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SA KAEO, Thailand/SINGAPORE (Reuters) - Hidden in 18-wheeler trucks, carts and pick-up vans, hundreds of thousands of tonnes of rice are being smuggled from Cambodia and Myanmar into Thailand, although the country holds enough stocks to meet half the world's annual trade in the commodity.
A populist programme to support prices has led to the Thai government paying its farmers almost double prevailing prices in Cambodia and Myanmar. Farmers and traders in the neighbouring countries are trying to take advantage, sending their grain across the border to be sold into the Thai intervention scheme.
The equivalent of 750,000 tonnes of milled rice is being smuggled into Thailand a year, mainly from Cambodia and Myanmar, according to estimates of analysts and traders who have studied the illicit shipments.
"No one can differentiate which one is Thai rice and which one is Cambodian rice. That makes it easy to smuggle rice in and make a profit by selling it to the government," said Kiattisak Kalayasirivat, managing director at Thai trader Novel Agritrade.
The extent of the smuggling adds to a headache for Thai Prime Minister Yingluck Shinawatra, who increased the support price for unmilled rice to 15,000 baht ($480) per tonne after she took power in 2011, to please her farmer vote-bank.
Yingluck's support base is mostly in rural districts, and her government mistakenly bet that Thailand could corner the world rice market by building up stocks.
Instead, the government, already running a budget deficit of 300 billion baht $9.59 billion (6.33 billion pounds) this fiscal year, is struggling to fund the multibillion-dollar programme and find buyers for the grain. Ratings agency Moody's warned in June that "populist measures" were a risk to financial discipline.
The government said last month that losses from the scheme amounted to $4.4 billion in the crop year that ended in September 2012.
Thailand now sits on rice stockpiles of 18 million tonnes, almost double a normal year's exports and nearly half of annual global trade of 38 million.
It is mostly holding on to the stocks since it will make a huge loss if the rice is sold. The intervention price of $480 per tonne of unmilled rice translates to $750 a tonne for milled rice. Milled rice is quoted around $475 a tonne in Thailand's open market and around $400 a tonne in Vietnam, traders said.
From No. 1, Thailand has dropped to the world's No. 3 rice exporter behind India and Vietnam.
The quality of the rice in its warehouses has also dropped because most of the smuggled grain is broken rice, which is then blended with full-grain Thai rice.
Because of that, the spread between 5 percent and 100 percent broken rice available in Thailand has narrowed to just $30 a tonne currently from $60 a tonne in June last year and $85 in 2011. "The spread has tightened up very dramatically," said Ben Savage, managing director of London-based Jackson Son and Co, a rice broker since 1860.
Thailand's porous border with Cambodia, to the east, has no natural barriers like rivers and villagers easily cross between the two countries. Smuggling of rice appears to be rampant.
"As long as our prices are high and they can make a profit, we won't stop them," Pakkarathorn Teainchai, the governor of Sa Kaeo province on the border with Cambodia, told Reuters. "It's like a cat running after a mouse,"
"Recently we confiscated 60 tonnes of rice. There's bound to be more that we can't prevent."
Noppadol Thetprasit, head of a customs post in the Aranyaprathet district of Sa Kaeo, said he recently intercepted 30 tonnes of rice being smuggled from Cambodia, but he knows more must be getting through at smaller crossing points that lack his facilities.
"The rice is being carried into Thailand on villagers' small carts, and is then reloaded onto bigger trucks and moved on to other provinces in Thailand to be resold," Noppadol said.
The smuggling is happening on a far bigger scale than the talk of villagers and carts would suggest. Thai officials say some smugglers use 18-wheel trucks to bring rice into the country.
Small-scale smuggling had occurred previously but volumes have jumped with the advent of the high intervention price.
The International Grains Council in London estimated the equivalent of 750,000 tonnes of milled rice a year was coming into Thailand, senior economist Darren Cooper said. That would be about 900,000 tonnes of unmilled rice, or paddy.
"Clearly shipments (to Thailand) started going up since the intervention scheme started," Cooper said. "It is highly attractive for the neighbouring countries to try and get as much rice across to Thailand as possible and supply into the scheme."
The United States Department of Agriculture put Thai rice imports at 600,000 tonnes a year in the first two years of the scheme, jumping from 200,000 tonnes in 2010/11.
In Cambodia, the authorities turn a blind eye to the smuggling. Khung Vun, president of the Rice Millers Association in Banteay Meanchey province on the border, says customs and police officials will wave grain through as long as a general export permit can be produced.
In 2012, legal rice exports to all countries by Cambodia amounted to 205,717 tonnes, according to its official data.
Thon Virak, director of Cambodian state-owned rice exporter Green Trade, estimated up to 300,000 tonnes of paddy rice was smuggled into Thailand in 2012 and a similar amount in 2011.
"This year, the number will decline because crossing points have been closed," he said in Phnom Penh, referring to stepped-up border policing on the Thai side.
In Myanmar, a shortage of good-quality mills restricts demand for legal exports and encourages smuggling out.
Aung Kyaw Htoo, agribusiness manager at cargo surveyor SGS in Yangon, estimated around 120,000 tonnes of rice was smuggled into Thailand in 2012, most of it lower-quality broken grain.
He said he understood the rice was sold into the intervention scheme, although other analysts said some of it could have been bought by noodle makers and feedstuff producers who, because of state buying, find Thai grain scarce or costly.
Thailand announced it would cut the intervention price to 12,000 baht per tonne last month, but reversed the decision on the day it took effect, giving in to farmers who had threatened protests.
Before rowing back on the cut, Yingluck sacked Commerce Minister Boonsong Teriyapirom, after public criticism that he had failed to be credible or transparent about the costs of the scheme.
New commerce minister Niwatthamrong Bunsongphaisan says the government will sell up to 1.5 million tonnes of rice a month for the rest of year through tenders and will also try to sell to other governments.
It is unclear how he will do that without offering grain at cut-rate prices to exporters or governments, and that may lead to charges of dumping. The United States and others have already sounded warning noises at the World Trade Organisation because of Thailand's lack of transparency on sales and stocks. ($1 = 31.0150 Thai baht)
Additional reporting by Prak Chan Thul in Phnom Penh, Aung Hla Tun in Yangon and Andrew R.C. Marshall in Bangkok; Writing by Alan Raybould, Editing by Jason Szep, Amran Abocar and Raju Gopalakrishnan