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Cablegate: As Prices Rise, the Northern Rice Bowl Expands

VZCZCXRO8245
PP RUEHCN RUEHDT RUEHHM
DE RUEHCHI #0072/01 1290813
ZNR UUUUU ZZH
P 080813Z MAY 08
FM AMCONSUL CHIANG MAI
TO RUEHC/SECSTATE WASHDC PRIORITY 0754
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUEHCHI/AMCONSUL CHIANG MAI 0810

UNCLAS SECTION 01 OF 03 CHIANG MAI 000072

SIPDIS

E.O. 12958: N/A
TAGS: EAGR EAID ETRD ECON PGOV PREL TH
SUBJECT: AS PRICES RISE, THE NORTHERN RICE BOWL EXPANDS

REF: BANGKOK 1322

CHIANG MAI 00000072 001.2 OF 003


-------
Summary
-------

1. Northern Thai farmers expressed joy to us about rising rice
prices during a recent trip by ECON staff to the lower northern
provinces of Sukhothai, Phitsanulok, and Phichit, collectively
known as the "Rice Bowl of the North." Farmers and rice mill
managers cited an over 50% increase in rice prices from early
March to mid-April. Farmers are now seeking to expand rice
production across the lower north in response to high prices and
rising global demand. They noted, however, that limited access
to water, costly fertilizers, and lack of high-yield rice seeds
are barriers to increasing rice production. Moreover, while
rice production is expected to expand with more land being
cultivated during the monsoon season and labor shifting to the
rice sector, gains from high prices are expected to be unequally
distributed between wealthy and poor farmers as well as among
farmers, mills, and traders. While farmers are responding to
global market forces to increase the rice supply, the RTG,
however, is doing little to promote greater productivity. End
summary.

-------------------
Rice, the New Gold?
-------------------

2. While consumers across the world speak of a food crisis, rice
farmers in northern Thailand are rejoicing at unusually high
revenues this year. The farm-gate price of unpolished rice
increased from 295 USD per ton in early March to 458 USD per ton
in mid-April, a 55% increase, according to a Phitsanulok Rice
Seed Center Agricultural Specialist. For provinces where rice
production is the largest sector of the economy, these high
prices translate into upward spikes in provincial GDP. In
Sukhothai, the Bank of Agriculture and Agricultural Cooperatives
Director of Finance noted that high rice prices caused a 32%
increase in the province's GDP in the first quarter of the year.
A farmer from Ban Chainam village in Phitsanulok happily
reported that, whereas the rice price was only 166 USD late last
year, it has been endlessly increasing in the last three months.
Our Phitsanulok Rice Seed Center source gleefully compared rice
to gold, noting that the price seems to be changing daily now.

-----------------------
Expanding the Rice Bowl
-----------------------

3. Farmers, mills, and seed suppliers all agree that rice
production will increase in response to high rice prices this
year. Although shifting to other crops, especially inputs for
biofuel production, has been en vogue in recent years, the
Sukhothai Bank of Agriculture reported that land rented for rice
production is increasing and that labor is shifting away from
other industries toward rice production. Farmers reported that
they will continue to grow rice and "won't waste farmland on
other crops."

4. Although productivity in Sukhothai, Phitsanulok, and Phichit
is among the highest in Thailand at 1,350 to 2,250 kilograms per
acre, expanding rice crops will primarily stem from increasing
productivity even more. Most farmers will attempt to grow more
crops in the coming year to reap the benefits of the high
prices. Typically, farmers within range of the natural and
man-made irrigation systems of the lower north grow two crops
per year, one harvested in Spring and another in October.

5. Now, however, the landscape of the northern rice bowl
indicates many farmers intend to grow a third crop this year.
While some rice fields are black and brown from a recent harvest
and burning, others are sprouting new growth suggesting planting
about two months ago. Still other fields show mature growth at
five to six months. The reason is that many farmers have chosen
to plant a third crop this year. In general, one traditional
crop takes 120 days to produce, which means about five crop
cycles can occur in a two-year period.

6. All of the farmers who produce at this level have access to
the region's irrigation systems. Nonetheless, the primary
limitation to rice production in the lower north is water. Over
half the farmers in this region can only produce one crop per
year because their only source of water is rain during monsoon
season. Because their land is situated outside of the
irrigation systems, options for second and third crops do not
exist. Farmers stress that expanding access to water is key to
expanding rice production.


7. Since quantity trumps quality in this year of food shortages,
some farmers are shifting to newer strands of rice seeds as
another way to boost productivity. Short-period seed types can

CHIANG MAI 00000072 002.2 OF 003


yield a crop in as little as 80 days, leaving the possibility of
up to five crops in a single year. Many farmers, however,
complain that these strands yield a lower quality crop that is
sold at a lower price on the market; thus many continue to grow
traditional rice or the more pricey jasmine rice.

---------------------------
As Prices Rise, So Do Costs
---------------------------

8. While farmers believe that productivity growth is the key to
reaping full benefit of the price trend, the high prices do not
necessarily reflect substantial profit increases. Costs of
necessary inputs remain high and pose a significant barrier to
expanding rice production. Specifically, the high costs of
fertilizer, land, and machinery are limiting the benefit of high
rice prices for farmers. Fertilizer prices have increased from
20 USD to 33 USD per 50 kilogram sack. Land rental rates have
more than doubled going from 42.50 USD to 85 USD per acre and in
some cases up to 125 USD per acre. These rental rates are
directly related to the rice prices, as rent is usually paid in
kind at the time of the harvest. Land costs have also risen, as
landowners shift from leasing land by year to by crop, allowing
them to adjust the rental rate more directly to rice price
fluctuations. Rental rates for machinery have also increased;
and rising oil prices are impacting production costs as well.

---------------------------
The Rich are Getting Richer
---------------------------

9. Farmers across the income spectrum are gaining from these
high rice prices, but the margin of profit is dependent upon
their relative wealth prior to the price changes. Farmers who
harvested the most recent crop are the greatest gainers,
enjoying both the revenue of high prices and the legacy of
relatively lower costs during the crop season, before prices
began to rise. For the most recent crop, profits are as high as
350 USD per ton for farmers who own land and plowing machinery.
Meanwhile, landless farmers who have the additional costs of
renting land and machinery are seeing profit margins of about 65
USD per ton. The Sukhothai Bank of Agriculture reported that
some farmers have been able to pay down some their debts as a
result, and even savings account balances are increasing.

10. The poorest farmers -- those who do not have access to
water outside of the monsoon season -- gain nothing from the
current price increases because they have only just begun to
plant their seeds for their single crop of the year. Moreover,
they are entering the production process when the costs of
inputs are already rising from the high price of rice. The only
gain that farmers in this income bracket are able to reap is the
selling of rice stocks that they reserved in fall 2007 for
personal consumption throughout the dry season. These benefits
are arguably nullified, however, by the fact that these farmers
will simply buy rice from the market to feed themselves at the
same high prices at which they sold their own stocks.

11. Farmers remain optimistic, however, that prices will stay
high, at least through the next harvest. A Chiang Rai rice
miller told us the price of jasmine rice should remain high for
at least the next three to four months, while that of
traditional white rice is expected to stay at high levels
through the end of the main crop season in October. However, he
expects that as rice-producing nations increase production in
response to high prices, world supply will gradually increase
and eventually push prices downward.

----------------------
Let Them Eat Less Rice
----------------------

12. Farmers claimed that the RTG has done relatively little to
assist in expanding rice production. So far, the RTG's actions
have been limited to advising farmers to lower their costs by
shifting from chemical-based fertilizers to less expensive,
organic fertilizers. Farmers complained, however, that organic
fertilizers are not readily accessible throughout Thailand, and
they are worried that switching to an unfamiliar fertilizer
could yield a smaller crop -- a legitimate fear at a time when a
low yield would be very costly. On the demand side, Prime
Minister Samak Sundaravej attempted to assist rice farmers by
pleading to domestic consumers to consume less rice, allowing
farmers to export the commodity at the rewarding high world
price.

-----------------------------
Rice Farmers' Message to U.S.
-----------------------------

13. Farmers we met with appealed to the USG to consider policies
that address the global food crisis while allowing farmers to

CHIANG MAI 00000072 003.2 OF 003


gain from the high prices. The Phitsanulok Rice Seed Center
urged the U.S. to allow market mechanisms to function freely
during this time, and our farmer contacts called for the U.S. to
transfer new and productive technologies such as high-yield
seeds to Thai farmers so they can produce more rice.

-------
Comment
-------

14. With the rest of the world facing food shortages and, in
some cases, starvation, Thailand is in a unique position as the
world's largest rice exporter to help shape the outcome of this
global crisis. A widespread expansion of irrigation systems
across the rice-producing regions of Thailand is a necessary
first step toward yielding more crops each year. Provincial
governments have limited reach in this regard, and are
exhausting their resources to maximize access to water. Only
the central government has the means to support a truly
widespread water management system. Such a system would also
lessen the economic inequalities faced by farmers without access
to water - and boost their productivity.

15. This cable was coordinated with Embassy Bangkok.
MORROW

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