Bangkok helps explain wheat moves
April 14, 2015
Seldom has the downward course of wheat prices been traced to as many factors as are often cited for the sharp decline running for the past year. Large crops in major producing countries, inventory buildups, cautious and selective import demand attributed to varied foreign exchange fluctuations, political actions interfering with trade and competition from vast crops of corn comprise a simple list of what’s weighing on wheat. The trouble with such a list is that it tends to overlook out-of-the-ordinary influences that on close examination may have more to do with the market than almost anything else. For an example of such an unusual force, consider events under way in distant Thailand, a country producing little or no wheat itself and milling the grain into wheat flour primarily for use as a feed for shrimp farmers.
Thailand has its role in current wheat prices due to its position historically as the leading exporter of rice, the food grain that competes directly with wheat across large areas of Asia. In the current 2014-15 season, global rice exports are forecast by the International Grains Council at slightly above 41 million tonnes, of which 11 million will come from Thailand. That outgo makes it the No. 1 exporter, ahead of India, Pakistan and the United States. The latter is expected to ship 3.3 million tonnes.
Drilling down, numbers that may appear normal hide the absolutely wild situation ruling in Thailand and its rice picture. Indeed, it is a rice controversy that caused the overthrow by a military junta of the elected government. The role of rice emerged when the government of Yingluck Shinawatra, the woman prime minister, decided for several years to pay rice farmers double the world price, meaning that vast stocks were accumulated in more than 1,000 warehouses and causing Thailand in several years to lose its position as a major exporter. Nearly $27 billion was borrowed by Bangkok from foreign lenders to finance these purchases, prompting an outcry by interests objecting to this situation and contrary to the backing of rice farmers.
It was in reaction to this incredible situation that the military junta seized control from the Yingluck administration, removing her and accusing her of criminal negligence and corruption in implementing the rice program. A guilty verdict resulted in her being banned from politics for five years along with a threat of bringing charges that could lead to criminal penalties. The sequence of events was compared to the 2006 action of the military junta that removed her older brother, Thaksin Shinawatra, from office and sent him into exile. Her defense included the following, which reverberates familiarly in the U.S. Congress: “Many governments have public policies to help farmers. It’s the government’s duty to look after them.”
As the result of this overpayment program running from November 2011 to February 2014, the Thai government at one time owned nearly 18 million tonnes of rice and its ending carryover climbed to 13 million tonnes. The junta has decided to start selling off rice stocks in international auctions aimed at minimizing what already has been bearish for global grain markets, including wheat. These pressures are lessened by inventory quality deteriorating to below food grade, which means use primarily for feed, and also by a drought ruling in parts of the country that may sharply reduce the new harvest. At the same time, knowledge of the huge stocks will likely weigh on prices through this year, if not longer.
Seldom have global wheat and other grain markets been embroiled in a conflict as dramatic or as wide reaching as what is happening in Thailand’s rice market. Perhaps this outcome could have been predicted by anyone following Thailand’s national debt or its domestic rice buying at unrealistic prices. For grain-based foods in America, the story is one of appreciating the potential impact of distant and unfamiliar developments on the price of wheat, flour and bread.