There's something quite curious afoot in Asia's rice markets with prices near a seven-month high even as stockpiles across the region remain at elevated levels and exports slump, says an analyst.

It's not just Thailand's inventories that are swollen, but India also has almost three times more rice in storage than it needs for official reserves, writes Clyde Russell, a Reuters market analyst.
     
Thailand's exports have plummeted 42 percent so far this year to 2.7 million tonnes as its stockpiles have climbed to a record 13.9 tonnes of paddy rice, equivalent to about 8.3 million tonnes of milled rice.

While the crash in Thai exports is linked to the government's subsidies to farmers making the price uncompetitive, this doesn't explain why shippers such as Vietnam are struggling to boost exports, or why prices remain high. 

Vietnam's exports in the first five months of the year are estimated to have fallen 12.4 percent from the same period in 2011 to 2.95 million tonnes, according to official figures.

Traders cite a lack of demand for rice cargoes from Vietnam, but a dearth of buyers normally results in lower prices, which hasn't really been the case.

Vietnam's 5 percent broken rice dropped to $420-$440 a tonne last week, from $430-$450 the prior week. However, this is higher than the $420 a tonne it fetched two months ago.

Thai benchmark 100 percent B grade white rice dropped to $630 a tonne last week, down from a seven-month peak of $640 the prior week, while the 5 percent broken grade was at $610 a tonne.

This means Vietnamese rice is $180 a tonne cheaper than the similar grade from Thailand, which should be boosting demand but this doesn't appear to be the case.

It is also likely that more supply will be coming onto the market with Thailand's main crop set to rise 20 percent to 24 million tonnes of paddy, equivalent to 14.4 million tonnes of milled rice.   

So we have a picture of large stockpiles, plenty of supply and declining exports from the world's two biggest shippers, but prices still holding up. One gets the feeling that something will have to give, and the most logical thing is for prices to fall.

But so far the Thai government is maintaining its policy of paying farmers 15,000 baht ($470) a tonne for paddy, which comes to about $780 a tonne for milled rice, well above the market price.

It's also expected by rice traders that the government of Prime Minister Yingluck Shinawatra will extend the subsidy beyond its end in the middle of the year given it needs the support of rural communities. This means Thailand's rice mountain will continue to build, creating a massive overhang that can only disrupt the market when the financial pain of the buying and storing rice becomes too much for Bangkok's budget to bear.     

It may be that rice buyers are waiting for this to happen, delaying purchases for as long as possible in the hope that Thailand's populist government is forced to sell rice at a loss as the less worse option to not selling it at all.

It may well be that Asia's rice markets are playing a game of chicken, with the Thai authorities betting they can hold out until buyers are prepared to pay a price that allows subsidies to continue, while consumers wait for the Thais to get desperate enough to sell at any price. - Reuters