Assessing the Thai Paddy Pledging Policy: Its Performance and Social Costs

Published date01 September 2014
Date01 September 2014
World Food Policy - Volume 1, Number 2 - Fall 2014
Like other countries, ai agricultural
price intervention has changed from
a regime that penalized the farmers
to one that provides farm subsidy in the
late 1980s, the sugar industry being an ex-
ception (Ammar and Suthad 1987). Before
1986, rice export in particular was heavily
taxed at the border. In addition to this direct
imposition, the rice sector was hurt by the
tari protection in favor of the manufactur-
ing sector and the resulting over-valuation
of baht. One consequence is the large net
resources transfer from the agricultural sec-
tor (Ammar and Suthad, 1987). anks to
e paper assesses the benets and costs of the ai paddy pledging policy be-
tween October 2011 and May 2014. e scheme, which purchased 52 percent
of total paddy production from the farmers, was to date the largest interven-
tion by the government in the rice market. Its total costs were 984 billion baht
(or 41% of the 2013 scal budget). e government also became the largest
rice seller, trying unsuccessfully to corner the export market by withhold-
ing large supplies of rice from the market. ai rice export dropped sharply
as the export prices of ai rice were much higher than those of India and
Vietnam which toppled ailand from the world largest exporter position.
e attempt to release rice through the channel of Government-to-govern-
ment sales failed. But the government refused to admit its failure and kept all
rice sale information in secret. In fact, most of the claimed G-to-G sales were
sold to the connected traders who in turn sold them in the domestic market.
e policy directly beneted at least one third of the rice farmers who sold rice
to the government. Other non-participating farmers also beneted from the
higher domestic price. Yet most of the benets went to the medium- and large-
scale farmers. ai consumers also gained because the government maintained
a smooth ow of rice in the domestic market at the prices prevailing at the end
of the previous government, despite higher paddy price. e study also nds
that there was corruption in the government rice sale as it sold rice to a few
connected traders at the prices below the market prices. at explained why the
scal loss is estimated at 595 billion baht to 885 billion baht, depending on the
time it will take to dispose 18 million tons of rice in the government stock. e
policy also creates other social costs. us the social costs exceeded its benets.
Keywords: social costs, scal loss, government-to-government sales, rice ex-
port , benets, economic rent
Nipon Poapongsakorn1& Kamphol Pantakua2
Assessing the ai Paddy Pledging Policy: Its
Performance and Social Costs
1 Distinguished fellow, ailand development Research Institute.
2 Researcher, ailand development Research Institute.
Assessing the ai Paddy Pledging Policy: Its Performance and Social Costs
the depression of world agricultural prices,
the rice premium was abolished in 1986,
resulting in a more neutral trade policy
(Warr and Achanun 2007). ere was also
a major political change aer 1986 when
ailand began to have elected prime
ministers, except for two short periods of
military governments and a recent mili-
tary coup on May 22, 2014. Since then, the
elected governments had begun to increase
farm subsidy in order to secure more votes
from the farmers who account for almost
40% of the workforce.3
A major instrument used to sub-
sidize farmers was by a so-called “paddy
pledging”. is instrument was introduced
in the 1981/82 crop year, originally to pro-
vide short-term liquidity to enable the
farmers to delay the selling of their paddy
during the harvesting period. Its ai name,
Jam Nam Khao,” literally means “paddy
pawning”. e farmers pledged their paddy
as a collateral against a subsidized non-re-
course loan4 from the state owned Bank for
Agriculture and Agriculture Cooperative
(BAAC). Since the loan was 80-90% of the
market value of farmers’ collateral, only a
small amount of paddy was pledged, e.g.,
0.001%-19% of production (Nipon 2010).
In 2001/02, the aksin Shinawa-
tra government, which won a landslide
election based on a populist policy plat-
form, raised the pledging price of paddy to
100% of the market price, and then further
to 110% - 135% in 2004/05 and 2006/075.
Since then the instrument was used to
support the price for farmers at levels sub-
stantially above market levels, yet its mis-
leading name “Jam Nam Khao” has been
retained. As a result, the volume of pledged
paddy jumped to 38% of paddy production
in 2004/05. is policy was pursued every
time aksin’s party (under various names)
came to power, notably when it won the
election in 2011, it dramatically increased
the paddy pledging price to 15,000 baht per
ton for ordinary (non-fragrant, non-glute-
nious) white rice, which was about 150% of
the market price at that time. Furthermore,
the government told the farmers it would
stand ready to buy every grain of rice from
the farmers. Although the pledging scheme
allowed farmers to redeem their paddy
within four months, none did so. ere-
fore, the government, in fact, became the
largest rice buyer at this inated price.
e new objectives of the policy
were very ambitious, i.e., to increase the
farmers’ income, to stimulate the economy,
to regulate the supply of rice and maintain
(retail) price stability, and, by cornering the
world rice market, to increase the export
prices of ai rice (National Rice Policy
Committee 2012).
is paper will assess the perfor-
mance of the policy with respect to its objec-
tives, except the simulation of the economy,
which has to be done using the macroeco-
nomic model. Aer describing the size and
operation of the scheme it tracks the ow
of paddy as it le the farm, was pledged to
the government, milled into rice and then
exported, sold to the domestic consumers
or put into storage (Sections 1 to 3). In de-
3 ere is a serious problem of counting the number
of farmers as many of them hold multiple occupa-
tions. Using the full-time denition of 40 hours per
week in the Labor Force Survey, agricultural work-
force is estimated at 27% of total employment in
4 A non-recourse loan is a loan that is secured by a
pledge of collateral, but for which the borrower is not
personally liable. If the borrower defaults, the lender
can seize the collateral, and the lender’s recovery is
limited to the collateral (Wikipedia)
5 Between the 2004/05 and 2005/07, the pledging
prices of non-glutinous paddy were 4.6%-5.2% high-
er than the market prices, while the pledging prices
of jasmine paddy were 33.7%-35% higher. But there
was a ceiling on the amount of pledged paddy for
each farmer. e pledging price of jasmine variety
declined to 6.4% in 2006/07.

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