Government Failure: Thailand’s Rice Subsidies

File this under another grand moment of government failure: Thailand’s rice subsidies

From the Wall Street Journal Real Times Economic Blog (bold mine)

Under the program, the government offered to buy rice from local farmers for up to 50% above the market rate in a bid to boost incomes and spending among a key constituency. The premise was that by hoarding rice Thailand would be able to force up rice prices globally, reaping a larger profit when the stocks were eventually sold.

But the program backfired as India and Vietnam ramped up their own rice exports, knocking Thailand from its spot as the world’s top producer and forcing prices down.

State warehouses were flooded with an estimated 10-15 million tons of rice that Ms. Yingluck’s administration was forced to sell in order to pay farmers after the plan’s financing became unsustainable, driving down prices further. Still, many farmers went unpaid for months, and a few committed suicide after finding themselves unable to pay off debts.

This seems like a wonderful depiction of central planning failure and of the political economic lesson called “There is no such as a free lunch”

The former populist governments of Thailand bought the farmers votes by providing rice subsidies. That’s because about 2/3 of Thai’s population have reportedly been rice farmers. The government eventually came to realize that their grand scheme of influencing world markets backfired which is classic example of the fatal conceit from central planning. 

And most importantly, the government eventually awakened to the reality that taxpayer resources has LIMITS!!!

So the parasitical dependency relationship which had been nurtured from Thai’s rice politics caused financial havoc to many farmers where many were left unpaid which prompted a few to commit suicide.

Thai’s rice politics seem to ring a bell with the Philippine setting whose very costly counterpart carries a slogan “rice self-sufficiency” program. Like in Thailand, spending by the government continues to bulge, part of which has been financed by ballooning debt.

The article’s intent has been to report that the junta government has “officially confirmed” the end of the controversial subsidy program under its regime. This should be a welcome development. But the military government said that the decision for its continuance “could be left to the new interim government”. This means for now Thai's rice subsidy has conditionally been placed in the backburner subject to future political exigencies. Politics has always been about smoke and mirrors.

Biofuels Aggravates Food Price Inflation, Promotes Hunger

One product of environmental politics has been to promote the politically privileged taxpayer supported, green energy industry.  Biofuels is part of the renewable green energy.

Yet the unintended effects of biofuels has not only been cronyism, but importantly, biofuels contributes to the constrains in food supplies that has led to higher prices and thus food shortages.

Here is the New York Times,

In the tiny tortillerias of this city, people complain ceaselessly about the high price of corn. Just three years ago, one quetzal — about 15 cents — bought eight tortillas; today it buys only four. And eggs have tripled in price because chickens eat corn feed.

Meanwhile, in rural areas, subsistence farmers struggle to find a place to sow their seeds. On a recent morning, José Antonio Alvarado was harvesting his corn crop on the narrow median of Highway 2 as trucks zoomed by.

“We’re farming here because there is no other land, and I have to feed my family,” said Mr. Alvarado, pointing to his sons Alejandro and José, who are 4 and 6 but appear to be much younger, a sign of chronic malnutrition.

Recent laws in the United States and Europe that mandate the increasing use of biofuel in cars have had far-flung ripple effects, economists say, as land once devoted to growing food for humans is now sometimes more profitably used for churning out vehicle fuel.

In a globalized world, the expansion of the biofuels industry has contributed to spikes in food prices and a shortage of land for food-based agriculture in poor corners of Asia, Africa and Latin America because the raw material is grown wherever it is cheapest.

Nowhere, perhaps, is that squeeze more obvious than in Guatemala, which is “getting hit from both sides of the Atlantic,” in its fields and at its markets, said Timothy Wise, a Tufts University development expert who is studying the problem globally with Actionaid, a policy group based in Washington that focuses on poverty.

With its corn-based diet and proximity to the United States, Central America has long been vulnerable to economic riptides related to the United States’ corn policy. Now that the United States is using 40 percent of its crop to make biofuel, it is not surprising that tortilla prices have doubled in Guatemala, which imports nearly half of its corn.

At the same time, Guatemala’s lush land, owned by a handful of families, has proved ideal for producing raw materials for biofuels. Suchitepéquez Province, a major corn-producing region five years ago, is now carpeted with sugar cane and African palm. The field Mr. Alvarado used to rent for his personal corn crop now grows sugar cane for a company that exports bioethanol to Europe.

Aside from biofuels, on the supply side, agricultural subsidies, agricultural protectionism and various forms of (regulatory) interventionism have all contributed to higher prices.

On the demand, aside from demand from China and emerging markets, global central banking relentless pumping of money have also pumped up prices of food. 

And given the acceleration of balance sheet expansions by global centrals in order to "promote aggregate demand" (in reality buoy asset prices to save the distressed too big to fail politically connected banking system and insolvent welfare states), the risks of food crisis, from the cumulative effects of interventions, cannot be discounted.

Food Crisis Watch: World Food Prices at 6 month High

For the mainstream’s view of the world, price inflation has hardly been a concern.

Yet in reality, price inflation appears to be seeping into the global economy mostly channeled through the commodity spectrum (one must add health, education costs among the other contributors).

A particular cause of concern has been rising international food prices which according to the FAO is at a 6 month high.

chart from FAO

From Businessweek/Bloomberg 

World food prices rose in September to the highest in six months as dairy and meat producers passed on higher feed costs to consumers, the United Nations’ Food & Agriculture Organization said.

An index of 55 food items tracked by the FAO rose to 215.8 points from a restated 212.8 points in August, the Rome-based agency reported on its website today. Dairy costs jumped the most in more than two years.

Livestock breeders and dairy farmers are passing on the higher cost of feed, after grain prices jumped in June and July, according to Abdolreza Abbassian, an economist at the FAO in the Italian capital. Higher prices don’t mean a food crisis is imminent, he said today by phone.

“Despite a very difficult market, the fundamentals that suggest a food crisis are just not there,” Abbassian said. “Market sentiment is now accepting high prices more as a rule than as an exception.”

Surging food crisis has been associated with social strife, particularly as one of the major trigger to the recent Arab Spring revolts. (chart from Sovereign Man)

While changes in weather patterns have proven to be a catalyst, many other policies such as tariffs, subsidies (agri and bioethanol) and others plays a role in exacerbating the supply side situation.

Importantly, massive inflationism by global central banks has been a key contributor to the demand side.

A continued ascent in food prices will amplify the risks of stagflation especially pronounced for emerging markets.

This is one very important dynamic to keep an eye on.

Have some steak today before they become pricey.

Agricultural Subsidies Keep Agricultural Commodity Prices High

Wonder why prices of agricultural commodities remain stubbornly lofty despite advances in technology?

Not all have been about "demand" growth from emerging markets.

The widely unseen forces come from central bank money printing, trade restrictions and agricultural subsidies. For instance the US government subsidizes farm owners not to farm (which contributes to a reduction in supplies).

From Wall Street Journal Blog (bold highlights original)

More farmers than expected applied to put their land in a government program that pays the farmers not to plant crops and not all of the acres could be accommodated, the U.S. Department of Agriculture said Friday.

The USDA accepted 3.9 million new acres into the Conservation Reserve Program, or CRP, in the latest sign-up period and turned away 600,000 acres.

Interest in the program was so high, a USDA spokesman said, the agency extended the time period to allow farmers to get their applications filed.

A guaranteed return on land is appealing to farmers, especially if the land isn’t well suited for planting crops, said Todd Davis, a senior economist with the American Farm Bureau Federation.

The USDA is anxious to enroll new acres in the program that is aimed at protecting environmentally sensitive land because on Sept. 30 the contracts that keep about 6.5 million acres of potential farm land idle will expire. Contracts take land out of production, thus conserving soil, for either 10 or 15 years.

About 30 million acres are now idled under the program, but the 6.5-million-acre exodus will be the largest ever. The USDA spends about $1.8 billion a year on the program, paying “rent” to land owners.

Bottom line: politics distorts demand and supply.

Unintended Consequences From Europe's Agricultural Subsidy

This is another example of the unintended effects from market distorting regulations.

From the New York Times

(all bold highlights mine)

``Call it the mystery of the European sugar triangle.

``It began when Belgian customs officials examined shipping records for dozens of giant tanker trucks that outlined an odd, triangular journey across Europe. The trucks, each carrying 22 tons of liquid sugar, swung through eight nations and covered a driving distance of roughly 2,500 miles from a Belgian sugar refinery to Croatia and back — instead of taking the most direct, 900-mile route.

``Along the way the trucks made a brief stop in Kaliningrad, a grim and bustling Russian border checkpoint on the Baltic Sea.

``Suddenly the sugar triangle made sense to them. Because Russia, and not Croatia, was listed as the intended destination, the shipments qualified for valuable special payments known as export rebates from the European Union’s farm subsidy program.

``Some 200 shipments roared along this route over a three-year-period, investigators say, earning 3 million euros in refunds (about $4.5 million) for the Belgian sugar maker Beneo-Orafti. In the spring, dozens of Belgian and European investigators raided the company’s offices, freezing half of its refunds and initiating an investigation that could cost the company the remaining 1.5 million euros, and possibly more. In the sprawling European subsidy program — which lavishes more than 50 billion euros ($75 billion at current exchange rates) a year in agricultural aid — no commodity is more susceptible to fraud, chicanery and rule-bending, experts say, than simple household sugar."

Regulatory arbitrage according to wikipedia.org is "where a regulated institution takes advantage of the difference between its real (or economic) risk and the regulatory position".

Simply put, where some people try to profit from regulatory loopholes. The New York Times call this "cookie jar waiting to be pilfered"

Additional notes from the article:

-impact of price control via subsidies...

``Critics have long said that Europe’s subsidy system distorts the market, skewing competition and driving up prices. That is especially true for sugar, which in Europe has traded at roughly double the world market rate for almost two decades. European sugar prices are the highest per capita of any region in the world and about 20 percent higher than in the United States.

-failed goals

``But investigators say that fraud and rule-bending also contribute significantly to higher costs, because of the millions lost in uncollected revenue and in the payment of undeserved subsidies."

-spawns illegal activities...

``In addition, there are continuing investigations in Germany, Hungary and Belgium into cartel activity aimed at fixing prices and dividing up customers and territory."

``Perhaps the most common scheme used to game the system is to mix in cheap cane sugar from abroad with European beet sugar, which lowers production costs and increases volume. Companies doing this often falsely declare the country of origin for the sugar, which is illegal.

-producers confused with the bureaucratic maze...

``Sugar companies claim their activities are misinterpreted because they are governed by a byzantine European Union system that invites confusion. “It’s very complicated” and difficult for anyone to understand, said Dominik Risser, a spokesman for the Südzucker Group, a German company that is the industry giant in Europe and owns 40 factories in 10 nations, including those of Beneo-Orafti.

-producers or traders devise schemes to evade or circumvent regulations and taxes

``The mixing schemes extend into exotic hybrids — sugar mixed with dashes of tea and cocoa. By doing this, exporters can declare their products processed foods, and thus pay lower customs fees or avoid them altogether."

All these translates to a failure of policy or regulations.

Let me add that such distortive regulations will further put a strain on the global food supply chain as monetary stimulus from global central banks gains more traction, heightening the risks of a food crisis.

It's time to abolish such subsidies.