RT Vol. 7, No. 2 Troubling trade

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13Rice Today April-June 2008

International rice trading is not a business for the faint-hearted.

Thailand’s exporters knew that well. They also knew, whenthey prepared in November

2007 for what was supposed to be a

boom year ahead, that prices werelikely to rise. Little did they realizehow steep that rise would be.

Poor weather and domesticsupply concerns had severely restricted competition on the world’smarkets from Vietnam and India,Thailand’s main export rivals.China, Egypt, and Australia had also

restricted their rice exports. So, 2008amounted to a one-horse race, and,as the 2007 harvest began to roll infrom the elds, Thailand’s exporters began their wheeling and dealing, with buyers clamoring at the door.

“You can only make money if you speculate properly,” says veteran

exporter and former president of theThai Rice Exporters’ Association Vichai Sriprasert. “At the time of the deal, we expect to make $5a ton. Nobody has 100% of thestock in hand. We hope to buy therest. If I end up making $1 perton, then I’m happy with that.”

It was their forward-orders

practice that let them down, in asellers’ market the likes of whichthey had never experienced before.Local and export prices were soaring,even as they struck their deals todeliver in three or four months’ time, when they still had to buy the ricethey had just sold. In some cases,

the small prot margins they werehappy to accept disappeared withina few hours. Then, they could only watch in despair as the spiralingprices battered at their solvency. Inorder to honor their commitments,some were forced to buy milled riceat a ruinous US$200 per ton morethan they had agreed to sell it.

It would be easy to think that the escalating price of rice is a boon for exporters—but,

in a Thailand exclusive, Rice Today reports on the chaos that has Thai traders reeling

Troubling trade

Story and photos by Bob Hill

paRBoiLeD Rice ldd rvrd dk nBnkk. i wll b uld dwn c pryRvr gulf f tlnd, b ldd brdr bund fr afr.



14 Rice Today April-June 2008

In the few months fromNovember to February, 30 to 40exporters, many of them among thecountry’s most experienced traders,lost an estimated $128 million.

Worse still, supplies of paddy (unmilled rice) all but dried up inlate February, leading to claims thatfarmers and millers were hoardingit to speculate on even higherprices. The government ordered anofcial check of its own stocks afterthe discovery that 12,000 tons of paddy had “disappeared” while in

the storage custody of millers, andexporters scoffed that 12,000 tons was the tip of a very large iceberg.The accusations rumbled back and forth through a shell-shockedindustry, bleeding on the one handand proting on the other. At thesame time that many exportersfaced heavy losses, farmers, localpaddy traders, and many millersproted like never before.

Unable to nd supplies and

badly scared, many of Thailand’ssmaller exporters withdrew fromtrading in March, to brood and wait for the second crop to comein, later that month and in April.Others cautiously accepted orders nomore than one month in advance.

Had they kept an eye on worldfood prices, they might have beenforewarned. The price of wheat hasdoubled since April 2007 and the foodprice index of the United Nations’Food and Agriculture Organizationclimbed by almost 40% in 2007.

Demand is outpacing supply and the world’s stocks of cereals like rice aredwindling to the point at which they can no longer provide an effective buffer in years of poor production.

Although population growthis the fundamental cause, theproduction and pricing problems arealso partly due to weather problemslinked to climate change as well asrising oil prices boosting demandfor biofuels. Changing diets in fast-

developing countries such as Chinaare also a factor, with more landneeded to raise livestock to meetincreasing demands for meat.

“The force of the technology thatcreated the Green Revolution hasrun out,” says Mr. Vichai. “Worldstocks of rice have been fallingfor 4 or 5 years, and consumptionof rice exceeds production. Thisis a very dangerous situation. Weneed a new level of technology in the rice elds of the world, sothat we can meet the demand.”

In 2007, Thailand exportedabout 9.5 million tons of rice. In the4 months from November 2007 toFebruary 2008, exports acceleratedto 1 million tons per month—wellabove the expected monthly rate of 800,000 tons. Some of Thailand’s biggest rms, such as CP Intertrade,part of the giant Charoen Pokphandconglomerate, say that rice exports will bring them a bonanza. Other big rms that bought rice at auction

thai Rice exrr’ a srry-grl Krbk imur (right ), w l f xuv f Kmlkj gruf m, vr l f bd rbld r bud fr nr dB Kmlkj’ Bkk l.




from the Thailand government’sstocks and were still holdingsizeable amounts also raked in big prots in the early months of the year. Smaller exporters simply didn’t have the money to do that.

The Thailand government hasset a target of 8.75 million tons

for rice exports this year, and asenior government ofcial closeto the rice trade says he is “quitepositive” the target will be reached.

The country has about 400licensed rice exporters. Of these, 185 belong to the Thai Rice Exporters’ Association, and, according to itssecretary-general, Korbsook Iamsuri,this group accounts for more than80% of the country’s rice trade.

The association says that, in the 3months from 6 December 2007 to 12

March 2008, the f.o.b. prices of majorThai export grades of rice rose way beyond expectations. The price of 5% white rice rose from $348 to $544 perton; Hom Mali 100% B climbed from

$606 to $771; parboiled 100% wentfrom $380 to $604; and broken A1super rose from $321 to $512. At lastreport, the pace of the escalation wasundiminished. (f.o.b. stands for “freeon board,” which means the seller bears the cost of loading goods ontoa ship or other form of transport, at

a given port or point of departure.)Making the trading position

of Thai exporters much moredifcult is the need to conduct alltransactions in U.S. dollars. Notonly is the dollar growing weaker, but their home currency, the Thai baht, is appreciating against thedollar and showing no signs of slowing down. In January 2006,one U.S. dollar bought 40.77 baht;in January 2007, 35.55 baht; and inmid-March 2008, just over 31 baht.

As difcult as making a modestprot has become, it is often furthereroded by a volatile exchange rate.

“The exporters are scared,”admits the government ofcial,

who asked not to be named. “They must wait and see what happens.Meanwhile, there is speculation andhoarding. The exporters can’t buy rice, so this is a difcult time forexporters and millers. The farmersthink prices will continue to rise.”

Normally, the annual crop

totals 18 to 19 million tons of milled rice. Nine million tons areconsumed domestically, eight ornine million tons are exported,and the rest is held in stock.

“We don’t know where the 2007harvest is,” complains Ms. Korbsook.“At this time last year, I could buy 100,000 bags per day without any trouble. Today, I’m lucky if I can get10,000 bags.” She accuses farmersand millers of hoarding stocks tospeculate on higher prices. “They

should be selling it now, if they’regoing to sell it at all, because they’regetting a 500% markup. But nothingis hitting the market. It’s madness!”

Ms. Korbsook is also chief

paRBoiLeD Rice rll u f Bkk l f Kmlkj gruf cm, bud fr nr dB, afr.



1 Rice Today April-June 2008

executive of the Kamolkij Group

of Companies, having taken overthe family rm from her father.It claims to be the world’s largestexporter of parboiled rice (which issoaked and steamed before milling),shipping 400,000 tons per year tomarkets such as Nigeria and India.

In an effort to shift the paddy onto the market, the exporters’association has urged the governmentto set aside its controversial priceintervention program, a move it says would save Thailand billions of bahtper year. The association suggeststhat, without a price guarantee asa psychological backstop, farmersmay opt to sell, easing pressure ondomestic prices and dealing withthe current supply shortage.

The price intervention programhas existed for some years, but began to play a signicant role inthe country’s rice production andmarketing system as one of the early “populist” policies of the deposed

Thaksin administration. Since themilitary takeover in September 2006,guaranteed prices have sunk far below market prices. But, since theelection of the new government inDecember last year, populism is oncemore a driving force in Thai politics.

Under the scheme, farmers canopt to sell to the government at aguaranteed price or sell to traders ormillers if they can make more money.In years of low market prices, the

program has seenthe governmentgather hugestocks of up tove million tons,spread aroundthe country in countless

warehouses, many of them privately owned. The stockshave then beensold from timeto time by anelectronic auctionsystem. In March,the government’sstocks wereofcially 2.1million tons.

The exporters’ association

warns that, if the new governmentuses the program to once again sethigh guaranteed prices, it will affect both local and export markets.

The intervention scheme hasencountered many problems, theleast of which were claims thatrice entering the program had been mixed, with lower-gradedrice mixed with premium grades.This led not only to extensiveaccusations but also to widespreadDNA testing to ensure that buyers were getting what they paid for.

There have also been repeatedclaims that quantities of governmentstocks being held in privatestorage have “gone missing.”

Ms. Korbsook dismisses theprogram as riddled with corruptionand losses, and says that quantitiesof rice have been sold, switched,or mixed. “Maybe the politicianshave beneted,” she says, “but itmeans that the farmers don’t go

for quality. They can sell anythingat all at the guaranteed price. Itdiscourages improvement. Thefarmers don’t care when themarket needs better quality.”

“In theory,” concedes thegovernment ofcial, “it is notgood, because we should let supply and demand work. We shouldn’tintervene in the market.

“But realistically, the programis suitable for the character and

circumstances of Thailand.Developed countries subsidize theirfarmers directly, but we don’t havethat much money. We have 3.6 millionfarming families in rice alone, so wecan’t afford subsidies. We don’t puta lot of money into this intervention. We absorb some surplus quantities.”

“They keep the rice everywhere,”says Mr. Vichai. “Private millersare holding a lot of it, and themillers sell the paddy belongingto the government rst. When thegovernment releases stocks, they scramble to replace it, and instead of the price going down, it goes up!”

The exporters are also quick, intheir current frustration, to refutethe notion that middlemen haveconsistently squeezed farmers dry.Mr. Vichai, whose company, Riceland

International, began in the toughtimes of the Great Depression of theearly 1930s and who took over fromhis father after studying economicsin the U.S., says that, even in the best of circumstances, the protmargins of rice exporters are guredin fractions of 1%. Thai farmers, onthe other hand, often make 100%percent prots on their rice crops.

“The truth is, they will still bepoor because they don’t have enoughland,” he says. “They will not earnenough for a good life. We have toomany people and too little land.”

The exporters claim thatproducing paddy costs farmers about5,500 baht per rai (0.16 hectares), which at a recent exchange rate isabout $1,100 per hectare. Even if afarmer plants 2.5 hectares—aroundthe national average farm size—and both his yield and selling price areoptimum, his 100% prot will still be only about $172 per month.

The price rises also came toolate for the poor rainfed farmers, whose harvest was in October andNovember. The main proteershave been the irrigated farmersof Thailand’s central region, who plant three crops a year.

In the midst of the turmoil,Thailand’s rice industry has becomeintensely introspective. Governmentdepartments feel that developmentof the country’s rice industry still

Ms. KoRBsooK uv Kmlkj gru mn, wlm b wrld’ lr rr rbld r.




has a long way to go, particularly inthe effort to build yields and reduce water use. There has been talk of bringing the industr y together todiscuss its future, in the hope of achieving some kind of unity.

There’s also a plan to implementa zoning system in which farmers

will be compelled to grow varietiesthat perform well in their localfarming conditions and that arein market demand. The seniorgovernment ofcial said the planneeded another 4 or 5 years to setup, but, once operating, it wouldhelp overcome present problemsand assist in the marketing of Thailand’s crop. The exportersare skeptical, pointing out thatthere’s not a farmer born who takeskindly to any kind of compulsion.

Whatever might happen,prices are still rising.

“It is purely a matter of supply and demand,” Mr. Vichai says.“Higher oil prices mean that farmersare changing to fuel crops, and thesecrops will need more land and more water. Rice prices have to go up, orhumanity will have nothing to eat.The price will have to rise to the point where rice can compete, nancially,

with fuel crops. I believe the domesticprice of rice will triple, and will reach$1,000 per ton on the export market, just to catch up with oil prices.

“Maybe, at some point, theThailand government will interveneto protect domestic consumers.”

The seniorgovernmentofcial disagrees with the expectedmove to fuel crops.“Shifting to fuelcrops is not easy,”he says. “You needsuitable land andconditions. Ourculture demandsthat we still musthave rice as ourstaple food. It

is our soul andour spirit. In the beginning, wegrew rice for ourown consumption,and we expandedto become worldleaders in riceproduction. Nomatter whathappens, we willstill grow rice.”

In one way, both Ms. Korbsook and Mr. Vichai are typical of long-standing rice exporters in Thailand:they come from family rms thathave been operating for severalgenerations. Their companieshave diversied their businessespurely because of the huge risksand difculties of rice trading onits own, and the businesses have been kept within the family.

Ms. Korbsook believes acomplete overhaul of the rules andregulations surrounding Thailand’sentire rice industry is long overdue,and she is scathing in her criticismof what she claims is the industry’slack of ordinary integrity. “Ricehas so many steps to pass throughand there’s fraud, theft, andmismanagement all along the way.”

Mr. Vichai sees what is happeningas a “disruptive situation.”

“Too few people acknowledge thatit takes integrity—an integrity builtup over generations of reliability—tosurvive in this kind of situation,”he says. “This is a crucial time.It will tell the story of who willsurvive and who will not survive.”

Bob Hill is a Thailand-based writer

specializing in science and technology.

Government price

intervention scheme

Farmers

Farmer

cooperativesBrokersPaddy traders

Millers

BrokersExporters Wholesalers

Retailers

Domestic marketExport market

thai Rice expoRteR V srrr.

t ru w t r r

n wy rm rmr’ fld rr dm l.Source: Thai Rice Exporters’ Association.

RT Vol. 7, No. 2 Troubling trade

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