

Over time this means that Thai supplies are likely to return in significant volumes, which will keep prices capped while also pushing the market to return to a greater focus on supply and demand fundamentals.

Clyde Russell is a Reuters market analyst. The views expressed are his own.