Constructive Thoughts for the Day

Constructive Thoughts for the Day
Permalink : http://blog.nationmultimedia.com/kriengsak

Sunday , June 22 , 2008

Contract farming rather than “selling the family rice paddy”

Posted by Kriengsak , Reader : 959 , 22:05:08 | Category : Economy

picture from http://thummada.com/php_upload2/Laotian-Rice-Farmer.jpg It is no exaggeration to say that the Thai people are a patriotic race. Thus, the thought of selling the family rice paddy to foreigners is an almost unthinkable notion, even though this is a neutral economic transaction. Inevitably such deals trigger much social controversy and high emotions. In the same manner, the rumor that former Prime Minister Thaksin invited leaders of a Middle East country to view Thai rice paddies to “showcase Thailand’s primary commodity” as well as to attract foreign investors to Thailand’s rice industry inevitably became the talk of the town. Newspapers were flooded with a legion of bitter rebukes and protests, all which shared the common theme, “He has betrayed our nation.” From an impartial standpoint, allowing foreign investor to own local farmlands cannot always be deemed a “national betrayal.” Many foreign investors have bought Thai properties or businesses but have not been stigmatized as “nation betrayers.” However, the possibility of allowing foreign ownership of Thai rice paddies has generated an overcharged response. Therefore, this type of response seems quite illogical. However, in my opinion, the decision as to whether or not the sale of a Thai business to foreigners is national betrayal should depend on its effects on the Thai people. Since the majority of Thai people are rice farmers, any action that maximizes the Thai farmer’s benefit may be deemed “in national interest.” The end goal of helping Thai farmers is to dramatically increase the prices for their unhusked rice. One way to do this efficiently is by increasing the number of potential unhusked rice buyers. The more people are trying to buy unhusked rice, the higher its prices will become. And the higher the unhusked rice prices, the more the rice farmers will benefit. If, however, foreign investors who want to buy rice face no competition, unhusked rice prices will remain low. The new rice paddy owners will become what economists call monopsonists, that is, people who have monopolies on rice buying over their farms. As a result, Thai farmers will not gain any long-term benefit. Furthermore, if a significant number of rice fields are purchased by foreigners, Thai farmers will lack sufficient land for their own needs, and the foreign investors could monopolize the rice industry, which could threaten our national food supply. For this reason, although transferring rice fields to foreign investors is not national betrayal per se, if it does not yield long-term benefit to Thai farmers, we can only conclude that such a situation is “harmful to Thailand.” However, I want to make myself absolutely clear. I am not saying that international trade or foreign investment is always “national betrayal.” It can benefit our nation, including the Thai farmers if the terms of the agreement are fair. Instead of selling rice fields to foreign investors, a situation which may not yield much benefit to Thai farmers, I propose that Thai farmers consider contract farming. In contract farming, Thai farmers remain the owners of their fields. They continue to work the soil, but they negotiate contracts with foreign investors, who will guarantee them a certain rate of return for their crop. The government negotiates with interested foreign investors and helps to maximize the benefit to Thai farmers. In other words, the government ensures that rice prices are maximized while the risk to farmers is minimized. Contract farming would prevent monopolies because it would force foreign investors to compete against other rice buyers. Then because the contracts would allow farmers flexibility, the farmers could easily switch to the buyers with the highest price. This system would bring much long-term benefit to the farmers. Some may argue that contract farming will yield benefit to only one group of Thai farmers, those “selected” as contract partners with foreign investors by the government. However, if a significant number of Thai farmers engage in contract farming and the foreigners contractors are new consumers, the supply of rice in local markets will decrease while its demand remain constant. Consequently, rice millers and merchants must compete to buy rice from the farmers, so that in the end Thai farmers may gain benefit from higher rice prices, even if they don’t get as high per bushel prices as farmers outside of the contract system. However, since balance is a necessary condition of good policy, several issues related to the topic of contract farming needed to be discussed. First, we must consider national food security. Though we desperately need to raise rice prices, yet we must also guarantee that in crisis times, such as times of war or natural disaster during which the rice crop may be devastated, the Thai people can put first claim on Thailand’s rice crop. In no way do we want foreign contract partners to have first dibs on our rice crop. Therefore, too much contract farming may lead to a shortage of rice in local markets. For this reason, the government must cap the amount of contract farming allowed, so Thailand can maintain a secure food supply. Another consideration is the effect of contract farming on other groups in the country. We cannot escape the truth that if Thai farmers become more economically prosperous, some other groups in Thailand may suffer. The most affected group would be the local rice millers in areas where contract farming would occur. Another affected group would be the middlemen in rice industry who would inevitably be “cut out” of the business cycle. The last group affected would be the consumers who must pay higher prices for rice. Thus, contract farming must be limited to balance the needs of these interest groups with those of the farmers. Allowing foreigners into the rice sector may be not be national betrayal, if the rules and mechanisms are properly set. Contract farming but benefit Thai farmers without endangering the national food supply.

picture from http://thummada.com/php_upload2/Laotian-Rice-Farmer.jpg

It is no exaggeration to say that the Thai people are a patriotic race. Thus, the thought of selling the family rice paddy to foreigners is an almost unthinkable notion, even though this is a neutral economic transaction. Inevitably such deals trigger much social controversy and high emotions.

In the same manner, the rumor that former Prime Minister Thaksin invited leaders of a Middle East country to view Thai rice paddies to “showcase Thailand’s primary commodity” as well as to attract foreign investors to Thailand’s rice industry inevitably became the talk of the town. Newspapers were flooded with a legion of bitter rebukes and protests, all which shared the common theme, “He has betrayed our nation.”

From an impartial standpoint, allowing foreign investor to own local farmlands cannot always be deemed a “national betrayal.” Many foreign investors have bought Thai properties or businesses but have not been stigmatized as “nation betrayers.” However, the possibility of allowing foreign ownership of Thai rice paddies has generated an overcharged response. Therefore, this type of response seems quite illogical.

However, in my opinion, the decision as to whether or not the sale of a Thai business to foreigners is national betrayal should depend on its effects on the Thai people. Since the majority of Thai people are rice farmers, any action that maximizes the Thai farmer’s benefit may be deemed “in national interest.”

The end goal of helping Thai farmers is to dramatically increase the prices for their unhusked rice. One way to do this efficiently is by increasing the number of potential unhusked rice buyers. The more people are trying to buy unhusked rice, the higher its prices will become. And the higher the unhusked rice prices, the more the rice farmers will benefit.

If, however, foreign investors who want to buy rice face no competition, unhusked rice prices will remain low. The new rice paddy owners will become what economists call monopsonists, that is, people who have monopolies on rice buying over their farms. As a result, Thai farmers will not gain any long-term benefit. Furthermore, if a significant number of rice fields are purchased by foreigners, Thai farmers will lack sufficient land for their own needs, and the foreign investors could monopolize the rice industry, which could threaten our national food supply.

For this reason, although transferring rice fields to foreign investors is not national betrayal per se, if it does not yield long-term benefit to Thai farmers, we can only conclude that such a situation is “harmful to Thailand.”

However, I want to make myself absolutely clear. I am not saying that international trade or foreign investment is always “national betrayal.” It can benefit our nation, including the Thai farmers if the terms of the agreement are fair.

Instead of selling rice fields to foreign investors, a situation which may not yield much benefit to Thai farmers, I propose that Thai farmers consider contract farming. In contract farming, Thai farmers remain the owners of their fields. They continue to work the soil, but they negotiate contracts with foreign investors, who will guarantee them a certain rate of return for their crop. The government negotiates with interested foreign investors and helps to maximize the benefit to Thai farmers. In other words, the government ensures that rice prices are maximized while the risk to farmers is minimized.

Contract farming would prevent monopolies because it would force foreign investors to compete against other rice buyers. Then because the contracts would allow farmers flexibility, the farmers could easily switch to the buyers with the highest price. This system would bring much long-term benefit to the farmers.

Some may argue that contract farming will yield benefit to only one group of Thai farmers, those “selected” as contract partners with foreign investors by the government. However, if a significant number of Thai farmers engage in contract farming and the foreigners contractors are new consumers, the supply of rice in local markets will decrease while its demand remain constant. Consequently, rice millers and merchants must compete to buy rice from the farmers, so that in the end Thai farmers may gain benefit from higher rice prices, even if they don’t get as high per bushel prices as farmers outside of the contract system.

However, since balance is a necessary condition of good policy, several issues related to the topic of contract farming needed to be discussed.

First, we must consider national food security. Though we desperately need to raise rice prices, yet we must also guarantee that in crisis times, such as times of war or natural disaster during which the rice crop may be devastated, the Thai people can put first claim on Thailand’s rice crop. In no way do we want foreign contract partners to have first dibs on our rice crop. Therefore, too much contract farming may lead to a shortage of rice in local markets. For this reason, the government must cap the amount of contract farming allowed, so Thailand can maintain a secure food supply.

Another consideration is the effect of contract farming on other groups in the country. We cannot escape the truth that if Thai farmers become more economically prosperous, some other groups in Thailand may suffer. The most affected group would be the local rice millers in areas where contract farming would occur. Another affected group would be the middlemen in rice industry who would inevitably be “cut out” of the business cycle. The last group affected would be the consumers who must pay higher prices for rice. Thus, contract farming must be limited to balance the needs of these interest groups with those of the farmers.

Allowing foreigners into the rice sector may be not be national betrayal, if the rules and mechanisms are properly set. Contract farming but benefit Thai farmers without endangering the national food supply.

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comment 20
Kriengsak date : 01/07/2008 time : 13.08
http://blog.nationmultimedia.com/kriengsak

Thank you for all helpful ideas.

comment 19
wch date : 29/06/2008 time : 10.56

Contracting farming is presently used for non-rice, economic cash crops such as rubber, cassava, eucalyptos, coffees, in undeveloped worlds like Africa.

Why, they dont know how to cultivate them and need TECHNOLOGY from CONTRACTORS who are the large multinational food companies and own own cultivation technology.

Do Thai rice farmers need it ?.

DIRECT SALES SYSTEM.

Earlier Japan used this system, later Korea and China.
Government provide a large market places in core of metropolitan cities where farmers bring their products and sell to directly Urban consumers.
Of course prices are MARKET PRICE the consumer price that means no intermediary profit takers.
This also brews up good understanding between ther rural and the urban what their staple, RICE is and how to cultivate.

This system brought up so called 'WEEKEND HOME" business, so called here AGRO-TOURISM.

I did same WEEKEND HOME in a place of Isan where I keep my in-laws who deal my farm house complex where have rice mill, cattle stable, swine pens and 20 rais rice pad and some infence vegetable gardens.

and a good liberary that contains most of agriculture books issued in Thailand and college.
I tested to raise, sugar cane, cassava, herbes, fish (pranin, prachurn) and fast growing KAPOK tree.
This tree is good for pulp making as well as natural cotton.
My farm now have full machinery such a well equipped workshop, power tiller, combines, pumps.
Only my bro in law runs alone.

comment 18
Sulasno date : 26/06/2008 time : 13.11
http://blog.nationmultimedia.com/sulasno

I know of farmers who grow rice somewhere in Nonthaburi; the total area is about 32 rai; when it's time for harvest, they laid the paddy on the road and when the paddy gets drier, they are packed into sacks and sold. I do not know what's price is being transacted, but they are happy with the price. They kept the money and are d@rn thrifty. Try borrowing 10K from them is like trying to squeeze water from a rock. And the question is WHY can they be happy and not fall into debts?

comment 17
littlefish date : 26/06/2008 time : 12.14
http://blog.nationmultimedia.com/Breakthrough

But those cotract farming cases you mentioned, they were managed by thier own governments right? It was a temporary setup just to ease up the tension then.

I do not think we need such a scheme here in Thailand. Especially, anything that has to do with selling out assets to foreigners. I hope one day we have a government that will be focusing on the well beings of the country and the country only. We may need a different form of government. It has been proving that Thai Style Democracy is not working.

comment 16
wch date : 26/06/2008 time : 10.43

I have not touched the main topic of this text,
the contract farming.

The contract farming is used as a catapult to rehabilitate war torn nation like the East Timore.

The corporate farming technique is used to industrialize huge rugged land such as Brazil.

Homestead campaign - an 160 acres per a family was campaigned to polulate unmanned land during after the civil war of US.

Rice contract farming that this author raises here, pretty assymetric proposition in the environment of 70% rice farmers having not owned his own land.
Also another ignorance is, the rice is major staple of 63 million population and export is barely reaching 20% or 10 million tons of whole 50 million tons produce (this will be to reach quickly 60m this year though).

There is no historic records of Rice contract farming in human history. it is vertually impossible and no one is willing to do that.

"Contracting farming of rice" was recently brought up by Pracha and Thaksin with his Saudi friends.
They thought 10million contracting farming and milled in Supanburi to hand over to the Saudi trafficker. (huge modern rice milling plant and huge modern warehouses).

10 million tons is the whole lot of Thai annual exportation of rice.

Agriculture Bank is to handle rice on-pad forward purchase directly from now on but few people think they have ability to do such and,,,
Listen today the debate, this is another loophole to corruption to already-heavily-corrupted bank officials of this agro bank.

comment 15
littlefish date : 26/06/2008 time : 01.17
http://blog.nationmultimedia.com/Breakthrough

wch

I did not realize the whole mechanism was that complex. That is a reason why the govenment would not be able to solve this problem.

comment 14
Kriengsak date : 25/06/2008 time : 10.38
http://blog.nationmultimedia.com/kriengsak

Thank you Ian.
Thank you all good and useful comments.

comment 13
wch date : 25/06/2008 time : 09.16

For example,
a Chicago commodity exchange (it locates just inside of the lake side motorway, nearby the Drake hotel - infamous Al Capone den), negotiates among international auctioneers,
daily the rice prices. (I used to visit and took a look how the rice auction is going on every morning and afternoon).

Rice prices are announced,
Spot price in Carrebean sea, San Francisco, Japan, Thailand, etc,,,,,,

Each of 3 months, 6 months FORWARDING price at above place (called position where rice vessels are cruising or main rice produce countries).

6 months rice price is bench mark price to forecasts of the year's climate, balance of supply and demand, etc.

If today the market announce 14000 baht per ton of milled rice Class 1 (having 2, 3 and the finest polished rice ready to cooker) of 'Thai Hom Mali (very famous in international market, the highest bid price always), for December delivery (main crop in Thailand),
Thai rice exporters, warehouse runner, big rice miller (such as Banharn family, CP group, Beer Chang group, FMC group, etc), lobbied to government for FORWARD BUY-LOAN and they are permitted and hold huge mortage loan fund usually
50 - 100 million dollars. They faked document the purchase from farmers but in fact they dont mortage 'enough' to the loan.

When the harvest starts in October, November, they gather 'spot rice' offered by poor rice farmers who need "school tuition' or installation to their pickup hire purchase. Farmers sell rice at any price between 4000 - 7000 baht per ton

In December international spot price goes up 30,000 baht while forwarding contract is 14000 baht having committed earlier to an international rice dealer, lets say, Marubeni Tokyo.
There is arbituration clause - If gap is 16000 baht, the price must be 50 50 mutual risk taking, say
the price is fixed 22000 baht.

Thaksin and his Saudi friends wanted to do big RICE MILLERS in Supanburi. Of course money roller is Saudi rice importers and land holding nominees are Prachai family who now disseminate from Chat Thai's Banharn.
(100%, I am sure Banharn will no vote PPP and join the Democrat this evening).

Thaksin nominee government, Samak, Somchai and Surapong recently changed Alien Business Law - Category 1 Agriculture sector, - say - Any foreigners can invest RICE MILLING.
This laws is secret to the public now. (BOT website does not post this 'new change').

remark all figures I quoted here is an example generally the milled rice price.
In fact, farmers are easily cheated between milled rice ton and husky unmilled rice ton.
1 rai of land yields generally 3 tons of wet husky rice (called widely paddy or paddy rice, 30% humidity).
This 3 tons is milled into 0.9 - 1.2 ton of milled rice of 15 % humidity with 0.3 ton humid husk and 0.2 ton of humid bran.
(I runs a small rice mill in an Isan province although I left there two years ago).
(I think I answered Sulsano by this post)
Forgive me for my hurried writings.
wch

comment 12
Sulasno date : 24/06/2008 time : 23.09
http://blog.nationmultimedia.com/sulasno

c10

how come the farmers got to pawn their rice at only 9k to the rice millers and not 14k?

how much do you know about rice?

I got a number of questions;

1. Is the government buying rice @14k baht for white rice and not paddy?

2. Are the farmers supplying paddy or white rice to the middlemen / rice millers?

3. What is the normal loss to convert paddy to white rice?

4. Does the quality of the rice supplied to the government meets the export quality as determined under the law?

5. Is rice sold by weight or by volume?

comment 11
littlefish date : 24/06/2008 time : 14.32
http://blog.nationmultimedia.com/Breakthrough

wow wch

Thanks for the information about the rice issues of Thailand. I really feel pity for the farmers and the country as a whole for these capitalist schemes of taking advantage of the country. It is a very unfortunate for Thailand to have governments after governments that never really got to stabilize the country.

Rice is a back bone of the country, makes every government so proud of saying we are the top rice exporter, but look at the farmers what happens to them. You hit it right on the spot that the traders get it all, regardless of the rice price. I can see when the rice price soared for the first time in the past few months. Then rice sold at the high price was already in the hands of the traders. Farmers never have ways and facilities to stock rice. They always sold the rice at under market price to the traders since the rice was not even harvested yet. When the farmers were ready to get the new crops out, the price suddenly dropped to almost the price it was before the surge.

I do not have much knowledge about this issue. Just look at it from a citizen point of view. The government do not have a long term plan solving this issue. The subsidy is just a way to shut up the farmers and make them felt that the government care. Everything will go back to the same old situation in the next few months and will be quiet again. I wonder if the government care to find out exactly how much the farmers get per ton out of the 14,000 bahts of the tax payer money they allocated, or just only to make headlines. You would think we should get to read reports at a later date of how effective the program worked.

wch, I seem to agree with your conclusion of in C8. Dr. Kriengsak opinion looks theoretically sound, but in the real practice, it will be again selling another piece of Thai heritage to foreigners for profit sake to certain individual.

I look forward to reading your next posting.

Great job, thanks.

comment 10
wch date : 24/06/2008 time : 10.43

Huge government subsidy to rice farmers do not reach the farmers, but ends up to traders (rice millers, warehouse runners who are Hakkan descendents). How the subsidy flow ?. Look at this.

1. Government subsidy fund is given to rice millers at rate of 14000 baht per milled rice for advance purchase from rice farmers (on-pad, forward purchase in name of JAMLAM. This is done earlier for next harvest, usually 6 months ahead).

2. Rice farmers go to rice miller to sell jamlam at 9000 baht per ton. Rice farmers are taught to say to any government officials that " I sold at 13000 baht'.

3. Rice miller delivered to Government (state warehouse) at 14000 baht per ton after harvest.
By this rice miller wash hand with hefty profit.

4. Government open sales bid of delivered rice at state warehouse. Local rice exporters colluded at 9000 baht or around. Government sold at this price and happily lose the dificit of 5000 baht as a subsidy to rice farmers.

5. Local Thai exporters speculates international price, sometimes, 10,000 baht or somtimes 30,000 baht per ton. This price is called 'SPOT MARKET PRICE' that is heavily affected by market demand.
If they sell at 30,000 baht, it is called GANG GAMRAI - jackpot profiteering.
Exporters never suffer from loss because the 9000 baht is the worst level of intl market price.

6. In this process there are hundreds of corruptions, irregulatories, time gap, humidity cheats, hidden profits of rice husk and bran.
Natural dwindlement of weight (by time drying) is another big loophole to swindle.
Stealing rice from state warehouses are rampant today.

This is real the pandora's box. The tragedy of rice farmers !.

I like to post another disturbing information.
70 % of Thai rice farmers lost their land.
Beer Chang owner, a Hakkan bought up 2000 rai in central most fertile rice pad and soon ends up to 20,000 rais. Pad land is now hot cake.

comment 9
Sulasno date : 23/06/2008 time : 13.02
http://blog.nationmultimedia.com/sulasno

comment 8

what has AIS got to to with rice?

It's merely a financial transaction

comment 8
wch date : 23/06/2008 time : 10.52

Thailand needs comprehensive understanding what the rice is.
The author's interest, 'selling land to foreigners' is prohibited by laws. Furthermore Saudi's pledge that they will buy all rice at fixed price is impossible but this is used as sugar laced attraction toward central rice farmers, the allure by Thaksin and his agents, Prach and his elder brother cum a senator.
Also this motion of Thaksin is to demolish Banharn political seed bed of Supanburi, Angtong, Chainat.
This made Pracha excited by the hope of a regional patron to Thaksin group PPP by disseminating hard grip of Banharn. Banharn is old. After him no heir is prominent. His daughter and son are nobody.

Coming back to the rice and its traditional trade culture, same as in Indonesia, Philippines, Vietnam and Cambodia, the Hakkan descendents hold strong and monopolized long its rice trade.
Vietnam and Cambodia monopolized rice exports in state authority and disseminated Hakkan traders.
Indonesia and Malaysia are still largely in the hand of Hakkan traders. Thailand is fully at Hakkan hands.

The serious problem of Hakkan monopoly is their unhealthy use of the earning. Most of them evaded the money to Singapore where huge 100s billions dollars, so called 'Singapore Offshore Fund market' has been formulated and such fund is used by Singaporean banks as hostile Merge and Acquisition fund to buy up national assets, such as AIS.
Also such offshore fund rules in SET as a foreigner's market. Therefore the stock trade is ruled generally by Thai people themselves and a few Japanese Korean or Chinese stock players are there.

The profit that Thai rice exporters amassed is not used to healthy manufacture industry or technology development but largely used to buy up farming land, urban condominia.

The commerce minister, Mingkwan came to have know this vicious circle and he tried to abolish the nutshell trading system but faced strong counter-blow. The traders are closely linked to PPP's top tiers and important financiers to supply illegal political money. For your reference, an owner of a large construction company is now scavenging from this ministry to that ministry, all construction contract. He is one of renoun Hakkan chief.

Belated but fortunately, Thai farmers try to understand the immoral trade system and try to formulate the disconnection with Hakkan traders.

They need state warehouses, state rice mills (partly built by the monarch who tried to introduce good system in past) and state policy.

My recommendation is to follow Vietnam system.

Monopolize all rice and cash crops export.
(This was done in fact in era of Rama 1-5 in past).

comment 7
Ian date : 23/06/2008 time : 03.11
http://blog.nationmultimedia.com/anterian36

Kriengsak, you are writing about Thai rice farmers, so why the picture of a Laotian farmer? :-)
I can supply you with Thai pics but he's using an etok not a buffalo.

comment 6
Sulasno date : 23/06/2008 time : 00.50
http://blog.nationmultimedia.com/sulasno

Lalida;

trust me;

hunting for a virgin is much easier :-)

comment 5
Lalida date : 23/06/2008 time : 00.47
http://blog.nationmultimedia.com/Real

Sulasno,

I think both ain't easy

comment 4
Sulasno date : 23/06/2008 time : 00.32
http://blog.nationmultimedia.com/sulasno

ehhhhhhh .................
uncorrupt government ???
better luck in hunting for a virign :-)

comment 3
Ian date : 22/06/2008 time : 23.29
http://blog.nationmultimedia.com/anterian36

Most of your previous blogs have been sensible and practical, if overly optimistic at times. However, I cannot say the same for this idea. In Thailand rice has two roles, firstly a basic domestic food item, secondly a valuable export. Much of the volatility in price which affects Thai people is caused by these two competing requirements.
Rice brokers sit on stocks to sell abroad at high prices, this drives up the domestic price to the detriment of the local consumer. The rice brokers profits do not reach the farmer.
What the government should do is set a fixed price for rice each year based on the harvest. This plus handling costs should be the price to the domestic market.
Any surplus rice sold abroad should have an export tarif that matches the global price. Thus the profit would go to the government rather than the rice broker. Hopefully with an uncorrupt government this money could be used for the benefit of all Thais.

comment 2
Sulasno date : 22/06/2008 time : 23.06
http://blog.nationmultimedia.com/sulasno

dun listen to Kermit's brother

comment 1
Piset date : 22/06/2008 time : 22.20
http://blog.nationmultimedia.com/mahwatthai
Piset

Dr. Kriengsak:

I might support any barter system between rice and oil on a pre-set rate of exchange, such as, a bag of rice for 3-5 barrels of crude oil.

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