Harvest of plenty
Thailand's agricultural sector this year has been the beneficiary of a worldwide phenomenon, with farmers' incomes rising along with product prices that have reached record levels for some key commodities.
"This year has been a golden year for Thailand as we have not encountered any natural disasters and we have sufficient water supply," said Apichart Jongskul, the secretary-general of the Agricultural Economics Office.
He said the prices of farm products in the first half were relatively good, particularly rice, as several rice-exporting countries reduced exports to ensure domestic supplies in the wake of natural events that curbed output.
Prices of rice and other staple grains have been pushed up by rising affluence in many emerging markets, where consumers are eating more meat, which increases demand for animal feed. At the same time, acreage devoted to some staples is shrinking as farmers turn to planting other crops that can be used in the production of ethanol.
However, farm product price appreciation is set to decelerate in the second half. Rice prices are already nearly $200 below their peak of around $1,080 a tonne set in May, as Vietnam and others have lifted export curbs and more supply is about to enter the market.
High prices are helping to offset fast-rising production costs linked to oil, which is pushing up the cost of fuel, transport and fertiliser for farmers. In response, the Agriculture Ministry is promoting water saving and urging farmers to use organic fertiliser.
Chookiat Ophaswongse, president of the Rice Exporters Association, said that in the first five months, Thailand's rice exports reached five million tonnes as major players including Vietnam, Egypt and India banned shipments abroad in the face of domestic shortages.
"The rice export target this year is nine million tonnes, but we already exported five million tonnes in the first five months," he said. "This means we only need to export 570,000 tonnes a month on average, which is quite low when compared to exports at regular time of about 600,000 to 700,000 tonnes a month."
Thailand's rice exports could exceed 10 million tonnes given the high demand, he said.
Rubber prospects still robust
 |
| A golden year for the golden crop? Not necessarily, now that new supply is beginning to pour into the world market and costs are continuing to soar. |
Luckchai Kittipol, president of the Thai Rubber Association, said rubber prices in the first half also were strong. Natural rubber ribbed smoked sheets (RSS3) for December delivery hit a record high at the end of May on the Agricultural Futures Exchange of Thailand (Afet), at $3,200 a tonne. The average domestic price of rubber sheets rose to 103.7 baht a kilogramme and raw rubber to 99 baht.
Price increases have been due in part to speculation from international hedge funds, which have shifted more to rubber futures markets in light of bearish stock and bond markets.
Mr Luckchai projected that prices of rubber in the second half would stay high because of increased demand, though trading could be more volatile and the average could slip below $3,000 a tonne.
Higher rubber prices might result either in a slowdown in production or a shutdown of small-scale manufacturers of rubber-based products including tyres and gloves, as they could not afford to raise their selling prices fast enough to catch up with input costs, he said.
As well, rubber demand, especially for automotive tyres in China, is expected to be frozen as Chinese authorities are determined to reduce air pollution for a three-month period before, during and after the Beijing Olympics.
"But we expect prices are unlikely to drop as sharply as in 2006 when prices dropped to just $1,400 per tonne from $2,800 within three to four months, as the prices of all raw materials for plantations have moved up," said Mr Luckchai.
The association projects exports of 2.7 million tonnes this year, a rise of 2%, with export value expected to rise by 25% from $5.64 billion last year because of higher prices.
Tapioca: demand still outstrips supply
Chen Wongboonsin, president of the Thai Tapioca Trade Association, said Thailand exported 2.4 million tonnes of tapioca pellets and chips from January to April, down 700,000 tonnes from last year because of lower yields, resulting in higher domestic prices of cassava roots.
Prices of cassava roots have been increasing in the past two years and are now in a range of 2.20 to 2.50 baht a kilogramme, compared to 1.37 baht last year, as demand exceeds supply. Cassava and tapioca demand has also been helped by higher prices of wheat, maize and grain, and China's ban on maize exports.
"The export volume this year depends on crop yields in the last four months of this year," said Mr Chen. Currently, output of tapioca is expected to decline to 25.9 million tonnes, from an earlier projection of 27.6 million tonnes.
Palm: no shortage likely despite high demand
Palm oil production has also exceeded projections by 30% in the first half of this year, thanks to the continual rain, said Wiwan Boonyaprateeprat, secretary-general of Thai Oil Palm and Palm Oil Association.
"We project 1.5 million tonnes of fresh palm nut output this year, a 15% increase from the earlier projection of 1.3 million tonnes, and also up from 1.1 million tonnes last year," Ms Wiwan said.
About 70% of palm oil production will be used for food and 30% for biodiesel production.
"We won't face supply shortage this year," she said. "Also, the use of palm oil in biodiesel production is not going to affect cooking oil as currently there's only one active biodiesel producer, which is PTT, out of nine authorised manufacturers."
Selling prices of fresh palm nuts in the first half were 4.80 to 5.00 baht a kilogramme, when compared to 4.01 baht last year. Prices in May rose slightly to 5.30 baht due to reduced output, which is forecast to shrink by 30% after May.
Prices of fresh palm nuts in the second half are projected to rise to between 5.80 and 6.00 baht a kilogramme, leading to higher costs of production for crude palm oil and cooking oil.
On the back of higher palm nut prices, domestic prices of crude palm oil have reached 36-37 baht a kilogramme, on par with those of Malaysia.
"What we're concerned about is skyrocketing oil prices," Ms Wiwan said. "The increase in palm oil prices is due to the fact that Malaysia, which is the world's biggest exporter of oil and palm oil, has set the price of palm oil based on prices of crude oil in the world market. Thus, Thailand, as a producer of palm oil, also needs to set similar prices to those of Malaysia so that not all output of palm oil would go for export."
Improvement strategies
Nipon Poapongsakorn, dean of the Economics at Thammasat University, said that prices of more than 20 crops in Thailand have been on the rise.
But the plantation areas of cereals used in animal feeds, such as soybeans and maize, are on the decline as energy crops have taken over those of other crops including pineapples, sugarcane and off-season rice.
"The government shouldn't control feed prices because producers would cut costs by producing low-quality products which, in the end, would affect livestock farmers," said Mr Nipon.
The livestock product outlook could be poor this year due to rising costs of living that may slow meat consumption.
Longer-term, Mr Nipon says, the country needs more investment in irrigation development to help farmers to reduce production costs. He also advocates financial support for research of rice strains to increase yields and to develop breeds suited to the arid Northeast and other areas where irrigation is lacking.
As well, jasmine rice cultivated on the Thung Kula Ronghai plains, the world's largest jasmine-rice farming area, should be certified and labelled as a premium product with high prices, since farmers could only cultivate one crop a year.
COMPETITIVENESS
Agricultural research and development need a boost
CHAROEN KITTIKANYA
Thailand's agricultural sector is likely to see big trouble over the next five years because financial support for research and development for the sector is low compared with rival countries in the region.
Somporn Isvilanonda, an economist with Kasetsart University's Department of Agriculture and Resource Economics, said without appropriate investment in agricultural research and development, the country's agricultural sector, and rice in particular, would potentially be overtaken by competitors such as Vietnam in the next five years.
According to Mr Somporn, Thailand has been far behind the other newly industrialised countries when it comes to R&D spending as a share of GDP. The country's R&D budget remains at only 0.26% to 0.28% of GDP.
The figure in Malaysia is 0.63%, Singapore 2.24% Taiwan 2.42% and Korea 2.63%. Meanwhile, the rate in developed countries was higher with Japan at 3.20% of GDP and the United States at 2.66%.
The 0.26-0.28% share of GDP in Thailand has been stagnant since 1999.
According to statistics from the Budget Bureau, the budgeting plan for supporting science, technology, research and innovation of Thailand amounted to 11.51 billion baht in fiscal 2008.
The Agriculture Ministry rather than private food companies remains the largest performer of agricultural research, with a research budget worth 1.617 billion in fiscal 2008, mostly for research on crops, livestock, forestry, and fisheries.
Public universities also have significant programmes in agricultural research, funded through the Education Ministry and through grants from the Thailand Research Fund and the National Research Council.
In addition to public research, agricultural research policy in Thailand has explicitly sought to encourage private investment in agricultural research and technology transfer by focusing public resources on activities to complement, rather than compete with, the private sector. This is evident in the seed sector, where the public sector maintains a large seed capacity but avoids markets where private seed companies are active.
In corn seed production, for example, the public sector withdrew from seed multiplication as the availability and use of private hybrid seed expanded.
The public sector plays an important role in encouraging farmers to adopt improved agricultural technology, including new crops and crop varieties, and improved practices, chemicals, and compound animal feeds.
The Department of Agricultural Extension and the Bank for Agriculture and Agricultural Co-operatives (BAAC) distribute samples of new agricultural products to farmers at free or subsidised rates to encourage trials and adoption. The BAAC is the main source of financing farm machinery purchases by farmers.
Rising wages in the Thai economy have sharply increased the demand for labour-saving farm machinery.
A first wave of farm mechanisation occurred in the 1970s and 1980s, with the diffusion of mechanised land cultivation and rice threshing. Power-tillers, or two-wheeled walking tractors, were introduced in rice production. Larger, four-wheeled riding tractors were widely adopted to facilitate the rapid expansion of land planted with non-rice crops, especially cassava and sugarcane.
In the late 1980s and 1990s, a second wave of mechanisation affected crop harvesting. However, the role of the private sector in machinery development is limited to minor modifications to design and manufacturing processes. Major design improvements originate mainly from imported machinery and the public sector.
Nipon Poapongsakorn, dean of the Faculty of the Economics at Thammasat University, added that agricultural research and development seemed to be ignored by the government over the last 10 years.
Lower pay and little financial support from the government had prompted a number of researchers to leave the sector and in the meantime made it less attractive to lure the new ones.
"The government needs to think more seriously about agricultural R&D to stabilise long-term prices. For instance, rice prices increased significantly this year. The government should spend at least 1-2 billion baht on rice research and development and restructure rice management and administration to ensure steady prices in the long run," said Mr Nipon.
FOOD PROCESSING
Meeting the challenges
WALAILAK KEERATIPIPATPONG
 |
| Plantation areas of palm trees have grown rapidly in recent years, driven by rising demand for alternative energy crops. |
 |
| Oil is extracted from palm nut kernels. |
Over the past six months, Dhanin Chearavanont, the chairman and CEO of the Charoen Pokphand Group, has repeatedly conveyed his "Two Highs" theory by calling for authorities to let farm prices soar to benefit farmers while at the same time raising the salaries of low-income state workers and labourers to enable them to cope with higher expenses.
Mr Dhanin is confident the policy is an effective tool to push forward an economy that runs the high risk of being paralysed by the oil crisis.
In his view, the alternative - low salaries and farm incomes - would limit the purchasing power of the people, a scenario that would eventually affect manufacturers and the economy.
All the same, consumers should no longer entertain the illusion of cheap oil and food and learn to live with them, he noted.
With fuel prices likely to stay at high levels, consumers would turn to use more alternative fuels - ethanol and biodiesel, driving the demand of energy crops such as maize, sugarcane, and tapioca.
To benefit from the change, Mr Dhanin, chief of Thailand's largest agro-industrial conglomerate, has suggested Thailand turn the crisis into an opportunity since the country is already one of the world's largest producers and exporters of many farm products such as rice and rubber.
He compares the richness of the nation's soil and agricultural resources to the abundance of crude in oil-producing countries, a wealth that could generate not only income but also energy.
Today, more agricultural products such as palm, sugar, maize, and cassava have been turned into alternative-energy fuels, increasing demand for the produce and pushing farm prices to record highs.
Some manufacturers have been aware of the upward trend of the crop demand that could lead to a local shortage of the produce for use in the food-related industry, especially for maize and soybean used mainly in animal-feed operations.
As a giant agro-industrial group with a strong global network, CP has the advantage and capability of outsourcing raw materials abroad. It started growing maize in Burma, Cambodia, Laos and Vietnam, four years ago, with combined acreage expected to reach 3.2 million rai by end of this year.
 |
| High prices and high wages are the key to prosperity, says Mr Dhanin. |
Companies under the CP umbrella use about two million tonnes of maize per year and the biggest user is the group's food producer and exporter, Charoen Pokphand Foods Plc (CPF). The SET-listed food processor's cost of raw materials now accounts for about 40% of total sales cost and about 30% of its raw materials are sourced abroad.
Adirek Sripratak, president and chief operating officer of CPF, admitted to the company's shareholders at the annual meeting in April that costly raw materials were to blame for its declining net profit.
Prices of maize and soybean would remain high this year, sustained by higher demand of maize for ethanol production in the United States, which plans to allocate 30% of total maize production to the ethanol industry this year, up from 20% in 2007.
As maize and soybean meal represent up to 70% of the cost to produce animal feed, better management to deal with the risk from higher feed costs is necessary. CPF has set up an expert team to source the raw materials from local and overseas sources, to supply its subsidiaries engaged in both aquatic and livestock production.
"To avert risk, we have made advance procurements for soybean meal throughout this year and promoted the planting of maize abroad," he told the anxious shareholders.
Crop investments in neighbouring countries would also support the operations of the CP group in many foreign countries. CP would supply maize output to its subsidiaries in the region such as CP Vietnam Livestock Co and CP Laos Co, which need a large volume of maize each year.
Overseas investment is therefore a key policy of the CP group to expand its market as local consumption is too small.
"We prefer new but big markets, rather than fighting hard to capture market shares from the tiny domestic front," Mr Dhanin told a recent economic seminar.
He also said that as CP had a strong financial position and skilled human resources, it was better placed to compete with foreign companies abroad than struggle locally.
Investing in countries in Eastern Europe has been a big challenge in recent years after the group secured a strong foothold in China and Asian countries for many decades.
Turkey and Russia are the two countries that emerged on CPF's investment map most recently.
"Russians consume about one million tonnes of chicken per year and 700,000 tonnes of pork," Mr Adirek said, referring to a sizeable market where CPF's livestock operation will begin operation in the third quarter of this year.
More investments in various countries would also help minimise the impact of trade barriers on its operations, in addition to expanding its export customer base to diversify risks.
As the avian flu disease still haunts the poultry industry worldwide, an outbreak could shake the confidence of consumers at any time. CPF has chosen to upgrade its products and build brand awareness for consumers to be able to differentiate the company products.
It has built brand recognition for its processed food and semi-cooked meals not only in the domestic market but also in foreign countries, with the aim of increasing the shipments of branded products to outstrip commodity products in the near future.
"Currently, the exports of commodity products account for 60% of total revenue and we've planned to decrease the portion to 50:50 in the next five years," Mr Adirek said.
Ready-to-eat food is also on the rise and the skyrocketing oil prices would force people to travel less and dine out less.
To cope with the rising energy costs, the CP Group has adopted an energy-saving programme for its units, from the convenience store chain operator CP All Plc and CPF to the telecoms and media operator True Corporation.
Over the past four years, the group, with over 200 companies under its umbrella, reportedly saved about two billion baht in energy-related expenses and started to generate income from selling carbon credits derived from gas-emission reduction and proper waste management.
Besides expensive oil, foreign exchange remains a big worry for Thai operators. The baht rose 11.59% against the dollar in 2007, and over 4% in the first quarter of 2008.
As its business deals with both imports and exports, CPF has outlined several measures to deal with possible risks. The measures include entering into forward exchange contracts to protect against currency fluctuations. In addition, the company has increased more sales in euros and pounds sterling to 30% of total transactions to reduce its dependence on the US dollar.
Although Thai companies have identified and more efficiently managed their business risks to minimise their impacts, their investors have to consider other risk factors beyond their control.
Political instability is one major problem of the operators. However, the CP chairman believes that the current political conflicts would affect only the tourism industry, not the agro-industrial sector, and he pledged to continue its investment in Thailand.
