Business has never been better for the rice smugglers of Myawaddy. The scruffy, dusty Myanmese border town is separated from Mae Sot, in Thailand, by a narrow stretch of the Moei River. It takes just minutes to travel between the two countries and every night the traffickers take advantage of that proximity to smuggle what they coyly call “chicken feed” across the river.

Myawaddy has long been known as an illicit trading hub for drugs, guns and precious gems, but “rice is the main item being smuggled from Myawaddy now”, says Brother Tone, 42, who has been running the grain into Thailand for six years.

“The Thais want rice from Myanmar because it is cheaper than Cambodian or Laotian rice and it’s not hard to get it into Thailand.”

At a compound on the outskirts of Myawaddy patrolled by soldiers belonging to Myanmar’s national border guard, lines of trucks are pulled up close to the river bank. Sacks of rice are swiftly unloaded by labourers and transferred to boats.

“We started sending ‘chicken feed’ across to Thailand in big quantities about three or four years ago,” says border guard commander Major San Jo as he sits in his makeshift office watching Myanmese music videos with his revolver by his side. “Generally, we send about 100 sacks at a time. Each sack is 50 kilos.”

Fifty kilograms of rice is worth 25,000 kyat (HK$200) in Myawaddy, but in Thailand, the same amount sells for 1,500 baht (HK$370). It is that huge disparity in price that is driving the thriving trade.

An estimated 500,000 to 750,000 tonnes of rice is being smuggled into Thailand annually, almost all of it from neighbouring Myanmar and Cambodia. It is the equivalent of trafficking tea to China or opium to Afghanistan, because, until last year, Thailand was the world’s leading rice exporter – a position it proudly held for 30 years.

“In 2011, we exported more than 10 million tonnes of rice,” says Korbsook Iamsuri, president of the Thai Rice Exporters Association. “Last year, we exported 6.9 million tonnes. That’s a drop of 35 per cent. Now, we are the third-largest exporter in the world behind India and Vietnam.”

That dramatic slump is a direct result of the Thai government’s decision in October 2011 to pay almost double the market price for the rice grown by its farmers. Known as the rice-pledging scheme, the populist policy was conceived by the ruling Puea Thai party as a reward for rural voters, who make up much of its support. But the plan was also a highly ambitious attempt to corner the global grain market. By buying up locally grown rice and stockpiling it, the Thai government believed it could force up prices, enabling it to both subsidise its farmers and increase the revenue it earns from exports.

However, the scheme has backfired in disastrous fashion. Just as Thailand started paying out subsidies to its farmers in the northeast and central plains, India lifted its ban on rice exports and made 10 million tonnes of grain available for purchase. At the same time, Vietnam lowered its prices and the cost of rice began to plummet worldwide. The consequences for the Thai economy have been dire. Over the past two years, the government has spent about 680 billion baht (HK$167 billion) buying rice it is unable to sell at a profit, according to figures from the Ministry of Commerce. Now, Thailand is sitting on a vast stockpile of unsold grain, estimated at about 18 million tonnes, with little prospect of selling it in the near future.

“Overseas markets know the Thai government has a lot of rice and that the government is desperate to sell it,” says Nipon Poapongsakorn, an economist with the Thailand Development Research Institute who has made a study of the rice-pledging scheme. “That keeps the grain price low.

“Rice isn’t like wine: you can’t keep it forever,” says Nipon. “Keeping rice in a silo is only feasible for a year or 18 months. After that, the cost of storing it increases because the quality and value of the rice goes down.”

More than anything, the rice-pledging scheme has proved to be a boon for smugglers. Rice has always been smuggled into Thailand from neighbouring countries, because Thai rice has traditionally fetched a higher price due to its reputation for quality.

But in the past two years the amount of rice being trafficked has jumped in quantity. Passed off as grain grown in Thailand, it is sold by Thai traders at the artificially steep price set by the government before it joins the ever-growing mountains of rice being stored in warehouses across the country.

“The [rice-pledging] scheme has offered benefits to other exporters such as India and Vietnam because they have been able to steal market share from Thailand,” says Darren Cooper, senior economist at the London-based International Grains Council. “However, the key impact has been to promote an incentive to sell rice into the scheme to take advantage of the attractive prices on offer.”

Myawaddy’s rice smugglers do not need degrees in economics to understand that the scheme has created huge opportunities for them.

“Rice smuggling is good because it creates jobs for us here in Myanmar,” says Tone, in his wooden house close to the Moei River.

“I don’t want to say exactly how much I earn, but the average working person in Myawaddy makes 4,000 kyat a day. I can make 100,000 kyat a day if business is good.”

Small and wiry, Tone moves around Myawaddy in a battered pick-up truck, a status symbol in impoverished Myanmar. He is now earning far more than he did during the 18 years he spent as a migrant worker on building sites in Thailand.

His time there, though, gave him the skills necessary to succeed as a rice smuggler.

“I learned to speak Thai. That’s why I can do this job, because I can speak to the Thai traders,” he says. “Sometimes we’ll meet here or I’ll go to Mae Sot. What I do is show them a sample of the rice. If they are happy with it, then we arrange the deal. We send different types of rice across.

The bad quality rice is used to feed animals. The good stuff is mixed with Thai rice and sold to the government.”

The farmers around Myawaddy “sell so much to the Thais that sometimes they don’t have enough to sell here”, says Tone. “A few areas don’t have enough rice now because so much is going to Thailand.”

Like almost all of the rice smugglers in Myawaddy, Tone is a member of the Karen ethnic minority. So, too, are the soldiers from the national border guard who ensure the security of his shipments. And with the Karen National Liberation Army (KNLA) still battling the Myanmese army for their own independent state in southeastern Myanmar, the country’s authorities are loathe to crack down on the illicit rice trade from Myawaddy.

“It depends on the political situation,” says Tone. “At the moment, there is no fighting in Myawaddy, so the government doesn’t interfere with the trading. They would rather do this than fight the government.”

Indeed, with the border guards protecting the smugglers, rice trafficking appears to be officially sanctioned. “As long as you have permission from the army and pay the right people, it’s no problem. No one ever gets caught doing this,” says Tone.

Thailand’s long, porous frontiers with Myanmar and Cambodia run through remote jungle in many places, making stopping the flow of rice a near impossible task for the Thai authorities. Close to Myawaddy, people can simply wade across the Moei River with sacks on their backs.

“Our area of responsibility covers 542 kilometres of border and we have 59 officials to cover that area, so it is very hard to police the border,” says Supachai Sasomboon, deputy director of the Mae Sot customs post.

Agricultural products – mainly rice – and protected animals are the most commonly smuggled items, he says. “Whenever the price of anything is higher in Thailand than it is in Myanmar, smuggling increases. Most of it is small-scale smuggling by individuals.”

Mae Sot is the major gateway between Myanmar and Thailand – almost two billion baht of legal trade moves through it annually – but customs officers make few arrests for smuggling. From October last year to August, there were just 239 prosecutions, according to their figures.

In July, 25 tonnes of rice were found on one truck coming from Myawaddy alone. With no formal co-operation between the authorities in Myanmar and the Thai customs, there is little doubt that far more rice than is detected passes through Mae Sot. And like Tone and his colleagues on the other side of the border, Thais involved in the smuggling have little to fear, even if they are caught.

“People are fined up to four times the value of the cargo. They don’t go to prison,” says Supachai. The confiscated rice is handed over to the government and added to the vast stockpiles already being maintained.

While the Mae Sot customs officials seem to be in denial over the sheer amount of rice smuggling going on, critics of the Puea Thai party accuse the government of failing to acknowledge the huge impact the rice-pledging scheme is having on the economy.

With some estimates saying the policy could end up costing a staggering 8 per cent of Thailand’s annual budget, credit agency Moody’s warned this year that the country’s vital worldwide credit rating is at risk of being downgraded.

Nipon believes the potential losses are even higher than the figures announced. “The government is calculating the amount of rice stockpiled by the cost it paid for it. But you have to value the rice inventory by the market price,” he says. “The government is running into serious financial trouble from the scheme.”

For Thailand’s beleaguered rice exporters, the policy has caused only pain.

“I think ‘depressed’ would be the word that best describes their state of mind,” says Korbsook. “I think there will be a time when everyone has to come back to reality.

“People have to look at the numbers. The scheme was not carefully thought through. The government was trying to achieve too many goals and they weren’t realistic.”

Puea Thai party ministers remain defiant, insisting that it is right to support the millions of rice farmers in their northeastern heartland.

“If you have to suffer budget-wise to help 4.5 million families live a decent life, then I think it is fair,” says Thailand’s finance minister, Kittirat na Ranong. “It is the government’s job to take care of them.”

Many experts, though, question whether the rice-pledging scheme is actually assisting the people it is aimed at.

“I think it is the rice growers of the central areas who are profiting from the scheme rather than the small farmers in Isan, in the northeast,” says Korbsook. “They are more business-oriented and produce higher yields of rice and they have the trucks to transport it. The Isan farmers are far away from the rice mills and can’t store the rice they produce.”

Finding a solution to the financial havoc seems beyond the government.

Despite wooing China to buy some of its grain stockpile, no firm agreement has been reached with Beijing. Nor are other countries stepping forward to buy Thai rice in any quantity.

“Vietnam has been successful in selling rice to meet China’s unexpected demand for imports over the past couple of years and many of Asia’s traditionally big importers have not been in the market for large quantities this year,” says Cooper.

He believes that even if Thailand agrees to sell its rice at lower prices, it will still struggle to achieve significant sales.

“What seems certain is that stocks are likely to climb further and that the costs of storing the inventories will become increasingly burdensome.”

Nipon says: “The best thing to do would be to destroy the stockpiled rice; dump it into the ocean.

“It would help the farmers because it would drive the price back up.”

With rice playing such a central part in Thai life, that is an unlikely scenario. “Rice isn’t just a business for Thais, it is part of our culture and that’s why we produce so much. We grow it to feed ourselves as well as for export,” says Korbsook.

Ending the subsidies to the rice farmers would be seen as an assault on that culture, as well as risking alienating Puea Thai’s voter base.

“The farmers will protest and the government will have to negotiate with them and offer them something else in return. But that’s going to be difficult to achieve,” says Nipon.

There is certainly no chance of the rice traffickers ceasing their operations soon, not while it is so easy to smuggle the grain into Thailand and the risk of being caught is so low.

“The rice-pledging scheme has encouraged corruption at every level,” says Nipon.

“People see rice smuggling as a victimless crime. But it is the Thai taxpayers who are suffering.”