Of Rice and Men

Although not as popular in the West, rice is the single most important staple food for a majority of the world’s population. The cereal grain accounts for nearly a fifth of total calories consumed by the entire human species. That fact alone should discourage folks from meddling with production, free trade and availability of rice. But governments still try it and, nearly always, find themselves on the wrong end of unintended consequences.

This year’s chief rice manipulator has been Thailand, the world’s top rice exporter. Following her late-2011 election, Thai Prime Minister Yingluck Shinawatra initiated a multibillion dollar subsidy with the aim of pumping money into the country’s rural heartland. Shinawatra’s plan (which helped propel her into office) was predicated on the idea the government could buy rice (specifically unmilled rice, also called “paddy”) from rural farmers at double the market rate, stockpile the excess over a certain level and then re-sell it on world markets after prices rose for a tidy profit.

In essence, she hoped to manipulate global rice prices to her country’s benefit—and of course, gain the support of the rural electorate come the next election. (We’re not much fans of this plan, though we suppose it’s better than the idea she floated to form an OPEC-like rice cartel of Southeast Asian producers to control supply worldwide.)

So far, Thailand’s spent nearly $8 billion buying rice from its farmers. And Tuesday, Shinawatra’s government approved plans to spend another $7.8 billion—2% of Thailand’s total economic output—to buy additional rice from upcoming harvests. However, Shinawatra (and other proponents of the plan) failed to account for the importance of incentives. Specifically, incentive for other rice producers.

As Thailand began buying up its own rice and controlling exports to other countries, rice prices spiked. (It should be noted, droughts in the US and Brazil, among other factors, have also played a large part in the price increases.) Demand for rice is fairly inelastic—dietary staple that it is. So other countries in the region balked at the higher prices and boosted their own production—both for international trade and for domestic consumption. India, for example, loosened its stringent controls on exports of non-basmati variety rice. (See here for an interesting story on how Indian rice export controls roiled the global rice market in 2007.) Vietnam invested heavily in increasing production of higher quality rice to supplant lost Thai exports and has found ample willing buyers. The country may overtake Thailand as the world’s leading exporter of rice as early as next year.

That’s left Thailand in a precarious position with a large stockpile of rice few foreign buyers are willing to purchase. It's estimated that to even recoup the costs of its program, Thailand would have to sell its stockpiled rice at $800 a ton—today’s market price for Indian non-basmati rice runs a mere ~$400 a ton. Add to Thailand’s tab another $7.8 billion in government rice purchases, processing and stockpiling costs, and Thailand’s break-even price on the whole experiment goes up.

Of course, Thailand may yet break even. There’s no telling what supply pressures may appear—drought, natural disasters, plague or fungus that destroys rice crops. But our guess is that’s a long shot. Or perhaps a group of Thai academics succeed in the constitutional court challenge of Shinawatra’s rice scheme and the whole plan is unraveled at a still not small cost to Thailand—one can hope. All this just goes to show, even the best-intentioned, government-laid plans of rice and men often go awry.