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THAILAND SPATIAL EQUILIBRIUM MODEL STUDYSummary: The Thailand Agriculture Spatial Equilibrium Model is a programming model thatsimulates the market equilibrium condition for six commodities white rice, jasmine rice, gluti-

nous rice, cassava, maize and silk - in five agricultural regions of the country. The model is usedto simulate alternative policy options facing the agricultural sector in Thailand, particularly in theNortheast region of the country. These policies cover five broad areas: (i) Farm productivity en-hancing policies, (ii) Transportation infrastructure policies, (iii) Trade policies, (iv) Value chainstrengthening 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 marketingmargins through strengthening of rice value chains have the greatest benefits in terms of totalincome and farm household income. Infrastructure improvements will not have that great an im-

pact on income, and neither will reducing marketing costs for the silk value chain or improving silkyields. In terms of strengthening value chains, it is important to recognize the role of value add-ing, rather than just simply reducing costs. Policies that increase quality, and therefore demand

prices, will do more for increasing returns to farmers.

FEB 2005

Introduction

The Royal Thai Government (RTG) has re-cently embraced the objective of eradicatingmass poverty in the country by the end of2010. The strategic vision of this goal is out-lined in the 9th Development Plan. The keycomponents of the plan include balancingcommercial production with food sufficiencyneeds and local economic development; re-duction of production risks through diversifica-tion and value-adding processing; develop-ment of grass-roots community organizationsto enable individual producers to take advan-tage of scale of economies; product qualityimprovement and food safety; and sustainablenatural resource management.

In view of high concentration of poverty inthe Northeast, the Governments povertyreduction goal will only be reached by ena-bling the region to achieve higher economicgrowth. The National Economic and SocialDevelopment Board (NESDB), the nationalplanning agency, presented in July 2003 aNortheast Development Strategy. The imple-mentation of the regional strategy is the re-sponsibility of the newly appointed CEO pro-vincial governors. The strategic planning willtake place in provincial cluster units whichinclude 4-5 neighboring provinces, with betteroff provinces grouped together with worse-offprovinces to engender more balanced eco-

nomic development.

In the context of the formation of develop-ment clusters in the Northeast, the RGT hasasked the World Bank assistance in preparingof an operational development strategy forthe Northeast region. The proposed NortheastDevelopment Report (NEED) would provide atechnical support on selected priority topicswhich would enable to better understand thedimensions that characterize the underdevel-opment of the Northeast and find the ways inwhich the Royal Thai Government (RTG),supported by donors, can work to reducethem. The proposed study will be part of the

multi-year Country Development Partnershipon Poverty Analysis and Monitoring (CDP-PAM), launched in May 2002. The study willbe Bank executed and would provide input for

the formal Bank Economic Sector Work prod-uct.

The NEED report has several components;one of which is a study on value chains in theNorth East region, focusing on commoditieswith the potential for increased value adding.As an integral part of the value chains studyand the NEED report, economic modeling ofthe effects of agricultural change on Thailandand the northeast in particular was carried outby developing a spatial price equilibriummodel of Thailands agricultural sector.

This current report describes the developmentand analysis of the Thailand spatial priceequilibrium model, THAISEM, concentratingon white (non-glutinous) rice, jasmine rice,

glutinous rice, cassava, maize, and silk. Theseproducts were chosen due to being identifiedas priorities in the RTGs provincial clusterdevelopment strategies. These commoditieshave significant potential for export, expan-sion of local market consumption, and importsubstitution.

The Thailand AgricultureSpatial Equilibrium Model(THAISEM)

The Thailand Agriculture Spatial EquilibriumModel is a programming model that simulates

market equilibrium conditions for six com-modities white (non-glutinous) rice, jasminerice, glutinous rice, cassava, maize and silk -in five regions of Thailand. The multi-market,regional structure makes this framework par-ticularly well suited for analysis of marketingmargins, transportation costs and supplyshifts across the country or in specific loca-tions. THAISEM explicitly and endogenouslymodels the equilibrium production, consump-tion, trade flows (internal and external), andprices within each of the five regions of Thai-land.

THAISEM is implemented using the General-

ized Algebraic Modeling System (GAMS) pro-gramming language. THAISEM is calibratedfor the base year 2003. This was selected asthe benchmark year because it is the most

recent in which a comprehensive and reliabledata are available. Furthermore, 2003 was

considered to be a good year in terms ofproduction and there were no major supply ordemand shocks..

As noted above, THAISEM endogenouslymodels equilibrium production, consumption,trade flows, and prices of six commoditieswithin the regions of Thailand. The commodi-ties included in the model are white (non-glutinous) rice, jasmine rice, glutinous rice,cassava, maize, and silk. In terms of cropping,rice, cassava and maize comprise over 99.6percent of cropping area in the Northeast.

The regional structure of THAISEM includesfive domestic regions: North, Northeastern,Center, East and South. The model treatseach region as a spatially separated market.These markets follow the rules of spatial arbi-trage. This implies that trade between tworegions occurs when the price difference be-tween them reaches the transfer cost (the fullcost of marketing and transporting the com-modity from one region to the other).

The five domestic regional markets are con-nected to two international markets: theworld market and the Cambodian market. Fordomestic markets, trade between the domes-tic and international markets follows rules ofspatial arbitrage. Trade between domestic

and international markets occurs subject totransportation and marketing margins includ-ing specific margins for import and export andtaxes for international trade.

THAISEM includes endogenous imports vol-umes from Cambodia, while exports to Cam-bodia are computed as a proportion of im-ports from Cambodia in the base scenario,then kept constant in the following simula-tions. Cambodia exports are subtracted fromdomestic supply.

Identification and Imple-

mentation of Policy Op-tions

Although some of the policy simulations af-fects all crops equally, the focus of the simu-lations is primarily on the rice and silk sector.These sectors are particularly important orunique to the economy of the North Eastregion. In order to examine the effects ofalternate policies on the North East regionand in other regions of Thailand, six sets ofsimulations were conducted. The policy areasthat are implied by these simulations can besummarized as follows:

1. Farm productivity enhancing policies,which include a broad range of poli-cies such as irrigation, research andextension that would result in higher

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yields and consequently an upwardshift of the supply curve.

2. Silk productivity enhancing policies,which include a broad range of poli-cies such as improved breed researchand extension, improved reeling ma-chine technology that would result inhigher yields and consequently an

upward shift of the supply curve.

3. Transportation infrastructure policies,which would reduce transportationcosts of major transportation corridorsconnecting the five regions of Thai-land.

4. Import control policies, these arepolicies that lift the explicit or implicitrestrictions on international trade(with world and Cambodian market),specifically for silk and jasmine ricefrom Cambodia.

5. Value chain strengthening policies,these are policies such as the supportand development of marketing ser-vices, that would affect the marketingmargins of a commodity.

6. Standards and quality control policies,which include policies that wouldregulate the quality standard of ricevarieties and/or affect the degree ofmixing between rice varieties.

Each simulation assumes a certain causalrelationship between the Government policiesand their effects on the key parameters thatare captured by the model. For instance, it is

assumed that the main outcome of invest-ment in research and extension is an increaseof the crop yields, and that transport infra-structure improvement reduces the averagetransport costs, or the provincial marketingmargins.

Rice Farm Productivity Enhanc-ing Policies

Despite the achievement of the agriculturalsector of Thailand, the productivity of somecrops, rice in particular, remain relatively lowif 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 about20-60 percent lower compared to other re-gions of the country; these yields are equiva-lent to yield levels in Cambodia and even lessthan those recorded in Laos.

Improving productivity and efficiency of farm-ers in the non-glutinous and jasmine ricemarketing chains involves investing in tech-nologies and providing incentives to increasemarket returns. This will invariably focus onincreasing yields and improving quality. Theintroduction of supplementary irrigation andbest-practice management systems which

enable farmers to benchmark their productionsystems will provide clear and objective crite-ria for yield and quality improvements whichwill lead to increased profits. Such systems

may involve the adaptation of the Rice Inte-grated Crop Management System (RICM) orRicecheck for local use in Thailand. Theexperience from other countries suggest thatsignificant yield improvements can beachieved with the adoption of a RICM.

As an example, productivity enhancing inter-ventions affecting only 25,000 participatingfarmers in the Northeast could be expected todouble their yields. Assuming current average

yields of 2.5t/ha, and 2.5 ha average farmsize, another 156,250 tonnes of paddy couldbe produced. This would translate to an over-all 5 percent increase in production of jasminerice in the Northeast, or around 2 percentnationally for all rice varieties.

Farm productivity enhancing policies are im-plemented by changing the magnitude of theyield parameter for the appropriate crop andregion involved in the simulation. Two simula-tions are carried out, applying the followingparameter changes:

1. A 2 percent increase of rice yields (all

varieties) at the national level;

2. A 5 percent increase of jasmine riceyields in the North East region.

Silk Productivity Enhancing Poli-cies

Improving productivity and efficiency of seri-culturalists in the silk marketing chains in-volves investing in improved breeds, rearingand weaving technologies and providing in-centives to increase market returns. This willinvariably focus on increasing silkworm yieldsand improving quality of spun yarn. The intro-

duction of improved varieties of silkwormsand best-practice management systems whichenable sericulturalists to benchmark theirproduction systems will provide clear andobjective criteria for yield and quality im-provements which will lead to increased prof-its.

As an example, productivity enhancing inter-ventions affecting only 15,000 participatingfarmers in the Northeast could be expected todouble their silk yarn yields. Assuming currentaverage yarn yields of 9.4kg/household, an-other 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 imple-mented by changing the magnitude of theyield parameter. Two simulations are carriedout, applying the following parameterchanges:

1. A 10 percent increase of silk yields inthe North East region;

2. A 20 percent increase of silk yields inthe North East region.

Transportation Infrastructure

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

essors who the buyers are for existing prod-ucts and markets (even if they have difficul-ties accessing them), it is less clear what themarkets are and whom are the buyers fornew products that will develop under a strat-egy of value addition.

Support and facilitation needs to be given tostakeholders all along the value chain if theyare to access new markets and maintain theirlevel of sales in existing markets. This support

needs to be given at the local level, the re-gional level, and the national level.

If the Northeast region is to capitalize onthese export opportunities, then there needsto be some thought given to how the trans-portation and logistics system can be up-graded, as well as what changes to customsregulations are required. Investment in trans-port infrastructure can reduce transportationcosts for all commodities, between and withinregions. Although the transportation system isrelatively efficient in Thailand, there might stillbe a margin of improvement in transportefficiency.

In modeling terms, infrastructure improve-ments are implemented by reducing the ex-ogenous transportation cost between regionalshipping points. THAISEM allows for general-ized change of transportation costs as well asfor changes among specific routes. Two simu-lations are carried out using the followingmagnitude of change:

1. A reduction of transport cost of 5percent across Thailand;

2. A reduction of transportation cost of10 percent between North East andCentre and North East and East.

Import Control Policies

Regional trade integration with world marketand with neighboring countries may havesignificant effect for the Northeast region.Informal trade flows, particularly with Cambo-dia, have been reported to have a significanteffect on the rice sector. There has beengrowing debate with regard to silk on whetherpolicy investments should place an emphasison primary production (silk yarn) or on theprocessing sector (weaving). Alternative im-port policies can favor one or the other stageof the silk value chain. For the Northeast thekey question is whether the region shouldcontinue supporting commodity productionsystems or should it instead take advantageof increased border trade with Laos and Cam-bodia and focus on value added processing.

As all regulatory policies, lifting trade restric-tions is a type of policy that is relatively sim-ple to implement. These types of policychanges have generally an immediate orshort-term effect on trade flows and domesticprices. Increasing trade linkages with externalmarket are expected to realign domesticprices with international prices. The magni-tude of these changes, however, depends

also on the supply and demand conditionsprevailing on the domestic market.

Trade policies are implemented by changingthe quota constraint values that are bindingfor silk and Cambodian jasmine-substitute


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imports (QUOTA and QUOTACAM). Two policysimulations are implemented with the follow-ing changes:

1. A ten fold increase of import of jas-mine from Cambodia (from 47,000 to470,000); this increase might resem-ble also the increase in import ofregular rice which is then mixed to orcommercialized as Thai jasmine riceonce in Thailand.

2. A five fold increase silk yarn importsfrom the world market.

Value Chain Strengthening Poli-cies

Intervention in the marketing system by gov-ernments or donors is ultimately unsustain-able unless there is a strengthening of thelinkages between stakeholders along thevalue chain. A lack of linkages perpetuates asituation where there are multiple middlemenhandling the produce from farm gate to con-sumers, ultimately this results in an increase

in post-harvest losses, financial inefficiencies,and marketing margins. Moreover, a lack oftrust between stakeholders has a chillingeffect on transactions, particularly in an envi-ronment where there are no enforceable con-tracts. This also results in higher marketingmargins along the value chain.

This policy area encompass a range of initia-tives as linkages along the value chain can bestrengthened in a variety of ways. Supportand facilitation to stakeholders all along thevalue chain if they are to access new marketsand maintain their level of sales in existingmarkets. This support can be given at the

local level, the regional level, and the nationallevel. It is expected that these policies wouldreduce marketing margins at various level ofthe marketing chain.

Four simulations are implemented by chang-ing the magnitude of the exogenous market-ing margins (farm gate-wholesale, wholesale-retailer, and export margins). The magnitudeof parameter changes of each simulation is asfollows:

1. A 2 percent reduction of farm gate-wholesale, wholesale-retail and exportmarketing margins, respectively, forrice and all regions of Thailand.

2. A 5 percent reduction of marketingmargins (farm-wholesale, wholesale-retail and export marketing margins,respectively) for rice, cassava, maizeand silk for the North East region.

3. A 2 percent reduction of farm gate-wholesale, wholesale-retail and exportmarketing margins, respectively, forsilk in regions of Thailand.

4. A 5 percent reduction of marketingmargins (farm-wholesale, wholesale-retail and export marketing margins,

respectively) for silk in the North Eastregion.

Standards and Quality ControlPolicies

Rice is a key commodity for the Northeast andthe production of this region has also uniquequalitative characteristics. Jasmine aromaticrice receives a price premium on the interna-tional market, but its uniqueness is eroded bysimilar varieties grown primarily in the highlyproductive areas of the Central plain. Stan-dard and quality control policies that affectthe substitutability between varieties can havesignificant welfare effects on farmers of differ-ent regions of Thailand. The development ofnew varieties that have similar productivity ofregular white rice produced in Central regions.

The simulation is implemented by changingthe crop mixing coefficients (MIXS and MIXA).It should be recalled that these coefficientshave value of zero in the base scenario. Thisdoes not imply zero mixing, but rather anequilibrium situation between production,trade volumes and market prices, which isreflected in the unknown degree of mixingwhich is implied in the base scenario. Thuschanges should be regarded as changes fromthis equilibrium situation. The magnitude ofthe simulation is as follows:

1. A 2 percent increase in mixing ofwhite rice with jasmine rice in allregions of Thailand;

2. A 5 percent increase in mixing ofwhite rice with jasmine rice in theCenter and East of Thailand (withother regions mixing at 2 percent).

Results of Policy Simula-tions and Conclusions

The results are summarized in Table 1. Over-

all, the results indicate that although there arecommon elements to each broad area of in-vestment, the effect of a policy will depend onthe specific type of investment that is imple-mented.

Out of the five policy areas considered, po-lices which concentrate on increasing farmproductivity and reducing marketing marginsthrough strengthening value chains have thegreatest benefits in terms of total income andfarm household income. Infrastructure im-provements will not have that great an impacton income.

There is a net benefit to Thailand from in-

creasing farm productivity in rice (an increasein total real income between US$16.5 millionand US$15.7 million depending on the respec-tive simulations). However, there are adverseeffects on farm household income. The resultsof this simulation highlight the potential ad-verse effects of a policy that focuses merelyon productivity increases, both at the nationaland regional level.

Assuming relatively small supply and demandelasticities, such a policy may eventually havean adverse effect on farm income: the gain inproductivity increase, and consequent supplyincrease, may be eroded by adverse effects

on prices if the growing supply is not properlymanaged. The main driver for these effects isthe price elasticities, indicating that any policychanges need to take into consideration howprices will respond to changes in production.

Overall, the main effect of policies to increasethe productivity of silk is a slight increase intotal real income and farm income of aroundUS$320,000 and US$600,000 for a 10 percentand 20 percent increase in silk yarn yields.The main reason for this is that the increasein production is offset but a decrease inprices; while production increases by 6.5 and13 percent for each simulation, prices fall by 5

and 10 percent respectively. Given the verysmall benefits accruing from such a policy, thecosts of implementing such policies may out-weigh the benefits.

Policies to reduce marketing margins generategains for both producers and consumersthrough increasing the efficiency of the mar-keting system; which is reflected in narrowergaps between producer and consumer price.For changes in the marketing margin for ricethere is a net real income gain of US$25 mil-lion while for improvements in the marketingsystem in the Northeast there is a net realincome gain of US$41 million. For some com-modities there are still substantial gains to berealized on the domestic market by strength-ening the value chain of those products, whileother products such as jasmine will remaintypically export oriented.

For the silk industry, reductions in marketingmargins result in a net real income gain ofbetween US$10,000 and US$20,000. Suchbenefits are unlikely to cover the costs ofimplementing the policies.

In essence, policies which concentrate onreducing costs of production (and marketing)will have limited impact relative to policieswhich increase quality of production. Increas-

ing quality raises prices and therefore returnsto producers through simulating demand.

Policies that reduce transportation costs ap-pear to have only marginal effects on theeconomy of the six commodities considered inthe model. At the national level, despite asmall gain in total real income of around $3million for each policy change, farm income isadversely affected. However, at the regionallevel, the income of north eastern farmerswould have a modest but positive increment,both with a nation-wide transport policy aswell as with transportation policies that targetthe regions infrastructure.

The small total income benefit from thesepolicies suggest that the costs of implement-ing such policies may outweigh the benefits.

In terms of trade policies and policies dealingwith standards and quality the results are notfully straightforward. Trade policies whichliberalize the cross-border trade in rice orrelax import restrictions on silk yarn will havesignificant negative effects on total incomeand farm household income; particularly forthose farmers in those regions directly com-peting against imports. However, these re-sults do not take into consideration the down-stream industries that could potentially benefit

from such liberalization. In the case of the silkindustry, as an example, weavers and gar-ment manufacturers will gain significantlyfrom a reduction in the price of their main


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This Project Brief is based on researchundertaken in 2004-2005 for the Na-tional Economic and Social DevelopmentBoard of Thailand (NESDB) and Fundedby the World Bank. The original studywas the development of the ThailandAgriculture Spatial Equilibrium Model(THAISEM), under the auspices of theThailand North East Development Report(NEED).

The objective of the NEED Report wasto provide technical support on selectedpriority topics which would enable tobetter understand the dimensions thatcharacterize the underdevelopment ofthe Northeast and find the ways in whichthe Royal Thai Government (RTG), sup-ported by donors, can work to reducethem. The study on value chains focusedon commodities with the potential forincreased value adding and highlightedthe constraints and the strategic options

inputs such as silk yarn. Such effects are notmodeled in THAISEM, but need to be takeninto consideration when forming governmentpolicies.

In terms of policies impacting on standardsand quality, a relaxing of the restrictionsagainst mixing jasmine rice with non-glutinousrice will have significant negative effects interms of total income, as well as farm house-hold income. Total real income falls byUS$43.6 million, while in the second scenarioit falls by almost US$72 million. Those farmersin the Northeast region, where the majority ofjasmine rice is grown, will be significantlyaffected with incomes falling by between 4and 7.6 percent. In contrast, farmers in theCenter, who grow mainly non-glutinous rice,will benefit. In terms of this policy scenario, itmust be recalled that the main lobby groupcalling for increased mixing of jasmine ricecomes from the export sector.

The THAISEM simulations indicate that thebenefit in terms of increased exports are mini-mal, with the main beneficiaries being domes-tic consumers and rice producers in the Cen-tral region. Average prices for non-glutinous

rice will rise, while average prices of jasminerice will fall. Generally consumers will substi-tute into consuming the jasmine mixed rice inpreference to other rice varieties and other

crops.

The results of this analysis quantify the poten-tial regional effect of alternative policy opin-ions. In particular, the regional results showsome significant divide between North Eastregion and the Central and Eastern regions.From a regional perspective, it appears clearthat alternative investment options have dif-ferent effects on each region of the country.If balanced regional growth and reduction ofregional disparities are one of the objectives

of the Government, then the alternative in-vestment options should also be evaluated inthis perspective. The investment mix couldbecome an instrument to achieve these goals.

Out of the five policy areas considered, po-lices which concentrate on increasing ricefarm productivity and reducing marketingmargins through strengthening of rice valuechains have the greatest benefits in terms oftotal income and farm household income.Infrastructure improvements will not havethat great an impact on income, and neitherwill reducing marketing costs for the silk valuechain or improving silk yields. In terms ofstrengthening value chains, it is important to

recognize the role of value adding, ratherthan just simply reducing costs. Policies thatincrease quality, and therefore demandprices, will do more for increasing returns tofarmers.

Agrifood Consulting

International, 2005

www.agrifoodconsulting.com

Table 1: Summary of Selected Income and Trade Indicators (Million US$)

IndicatorTotal

incomeTotal realincome

Realfarm

income

Importvalue

Exportvalue

Intra-regionaltrade

Inter-regionaltrade

Base 139062.26 138979.8 2647.87 5.83 2956.44 2255.48 1274.97

FarmProductivityPolicies

2% increasein all rice yieldsnationally

Change -29.63 16.49 -27.02 33.38 -28.91 -11.26

% change -0.02 0.01 -1.02 1.13 -1.28 -0.88

5% increase in jas-

mine rice yields inNortheast

Change -28.67 15.66 -26.28 29.26 -19.33 -8.69

% change -0.02 0.01 -1.00 0.99 -0.86 -0.68

Silk ProductivityPolicies

10% increase in silkyields in Northeast

Change 0.32 0.32 0.32 0 -0.11 0.46

% change 0.01 0 0.04

20% increase in silkyields in Northeast

Change 0.61 0.6 0.61 0 -0.2 0.87

% change 0.02 -0.01 0.07

InfrastructurePolicies

5% reductiontransport costs

Change -0.19 2.98 -0.15 -0.56 -0.74 2.59

% change 0 -0.01 -0.02 -0.03 0.2

10% reductionNE > Central & East

Change -0.01 3.23 0.03 -0.88 -0.89 0.89

% change 0 0 -0.03 -0.04 0.07

Trade

Policies

Lifting jasminetrade restriction

Change -107.52 -50.37 -104.28 36.29 -27.11 -115

% change -0.08 -0.04 -3.95 1.23 -1.2 -9.02

Lifting silk traderestriction

Change -3.47 -3.39 -3.45 6.32 0.03 -0.71 -4.88% change 0 0 -0.13 108.44 0 -0.03 -0.38

Value ChainPolicies

Reduction ofrice mrk. marg.

Change 23.1 24.76 23.09 2.84 630.14 -583.72

% change 0.02 0.02 0.87 0.1 27.94 -45.78

Reduction ofmkt. marg. in NE

Change 43.15 40.8 42.89 6.24 67.42 -58.01

% change 0.03 0.03 1.62 0.21 2.99 -4.55

Reduction ofsilk mrk. marg.

Change 0.01 0.01 0.01

% change 0 0 0

Reduction of silkmkt. marg. in NE

Change 0.02 0.02 0.02

% change 0 0 0

Standards andQuality

Policies

2% ricevariety mixing

Change -43.63 -18.18 -41.95 3.76 27.82 -35.17

% change -0.03 -0.01 -1.59 0.13 1.23 -2.76

5% ricevariety mixing

Change -71.75 -23.16 -68.66 4.9 74.1 -87.22% change -0.05 -0.02 -2.6 0.17 3.29 -6.84

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