Thailand is set to sell half-a-million tons of rice on world markets at a loss, as it scrambles to offload a record stockpile deteriorating in quality in warehouses filled with grain bought under a government scheme.
The two-year old policy to pay farmers more for rice than it is worth on international markets is straining the country's finances, has cost Thailand its spot as world's top exporter and provoked concern at the World Trade Organization.
While officials publicly deny the politically sensitive scheme is in crisis, the government is looking at measures to stem ballooning losses so far estimated at $6 billion.
A Thai official this month also said the government might cut the price it pays to a level closer to the value of rice in international markets, causing an angry response from farmers. Bangkok may also stop buying lower quality strains of rice.
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Rival producers such as India and Vietnam, who have stepped into the vacuum caused by the exit of Thai exporters from the market, are watching closely in case Thailand is forced to dump millions of tonnes of rice onto well-supplied world markets, causing prices to slump.
In questions tabled for a WTO committee this week, the United States again challenged Thailand to explain how it planned to dispose of rice under the scheme.
Government stockpiles are estimated at a record 17 million tons of milled rice, nearly twice what Thailand used to export each year before the scheme came in two years ago.
An unraveling of the scheme would also be politically costly for Prime Minister Yingluck Shinawatra, given it helped her win millions of rural votes when she was elected in 2011.
Farmers say they are having to wait months for their money, with the state bank running the program complaining it has only received a fraction of the funds needed.
"The government might have run out of money. I've had to wait for two months," said Prasert Chamsopa, 66, a farmer in the rice-growing province of Suphan Buri who had sold 35 tons of paddy to the government.
According to the agricultural cooperative in the province, 100 km (60 miles) north of Bangkok, more than 1,000 farmers had experienced similar problems and were getting ready to stage coordinated protests with farmers in other provinces.
That leaves the government in a bind: it is committed to buying yet more rice, which it has no room to store and which it is unable to sell without suffering a huge loss.
Thai 5 percent broken rice was offered at $545 per ton this week, down from $570 early this year but still way above offers for the same grade from India of up to $450 per ton and from Vietnam of about $400 a ton.
A Commerce Ministry official said Thailand planned to release up to 500,000 tons from older crops onto the market by April, and that the sale would be based on market prices.
"We accept that some of the rice is from the previous crop which is quite old and the quality is not very good, so it's impossible to ask for very high prices," said Thikumporn Nartworathus, deputy director of the foreign trade department of the Commerce Ministry, adding it would be sold via a tender or government-to-government deals.
Traders and industry officials say the government will suffer big losses if it sells now with plentiful supplies from India and Vietnam, and with the baht hitting a 16-year high this month, making Thai rice more expensive in dollar terms.
The intervention scheme, criticized by academics, economists and the International Monetary Fund (IMF), is coming under increasing global scrutiny.
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At the WTO's agriculture committee meeting this week, Washington asked Thailand to say whether stocks were being exported or used domestically.
In questions seen by Reuters, it said that Thailand had previously said data on the scheme, including on rice exports, was on government websites, but this data had been discontinued.
A potential trade complaint is unlikely until Thailand formally responds, but Canada, the United States and Australia urged Bangkok to come back promptly. The European Union also said it was concerned and that Bangkok needed to say clearly how it would release stocks.
The Thai government is paying 15,000 baht ($510) a tonne, leaving export prices up to a third higher than equivalent grades from India or Vietnam, which explains why - for the first time in three decades - Thailand was not the world's biggest rice exporter in 2012.
In early March, a senior official at Thailand's Commerce Ministry tested the water by suggesting the government could stop paying the high price for rice.
The reaction in the countryside was immediate and angry: the Thai Farmers Association threatened to bring thousands of farmers to Bangkok to protest against the move.
The Commerce Ministry official said the government might also consider stopping buying 18 varieties of fast-growing rice of lower quality, which farmers have used to squeeze in more crops to cash in on the intervention scheme.
The government is running short of properly equipped warehouses and, even if stored in good conditions, the quality of the rice could start deteriorating after a year or two.
Commerce Minister Boonsong Teriyapirom said in October that 7.3 million tonnes had been sold in government-to-government deals but the foreign countries named have not confirmed this and exporters have seen no port activity to back it up.
Samarendu Mohanty, a senior economist at the Manila-based International Rice Research Institute (IRRI), said that although rice consumption in 2013 should remain strong, global rice prices would fall if Thailand offloaded stocks.
Kiattisak Kalayasirivat of Novel Agritrade warned prices could drop by $20-$30 a tonne if Thailand sold stocks, although demand from Africa or China would likely provide support.
Thailand operates the intervention scheme through the Bank of Agriculture and Agricultural Cooperatives (BAAC), which has spent up to 400 billion baht buying rice since October 2011 at a price that is around 50 percent above the market price.
The Ministry of Commerce is supposed to process rice and then sell it and reimburse the bank, but BAAC's vice-president told Reuters it had only got 86 billion baht from the ministry.
"We need to ask the Finance Ministry to guarantee an extra loan of around 70 billion baht so that we can lend more money to the Commerce Ministry to run the scheme," Supat Eauchai said.
The Thailand Development Research Institute (TDRI) warned the scheme had already caused a loss of 175 billion baht ($6 billion). It calculated this as the difference between the intervention price and the market price, as well as costs for storage, logistics and to reflect a deterioration in quality.
If this went on, it could help push Thailand's debt-to-GDP ratio to the legal limit of 60 percent from about 44 percent now, it said. In comparison, the government says the budget deficit for this fiscal year will be 300 billion baht.
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Intervention is nothing new in Thailand: it was introduced in the 1980s and successive governments have drained a certain amount of rice from the market each year to support prices.
But previously, the rice was bought at around the market level, providing a safety net for farmers. In contrast, the price set by the Yingluck government was almost double the market level in the run-up to the July 2011 general election.
That was aimed at boosting the income of farmers, supporters of former Prime Minister Thaksin Shinawatra, Yingluck's brother, who was ousted by the military in 2006 but is widely believed to guide government policy from self-imposed exile.
Whatever the merits of that objective, industry officials say something will have to give.
"The government can't go on with this scheme and it needs to adjust things, otherwise it could mean a collapse of our fiscal stability, affecting each and every taxpayer," said Vichai Sriprasert, honorary president of the Thai Rice Exporters Association.