The Pricing Model of Rice: Evidence from Thailand

Abstract

Although the rice market in Thailand is linked tightly with the world market, it is fraught with government intervention policies from time to time. In 2011 the Yingluck Shinawatra government embarked the rice pledging scheme that aimed to bid up domestic paddy prices above the global market. Such scheme set the premium of 40-50 percent higher than the world price. Nevertheless, the program was discontinued in 2014. This paper attempts to shed light on how the price structure in Thailand was affected by government intervention policies. In particular, we conducted a field survey to unearth the transmission mechanism that channel information about market factors on prices in various levels, ranging from world rice price to the wholesale paddy prices. The findings show that the paddy price was mainly determined by the rice mill, the central paddy market, the middleman, and the exporters. The government intervention policies could influence the paddy price temporarily, i.e., when the scheme was in place. In the long-run equilibrium, the paddy price is determined by a combination of the price at which the mills are willing to buy and the world price. Our empirical investigation, based on the Engel-Granger Cointegration test and the Error-correction model, confirms this conjecture. Moreover, the price expectation embedded in the millers’ offer price played a significant role in the price discovery process. The causality test revealed that the expected future price causes the spot wholesale price in the Granger sense. It is also found that the causation is bi-directional implying that the flows of information between markets are essential in determining the equilibrium price in the rice market.