The Commerce Ministry has set up a panel to look into the case, but the government insists no corruption was involved.
Deputy Agriculture and Cooperatives Minister and Prime Minister's Office Minister Varathep Rattanakorn said Tuesday that the rotten and burnt rice in Phitsanulok was part of the stockpile from the 2008 pledging project, instigated by the People Power Party-led administration of the time.
The rotten rice was set to be transported elsewhere but was damaged in the 2011 floods, so it was left where it was, Mr Varathep said.
The warehouse owner had agreed to pay compensation to the owners of the rotten rice, he said.
The rice was found dumped behind a warehouse and partly burned. It had been soaked in the rain, causing it to rot and emit a foul odour across the surrounding area.
Deputy Commerce Minister Yanyong Phuangrach said the rotten rice was among 13,464 tonnes of rice sold to a Chinese state enterprise in a government-to-government agreement under the 2008 rice-pledging programme.
Only 13,000 tonnes of rice had been shipped to China, while the rest could not be delivered due to the damage, Mr Yanyong said.
A probe by the Marketing Organisation for Farmers (MOF) concluded that the rice was damaged during the 2011 floods, he said.
It also ruled that the burned rice had spontaneously combusted.
However, Mr Yanyong said the Commerce Ministry has set up a committee to investigate the case further.
The committee is required to finish the investigation in two weeks.
The probe intends to determine why the rice was mishandled, said Suchart Sinrat, deputy director-general of the Internal Trade Department.
More importantly, it is aimed at determining who would take responsibility for the damages if China sues Thailand, as it had already paid for the full amount but had not received it all, he said.
Democrat MP for Phitsanulok Warong Detkitvikrom said he would petition the National Anti-Corruption Commission next week to also investigate the matter.
He questioned the MOF's spontaneous combustion conclusion, saying this explanation did not make sense. Mr Warong said he strongly believed the rice was intentionally destroyed to cover up irregularities that would point to corruption in the pledging scheme.
Meanwhile, police in Phichit province on Tuesday began interrogating Munin Chantra, the owner of L Gold Manufacture Co rice miller, on fraud and embezzlement charges.
Mr Munin was arrested in Bangkok on Monday night and transferred to Phichit, where he had allegedly deceived rice farmers and embezzled about 12,000 tonnes of their crops.
Deputy provincial police chief Pol Col Thawach Muannara said three more suspects are wanted in the same case, namely Natthakit Ananchalin, Suphachok Natheethong and Natthariya Boonkuea.