The government is selling surplus rubber stockpiles directly to China as it buys up supplies from farmers in the world’s largest producer to prop up prices.
Prime Minister Prayut Chan-o-cha set aside 12 billion baht to purchase domestic rubber at above-market prices, then sell it to China, the world's biggest consumer, Amnuay Patise, deputy minister for agriculture and cooperatives, said in an interview in Bangkok. It has bought 130,000 tonnes since the program started in November.
"The government has to step in as the market mechanism alone is not enough to help farmers have enough income to offset costs of living," Mr Amnuay said. "The government will act as a trader, buying and selling rubber. We'll buy when farmers are in trouble."
The purchases are part of a combined effort by the world's largest growers to revive prices that have fallen more than 60% from a peak in 2011 as trees planted last decade across Asia matured and flooded the market with latex. Demand has also weakened from China, which has set its 2015 economic growth target at 7%, the slowest in 15 years. The country's total rubber imports fell 21% in the first two months of the year.
The state-run Rubber Estate Organisation is preparing to ship 40,000 tonnes of stockpiled rubber to China as part of a sales agreement with China Hainan Rubber Industry Group Co to supply 400,000 tonnes over the next year to 18 months, Mr Amnuay said. Dong Jingjun, board secretary of the Chinese company, didn't respond to a request for comment on Tuesday.
Undisclosed price
Ribbed smoked sheet grade 3, the Thai benchmark, averaged 59.96 baht a kilogramme in February, up from 52.79 baht in October, the lowest since 2009. Prices were 57.65 baht a kilogramme on Wednesday. Rubber on the Shanghai Futures Exchange last month averaged 13,711.7 yuan a tonne, or about 71.60 baht a kilogramme.
The government wants market prices to rise above 60 baht a kilogramme, Mr Amnuay said, declining to provide a specific level. "The target price is undisclosed, but won't be lower than 60 baht," he said.
Officials from Bacho district in Narathiwat chop down old rubber trees in January as part of the government’s campaign to reduce supplies of latex-producing trees. (Bangkok Post photo)
The government paused purchases on Monday because it ran out of storage space for the stockpiles, triggering a 20% drop in auction prices paid by the junta to 50.38 baht a kilogramme. Buying will continue when the "technical problem" is solved after the pending shipment to China, Mr Amnuay said.
Not sustainable
Stockpiling by the administration of former prime minister Yingluck Shinawatra accounts for about 200,000 tonnes of the volumes held by the present government, with the balance from the new programme, according to Mr Amnuay. The country's inventories totalled 393,300 tonnes at the end of last year, down from 516,000 in 2012, according to data from the Association of Natural Rubber Producing Countries.
"The Thai measures can support physical prices and nearby future contracts, but this is not a sustainable way to shore up prices," said Gu Jiong, a Tokyo-based analyst at Yutaka Shoji Co, a commodity broker. "How long can they support prices? I have doubts about it."
Officials from Thailand, Malaysia and Indonesia, which account for two-thirds of global production, decided in November to limit exports in an effort to tighten supply. The global natural rubber surplus will narrow to 51,000 tonnes in 2016 from a projected 77,000 tonnes this year as producers reduce output, the International Rubber Study Group said in January.
Tapping 'holiday'
Kanchana Jan-on (left), and Chalermsak Pinyakom, 23, collect rubber on a plantation in Phunpin, Surat Thani province, in this file picture taken in September 2013. (Reuters photo)
The government is encouraging farmers to cut down aging trees over an area of 400,000 rai. That may reduce production by 102,800 tonnes a year, according to yield estimates from the country's Agricultural Economic Office. About 100,000 rai of that will be switched to cultivating palm oil, according to the farm ministry. The government is also considering tapping "holidays" to reduce supply.
The country is providing low-interest loans to farming cooperatives and rubber-products manufacturers. The loans, to be financed by state-run banks, are part of a revolving credit line worth 80 billion baht, which will be used to support the rubber industry, Mr Amnuay said.
The country aims to increase domestic demand, already at 500,000 tonnes to 600,000 tonnes annually, by using rubber for road construction and sports fields, he added.
"All of our measures are important," said Mr Amnuay. "They help complement one another in stabilising prices."