* Caretaker govt said last week could not renew rice subsidy
* That will force farmers to sell crops in open markets
* Thai exports set to swell, stoking global supply glut
By Naveen Thukral and Apornrath Phoonphongphiphat
SINGAPORE/BANGKOK, Feb 19 (Reuters) - Millions of tonnes of Thai rice are set to flood into already oversupplied international markets when the government's controversial subsidy scheme grinds to a halt later this month.
The country's caretaker government last week said it did not have the power to renew the programme, which has paid farmers in one of the world's top exporters of rice nearly double market rates and is due to expire at month-end.
That will force farmers to offload the March harvest into a market currently dominated by India and Vietnam. With Bangkok already shifting grain from record government stockpiles, the sales threaten to worsen a supply glut that has dragged on international prices.
While many rice farmers are expected to remain loyal to Prime Minister Yingluck Shinawatra, who swept to power in 2011 on the back of rural votes generated in part by the subsidies, a slump in prices that could be blamed on her leadership would erode her support base and be another blow for her embattled government.
The bulk of the around 5 million tonnes of milled grain that is expected to be produced from next month's crop, equivalent to more than 10 percent of all rice traded globally last year, is likely to be sold to exporters as farmers and millers have limited capacity to hold back stocks.
"It's like farmers are being set adrift. We will have to sell rice to millers at prices lower than what we got in the past," said Boonserm Thongsook, a farmer in the province of Suphan Buri, around 40 km north of Bangkok.
"I may not vote for Yingluck again as she ignores us. The scheme is about to end and she does nothing to support us."
The subsidy programme has been mired in allegations of corruption and faced growing losses, becoming a target of a Bangkok-based protest movement bent on ousting Yingluck and the caretaker government she has led since December.
Unrest is spreading to her party's natural supporters in the countryside, where many farmers have gone unpaid for their rice for months as the programme scrambles for funding.
Hundreds of unpaid Thai rice farmers this week swarmed around Yingluck's temporary office and threatened to storm the building.
Any possible reintroduction of the rice-buying scheme would be off the cards until the completion of disrupted elections, which the country's Election Commission said was unlikely until late April.
Most market participants expect some sort of programme to re-emerge no matter who wins at the polls, though it is likely to be far less generous than the current scheme. Thailand has had different forms of rice support scheme for around three decades.
"From the world market's point of view, the end of the scheme could be bearish because it implies a potentially large boost to world export availability," said Darren Cooper, senior economist with trade body the International Grains Council in London.
GLOBAL GLUT
Traders and officials said Thai rice prices, which have already dropped 14 percent since January, won't fall much further as they are already cheaper than competing varieties.
"Exporters will not offer prices that are lower than their costs of production," said Chookiat Ophaswongse, honorary president of the Thai Rice Exporters Association.
Thai exporters said prices could fall to $350 a tonne for the benchmark 5-percent broken variety, the lowest in seven years, from $375 a tonne currently offered on a free on board basis.
That compares with $410 a tonne being quoted for similar varieties in top exporter India and $400 a tonne in No.2 seller Vietnam.
Thailand paid farmers 15,000 baht ($463) per tonne of paddy under the intervention scheme that started in October 2011, compared to the 8,000-9,000 baht per tonne they can expect in the open market this year.
Most Thai farmers live in poor and remote areas that lack access to large storage silos, meaning they have little opportunity to hold back rice in hope that prices will climb in future.
As well as sales from the upcoming harvest, authorities will open a tender this week to sell 500,000 tonnes of rice from state warehouses, after a previous 400,000-tonne offering attracted healthy interest.
Extra supply from Thailand comes as India is looking to shrink reserves swollen after bountiful monsoon rains and Vietnam starts to harvest the highest-yielding of its three annual crops.
The world's top rice buyers in Southeast Asia and Africa, who have stayed out of the market since January, are likely to make the most of their purchases from Thailand, hitting Indian and Vietnamese exports.
"Demand in the start of the first quarter has been subdued but we expect buyers to be back in the market in March or April," said a Singapore-based trader, who declined to be named.
"They will any day prefer Thai rice over other origins even if the prices are at par."
Thailand, which was the world's top exporter of rice until Yingluck's intervention scheme derailed shipments in 2011, is known for its high quality grains.
Vietnam has said it expects its rice exports in January-March to decline by a quarter with African buyers switching to cheaper Thai cargoes. ($1 = 32.4 baht) (Editing by Joseph Radford)
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