The government will issue a 75-billion-baht bond to finance the rice-pledging scheme as it has failed to pay farmers since the main crop began in October.
The programme, which pays farmers 15,000 baht a tonne for the grain, is the ruling Pheu Thai government's core campaign promise, so it is reluctant to scrap the scheme despite strong criticism from academics and international organisations about its massive losses.
The government has not been able to pay farmers for two months because the Bank of Agriculture and Agricultural Cooperatives (BAAC) has lacked the mandate to borrow more until January next year.
The delay may cost the government supporters at the ballot box as farmers threatened to join anti-government protests if the programme is scrapped.
The Public Debt Management Office (PDMO) said yesterday the BAAC will issue a three-year bond worth 75 billion baht to continue the scheme.
"The bond will be sold to the public on Nov 29," said Suwit Rojanawanich, the office's public debt adviser.
The note is part of the 140-billion-baht budget the government allocated to the scheme by guaranteeing BAAC's borrowings to finance the 2013/14 crop.
Of the 140 billion, 105 billion will be drawn this year and 35 billion next year. For this year, 75 billion will come from the bond and 30 billion will be term loans or overdue loans.
Next year the BAAC will consider whether to issue bonds or another term loan.
The scheme's massive losses may undermine investor confidence in the BAAC's bonds as it is widely expected that the Commerce Ministry, which is in charge of selling the rice, has not sold enough to repay the BAAC's debt.
Mr Suwit said the BAAC's notes for the programme are fully guaranteed by the Finance Ministry.
There are three types of government bonds _ state enterprise notes without a Finance Ministry guarantee, state enterprise bonds guaranteed by the Finance Ministry but the issuer must repay the debt by themselves, and GGLB, which is fully guaranteed by the ministry.
Mr Suwit said the note could lower BAAC's financial costs at a time when confidence in it is low. BAAC's previous lots of bonds had to pay 35 basis points higher than the average yield of government bonds.
Mr Suwit added the previous 185 billion baht in bonds issued by the BAAC to fund the scheme will also be converted into fully guaranteed bonds by the government.
Prakob Phiencharoen, head of debt capital markets at HSBC, said the average yield of BAAC's bonds is 25-35 basis points higher than other notes of similar maturities and types.
"This is quite expensive compared to three to four years ago when the bank could borrow cheaply. It resulted in a purchase delay as investors waited for higher offers in line with rising interest rates. The PDMO's move will help restore confidence in the BAAC's debt," said Mr Prakob.
In a related development, the government's effort to auction 452,538 tonnes of rice yesterday drew a lukewarm response from potential buyers, with only four exporters participating. The tender was the sixth held by the government, which is under pressure to offload the huge stockpile.
Of the 452,538 tonnes put on the block yesterday, 300,275 are Thai Hom Mali and Hom Mali broken rice for export and local sale, and 152,263 tonnes are 5% white rice for expors.
From the proposed six auctions for a combined 2 million tonnes, the government has sold only 700,000-800,000 tonnes to date.
The government has returned 140 billion baht this year from rice sales to the BAAC and expects to return 24 billion more this year, well below the 200 billion baht it aimed to repay earlier.
Surasak Riangkrul, director-general of the Foreign Trade Department, said the government would try its best next year to step up rice sales.
The Commerce Ministry is slated sign a contract today to sell 1.2 million tonnes to a state enterprise in Harbin, in northeastern China's Heilongjiang province. Delivery would be made in one to two years, and the value of the deal was not disclosed.