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THAILAND SPATIAL EQUILIBRIUM MODEL STUDY

Summary: The Thailand Agriculture Spatial Equilibrium Model is a programming model that simulates the market equilibrium condition for six commodities white rice, jasmine rice, glutinous rice, cassava, maize and silk - in five agricultural regions of the country. The model is used to simulate alternative policy options facing the agricultural sector in Thailand, particularly in the Northeast region of the country. These policies cover five broad areas: (i) Farm productivity enhancing policies, (ii) Transportation infrastructure policies, (iii) Trade policies, (iv) Value chain strengthening policies, and (v) Standards and quality control policies. Out of the five policy areas considered, polices which concentrate on increasing rice farm productivity and reducing marketing margins through strengthening of rice value chains have the greatest benefits in terms of total income and farm household income. Infrastructure improvements will not have that great an impact on income, and neither will reducing marketing costs for the silk value chain or improving silk yields. In terms of strengthening value chains, it is important to recognize the role of value adding, rather than just simply reducing costs. Policies that increase quality, and therefore demand prices, will do more for increasing returns to farmers.

FEB 2005

recent in which a comprehensive and reliable data are available. Furthermore, 2003 was considered to be a good year in terms of production and there were no major supply or demand shocks.. As noted above, THAISEM endogenously models equilibrium production, consumption, trade flows, and prices of six commodities within the regions of Thailand. The commodities included in the model are white (nonglutinous) rice, jasmine rice, glutinous rice, cassava, maize, and silk. In terms of cropping, rice, cassava and maize comprise over 99.6 percent of cropping area in the Northeast. The regional structure of THAISEM includes five domestic regions: North, Northeastern, Center, East and South. The model treats each region as a spatially separated market. These markets follow the rules of spatial arbitrage. This implies that trade between two regions occurs when the price difference between them reaches the transfer cost (the full cost of marketing and transporting the commodity from one region to the other). The five domestic regional markets are connected to two international markets: the world market and the Cambodian market. For domestic markets, trade between the domestic and international markets follows rules of spatial arbitrage. Trade between domestic and international markets occurs subject to transportation and marketing margins including specific margins for import and export and taxes for international trade. THAISEM includes endogenous imports volumes from Cambodia, while exports to Cambodia are computed as a proportion of imports from Cambodia in the base scenario, then kept constant in the following simulations. Cambodia exports are subtracted from domestic supply.

Introduction
The Royal Thai Government (RTG) has recently embraced the objective of eradicating mass poverty in the country by the end of 2010. The strategic vision of this goal is outlined in the 9th Development Plan. The key components of the plan include balancing commercial production with food sufficiency needs and local economic development; reduction of production risks through diversification and value-adding processing; development of grass-roots community organizations to enable individual producers to take advantage of scale of economies; product quality improvement and food safety; and sustainable natural resource management. In view of high concentration of poverty in the Northeast, the Governments poverty reduction goal will only be reached by enabling the region to achieve higher economic growth. The National Economic and Social Development Board (NESDB), the national planning agency, presented in July 2003 a Northeast Development Strategy. The implementation of the regional strategy is the responsibility of the newly appointed CEO provincial governors. The strategic planning will take place in provincial cluster units which include 4-5 neighboring provinces, with better off provinces grouped together with worse-off provinces to engender more balanced economic development. In the context of the formation of development clusters in the Northeast, the RGT has asked the World Bank assistance in preparing of an operational development strategy for the Northeast region. The proposed Northeast Development Report (NEED) would provide a technical support on selected priority topics which would enable to better understand the dimensions that characterize the underdevelopment of the Northeast and find the ways in which the Royal Thai Government (RTG), supported by donors, can work to reduce them. The proposed study will be part of the multi-year Country Development Partnership on Poverty Analysis and Monitoring (CDPPAM), launched in May 2002. The study will be Bank executed and would provide input for

the formal Bank Economic Sector Work product. The NEED report has several components; one of which is a study on value chains in the North East region, focusing on commodities with the potential for increased value adding. As an integral part of the value chains study and the NEED report, economic modeling of the effects of agricultural change on Thailand and the northeast in particular was carried out by developing a spatial price equilibrium model of Thailands agricultural sector. This current report describes the development and analysis of the Thailand spatial price equilibrium model, THAISEM, concentrating on white (non-glutinous) rice, jasmine rice, glutinous rice, cassava, maize, and silk. These products were chosen due to being identified as priorities in the RTGs provincial cluster development strategies. These commodities have significant potential for export, expansion of local market consumption, and import substitution.

The Thailand Agriculture Spatial Equilibrium Model (THAISEM)

The Thailand Agriculture Spatial Equilibrium Model is a programming model that simulates market equilibrium conditions for six commodities white (non-glutinous) rice, jasmine rice, glutinous rice, cassava, maize and silk in five regions of Thailand. The multi-market, regional structure makes this framework particularly well suited for analysis of marketing margins, transportation costs and supply shifts across the country or in specific locations. THAISEM explicitly and endogenously models the equilibrium production, consumption, trade flows (internal and external), and prices within each of the five regions of Thailand. THAISEM is implemented using the Generalized Algebraic Modeling System (GAMS) programming language. THAISEM is calibrated for the base year 2003. This was selected as the benchmark year because it is the most

Identification and Implementation of Policy Options

Although some of the policy simulations affects all crops equally, the focus of the simulations is primarily on the rice and silk sector. These sectors are particularly important or unique to the economy of the North East region. In order to examine the effects of alternate policies on the North East region and in other regions of Thailand, six sets of simulations were conducted. The policy areas that are implied by these simulations can be summarized as follows: 1. Farm productivity enhancing policies, which include a broad range of policies such as irrigation, research and extension that would result in higher

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yields and consequently an upward shift of the supply curve. 2. Silk productivity enhancing policies, which include a broad range of policies such as improved breed research and extension, improved reeling machine technology that would result in higher yields and consequently an upward shift of the supply curve. Transportation infrastructure policies, which would reduce transportation costs of major transportation corridors connecting the five regions of Thailand. Import control policies, these are policies that lift the explicit or implicit restrictions on international trade (with world and Cambodian market), specifically for silk and jasmine rice from Cambodia. Value chain strengthening policies, these are policies such as the support and development of marketing services, that would affect the marketing margins of a commodity. Standards and quality control policies, which include policies that would regulate the quality standard of rice varieties and/or affect the degree of mixing between rice varieties.

may involve the adaptation of the Rice Integrated Crop Management System (RICM) or Ricecheck for local use in Thailand. The experience from other countries suggest that significant yield improvements can be achieved with the adoption of a RICM. As an example, productivity enhancing interventions affecting only 25,000 participating farmers in the Northeast could be expected to double their yields. Assuming current average yields of 2.5t/ha, and 2.5 ha average farm size, another 156,250 tonnes of paddy could be produced. This would translate to an overall 5 percent increase in production of jasmine rice in the Northeast, or around 2 percent nationally for all rice varieties. Farm productivity enhancing policies are implemented by changing the magnitude of the yield parameter for the appropriate crop and region involved in the simulation. Two simulations are carried out, applying the following parameter changes: 1. 2. A 2 percent increase of rice yields (all varieties) at the national level; A 5 percent increase of jasmine rice yields in the North East region.

essors who the buyers are for existing products and markets (even if they have difficulties accessing them), it is less clear what the markets are and whom are the buyers for new products that will develop under a strategy of value addition. Support and facilitation needs to be given to stakeholders all along the value chain if they are to access new markets and maintain their level of sales in existing markets. This support needs to be given at the local level, the regional level, and the national level. If the Northeast region is to capitalize on these export opportunities, then there needs to be some thought given to how the transportation and logistics system can be upgraded, as well as what changes to customs regulations are required. Investment in transport infrastructure can reduce transportation costs for all commodities, between and within regions. Although the transportation system is relatively efficient in Thailand, there might still be a margin of improvement in transport efficiency. In modeling terms, infrastructure improvements are implemented by reducing the exogenous transportation cost between regional shipping points. THAISEM allows for generalized change of transportation costs as well as for changes among specific routes. Two simulations are carried out using the following magnitude of change: 1. 2. A reduction of transport cost of 5 percent across Thailand; A reduction of transportation cost of 10 percent between North East and Centre and North East and East.

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Silk Productivity Enhancing Policies

Improving productivity and efficiency of sericulturalists in the silk marketing chains involves investing in improved breeds, rearing and weaving technologies and providing incentives to increase market returns. This will invariably focus on increasing silkworm yields and improving quality of spun yarn. The introduction of improved varieties of silkworms and best-practice management systems which enable sericulturalists to benchmark their production systems will provide clear and objective criteria for yield and quality improvements which will lead to increased profits. As an example, productivity enhancing interventions affecting only 15,000 participating farmers in the Northeast could be expected to double their silk yarn yields. Assuming current average yarn yields of 9.4kg/household, another 280 tonnes of yarn could be produced. This would translate to an overall 20 percent increase in production of silk yarn nationally. Silk productivity enhancing policies are implemented by changing the magnitude of the yield parameter. Two simulations are carried out, applying the following parameter changes: 1. 2. A 10 percent increase of silk yields in the North East region; A 20 percent increase of silk yields in the North East region.

Each simulation assumes a certain causal relationship between the Government policies and their effects on the key parameters that are captured by the model. For instance, it is assumed that the main outcome of investment in research and extension is an increase of the crop yields, and that transport infrastructure improvement reduces the average transport costs, or the provincial marketing margins.

Import Control Policies

Regional trade integration with world market and with neighboring countries may have significant effect for the Northeast region. Informal trade flows, particularly with Cambodia, have been reported to have a significant effect on the rice sector. There has been growing debate with regard to silk on whether policy investments should place an emphasis on primary production (silk yarn) or on the processing sector (weaving). Alternative import policies can favor one or the other stage of the silk value chain. For the Northeast the key question is whether the region should continue supporting commodity production systems or should it instead take advantage of increased border trade with Laos and Cambodia and focus on value added processing. As all regulatory policies, lifting trade restrictions is a type of policy that is relatively simple to implement. These types of policy changes have generally an immediate or short-term effect on trade flows and domestic prices. Increasing trade linkages with external market are expected to realign domestic prices with international prices. The magnitude of these changes, however, depends also on the supply and demand conditions prevailing on the domestic market. Trade policies are implemented by changing the quota constraint values that are binding for silk and Cambodian jasmine-substitute

Rice Farm Productivity Enhancing Policies

Despite the achievement of the agricultural sector of Thailand, the productivity of some crops, rice in particular, remain relatively low if compared with international standards. Specifically, the North East region has one of the lowest productivity rates in agriculture. Average rice yields in the Northeast are about 20-60 percent lower compared to other regions of the country; these yields are equivalent to yield levels in Cambodia and even less than those recorded in Laos. Improving productivity and efficiency of farmers in the non-glutinous and jasmine rice marketing chains involves investing in technologies and providing incentives to increase market returns. This will invariably focus on increasing yields and improving quality. The introduction of supplementary irrigation and best-practice management systems which enable farmers to benchmark their production systems will provide clear and objective criteria for yield and quality improvements which will lead to increased profits. Such systems

Transportation Policies

Infrastructure

Stakeholders along the marketing chain noted the difficulties in accessing existing markets and buyers as well as developing new ones. While it is clear to farmers, traders and proc-

imports (QUOTA and QUOTACAM). Two policy simulations are implemented with the following changes: 1. A ten fold increase of import of jasmine from Cambodia (from 47,000 to 470,000); this increase might resemble also the increase in import of regular rice which is then mixed to or commercialized as Thai jasmine rice once in Thailand. A five fold increase silk yarn imports from the world market.

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Rice is a key commodity for the Northeast and the production of this region has also unique qualitative characteristics. Jasmine aromatic rice receives a price premium on the international market, but its uniqueness is eroded by similar varieties grown primarily in the highly productive areas of the Central plain. Standard and quality control policies that affect the substitutability between varieties can have significant welfare effects on farmers of different regions of Thailand. The development of new varieties that have similar productivity of regular white rice produced in Central regions. The simulation is implemented by changing the crop mixing coefficients (MIXS and MIXA). It should be recalled that these coefficients have value of zero in the base scenario. This does not imply zero mixing, but rather an equilibrium situation between production, trade volumes and market prices, which is reflected in the unknown degree of mixing which is implied in the base scenario. Thus changes should be regarded as changes from this equilibrium situation. The magnitude of the simulation is as follows: 1. A 2 percent increase in mixing of white rice with jasmine rice in all regions of Thailand; A 5 percent increase in mixing of white rice with jasmine rice in the Center and East of Thailand (with other regions mixing at 2 percent).

Overall, the main effect of policies to increase the productivity of silk is a slight increase in total real income and farm income of around US$320,000 and US$600,000 for a 10 percent and 20 percent increase in silk yarn yields. The main reason for this is that the increase in production is offset but a decrease in prices; while production increases by 6.5 and 13 percent for each simulation, prices fall by 5 and 10 percent respectively. Given the very small benefits accruing from such a policy, the costs of implementing such policies may outweigh the benefits. Policies to reduce marketing margins generate gains for both producers and consumers through increasing the efficiency of the marketing system; which is reflected in narrower gaps between producer and consumer price. For changes in the marketing margin for rice there is a net real income gain of US$25 million while for improvements in the marketing system in the Northeast there is a net real income gain of US$41 million. For some commodities there are still substantial gains to be realized on the domestic market by strengthening the value chain of those products, while other products such as jasmine will remain typically export oriented. For the silk industry, reductions in marketing margins result in a net real income gain of between US$10,000 and US$20,000. Such benefits are unlikely to cover the costs of implementing the policies. In essence, policies which concentrate on reducing costs of production (and marketing) will have limited impact relative to policies which increase quality of production. Increasing quality raises prices and therefore returns to producers through simulating demand. Policies that reduce transportation costs appear to have only marginal effects on the economy of the six commodities considered in the model. At the national level, despite a small gain in total real income of around $3 million for each policy change, farm income is adversely affected. However, at the regional level, the income of north eastern farmers would have a modest but positive increment, both with a nation-wide transport policy as well as with transportation policies that target the regions infrastructure. The small total income benefit from these policies suggest that the costs of implementing such policies may outweigh the benefits. In terms of trade policies and policies dealing with standards and quality the results are not fully straightforward. Trade policies which liberalize the cross-border trade in rice or relax import restrictions on silk yarn will have significant negative effects on total income and farm household income; particularly for those farmers in those regions directly competing against imports. However, these results do not take into consideration the downstream industries that could potentially benefit from such liberalization. In the case of the silk industry, as an example, weavers and garment manufacturers will gain significantly from a reduction in the price of their main

Value Chain Strengthening Policies

Intervention in the marketing system by governments or donors is ultimately unsustainable unless there is a strengthening of the linkages between stakeholders along the value chain. A lack of linkages perpetuates a situation where there are multiple middlemen handling the produce from farm gate to consumers, ultimately this results in an increase in post-harvest losses, financial inefficiencies, and marketing margins. Moreover, a lack of trust between stakeholders has a chilling effect on transactions, particularly in an environment where there are no enforceable contracts. This also results in higher marketing margins along the value chain. This policy area encompass a range of initiatives as linkages along the value chain can be strengthened in a variety of ways. Support and facilitation to stakeholders all along the value chain if they are to access new markets and maintain their level of sales in existing markets. This support can be given at the local level, the regional level, and the national level. It is expected that these policies would reduce marketing margins at various level of the marketing chain. Four simulations are implemented by changing the magnitude of the exogenous marketing margins (farm gate-wholesale, wholesaleretailer, and export margins). The magnitude of parameter changes of each simulation is as follows: 1. A 2 percent reduction of farm gatewholesale, wholesale-retail and export marketing margins, respectively, for rice and all regions of Thailand. A 5 percent reduction of marketing margins (farm-wholesale, wholesaleretail and export marketing margins, respectively) for rice, cassava, maize and silk for the North East region. A 2 percent reduction of farm gatewholesale, wholesale-retail and export marketing margins, respectively, for silk in regions of Thailand. A 5 percent reduction of marketing margins (farm-wholesale, wholesaleretail and export marketing margins, respectively) for silk in the North East region.

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Results of Policy Simulations and Conclusions

The results are summarized in Table 1. Overall, the results indicate that although there are common elements to each broad area of investment, the effect of a policy will depend on the specific type of investment that is implemented. Out of the five policy areas considered, polices which concentrate on increasing farm productivity and reducing marketing margins through strengthening value chains have the greatest benefits in terms of total income and farm household income. Infrastructure improvements will not have that great an impact on income. There is a net benefit to Thailand from increasing farm productivity in rice (an increase in total real income between US$16.5 million and US$15.7 million depending on the respective simulations). However, there are adverse effects on farm household income. The results of this simulation highlight the potential adverse effects of a policy that focuses merely on productivity increases, both at the national and regional level. Assuming relatively small supply and demand elasticities, such a policy may eventually have an adverse effect on farm income: the gain in productivity increase, and consequent supply increase, may be eroded by adverse effects on prices if the growing supply is not properly managed. The main driver for these effects is the price elasticities, indicating that any policy changes need to take into consideration how prices will respond to changes in production.

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Standards and Quality Control Policies

Table 1: Summary of Selected Income and Trade Indicators (Million US$) Indicator Base Farm Productivity Policies 2% increase in all rice yields nationally 5% increase in jasmine rice yields in Northeast 10% increase in silk yields in Northeast 20% increase in silk yields in Northeast 5% reduction transport costs 10% reduction NE > Central & East Lifting jasmine trade restriction Lifting silk trade restriction Reduction of rice mrk. marg. Value Chain Policies Reduction of mkt. marg. in NE Reduction of silk mrk. marg. Reduction of silk mkt. marg. in NE Standards and Quality Policies 2% rice variety mixing 5% rice variety mixing Change % change Change % change Change % change Change % change Change % change Change % change Change % change Change % change Change % change Change % change Change % change Change % change Change % change Change % change crops. The results of this analysis quantify the potential regional effect of alternative policy opinions. In particular, the regional results show some significant divide between North East region and the Central and Eastern regions. From a regional perspective, it appears clear that alternative investment options have different effects on each region of the country. If balanced regional growth and reduction of regional disparities are one of the objectives of the Government, then the alternative investment options should also be evaluated in this perspective. The investment mix could become an instrument to achieve these goals. Out of the five policy areas considered, polices which concentrate on increasing rice farm productivity and reducing marketing margins through strengthening of rice value chains have the greatest benefits in terms of total income and farm household income. Infrastructure improvements will not have that great an impact on income, and neither will reducing marketing costs for the silk value chain or improving silk yields. In terms of strengthening value chains, it is important to recognize the role of value adding, rather than just simply reducing costs. Policies that increase quality, and therefore demand prices, will do more for increasing returns to farmers. -107.52 -0.08 -3.47 0 23.1 0.02 43.15 0.03 0.01 0 0.02 0 -43.63 -0.03 -71.75 -0.05 -0.01 -0.19 2.98 0 3.23 0 -50.37 -0.04 -3.39 0 24.76 0.02 40.8 0.03 0.01 0 0.02 0 -18.18 -0.01 -23.16 -0.02 0.61 0.6 Total income 139062.26 -29.63 -0.02 -28.67 -0.02 0.32 Total real income 138979.8 16.49 0.01 15.66 0.01 0.32 Real farm income 2647.87 -27.02 -1.02 -26.28 -1.00 0.32 0.01 0.61 0.02 -0.15 -0.01 0.03 0 -104.28 -3.95 -3.45 -0.13 23.09 0.87 42.89 1.62 0.01 0 0.02 0 -41.95 -1.59 -68.66 -2.6 3.76 0.13 4.9 0.17 27.82 1.23 74.1 3.29 -35.17 -2.76 -87.22 -6.84 6.32 108.44 0 -0.56 -0.02 -0.88 -0.03 36.29 1.23 0.03 0 2.84 0.1 6.24 0.21 Import value 5.83 Export value 2956.44 33.38 1.13 29.26 0.99 0 Intraregional trade 2255.48 -28.91 -1.28 -19.33 -0.86 -0.11 0 -0.2 -0.01 -0.74 -0.03 -0.89 -0.04 -27.11 -1.2 -0.71 -0.03 630.14 27.94 67.42 2.99 Interregional trade 1274.97 -11.26 -0.88 -8.69 -0.68 0.46 0.04 0.87 0.07 2.59 0.2 0.89 0.07 -115 -9.02 -4.88 -0.38 -583.72 -45.78 -58.01 -4.55

Silk Productivity Policies

Infrastructure Policies

Trade Policies

inputs such as silk yarn. Such effects are not modeled in THAISEM, but need to be taken into consideration when forming government policies. In terms of policies impacting on standards and quality, a relaxing of the restrictions against mixing jasmine rice with non-glutinous rice will have significant negative effects in terms of total income, as well as farm household income. Total real income falls by US$43.6 million, while in the second scenario it falls by almost US$72 million. Those farmers in the Northeast region, where the majority of jasmine rice is grown, will be significantly affected with incomes falling by between 4 and 7.6 percent. In contrast, farmers in the Center, who grow mainly non-glutinous rice, will benefit. In terms of this policy scenario, it must be recalled that the main lobby group calling for increased mixing of jasmine rice comes from the export sector. The THAISEM simulations indicate that the benefit in terms of increased exports are minimal, with the main beneficiaries being domestic consumers and rice producers in the Central region. Average prices for non-glutinous rice will rise, while average prices of jasmine rice will fall. Generally consumers will substitute into consuming the jasmine mixed rice in preference to other rice varieties and other

This Project Brief is based on research undertaken in 2004-2005 for the National Economic and Social Development Board of Thailand (NESDB) and Funded by the World Bank. The original study was the development of the Thailand Agriculture Spatial Equilibrium Model (THAISEM), under the auspices of the Thailand North East Development Report (NEED). The objective of the NEED Report was to provide technical support on selected priority topics which would enable to better understand the dimensions that characterize the underdevelopment of the Northeast and find the ways in which the Royal Thai Government (RTG), supported by donors, can work to reduce them. The study on value chains focused on commodities with the potential for increased value adding and highlighted the constraints and the strategic options

Agrifood Consulting International, 2005

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