Mid-Year Economic Review 2002

AGRICULTURE

'Kitchen of the world' goal hard to achieve

Somporn Thapanachai

AGRICULTURE

Heavy state hand and financial struggles of large agribusiness groups have held back most promising sector

The agriculture sector is the backbone of the Thai economy, involving more than half of the country's population, but successive governments have often taken it for granted.

A turning point came when Thailand triggered Asia's economic turmoil in mid-1997. Suddenly, agriculture and related industries were thrown into the spotlight as they helped cushion the blow by absorbing thousands of people made redundant in collapsing industrial and service sectors.

However, tapping the full potential of the sector remains one of the most daunting public policy challenges. Promoting sustainable development, adding value to products and managing commodity price swings are all easier said than done.

DEVALUATION DELIGHT

The depreciation of the baht to more than 50 against the dollar by early 1998 was a mixed blessing. Paddy prices reached a record high above 10,000 baht a ton, but the gain was illusory as farmers bore higher production costs for fertiliser, insecticide and transport.

The government spent more than 20 billion baht propping up rice prices in the 2001-02 crop year, allowing farmers to pledge 4.7 million tonnes of Hom Mali paddy and one million tonnes each of white and glutinous paddy. Now comes the hard part: selling the rice at prices that cover its costs.

Over the past five years, the exports of many farm and food items increased in both volume and value, particularly in 1998. By 2000 Thailand was the world's 13th largest exporter of farm and food products with a total value of about 400 billion baht, accounting for 3.5% of total world farm trade. The country has declared a goal of becoming the "kitchen of the world".

With their high local content, the farm and food sectors have the potential to make money flourish in the country, but the windfall will not last if local companies do not improve their production standards to meet the requirements of importing countries.

The economic bust forced many entrepreneurs in the farm sector back to their core businesses after a spree of boom-era diversification into non-related industries, particularly property development. About half of the companies involved in commodity trading fell into a debt trap and some are still attempting to climb out through the restructuring process with creditors.

Somkiat Osotsapa, an independent economist, said there was almost no diversification of farm products during the crisis period, except for food items, because so many producers lacked the capital to expand. Thailand remained mainly an exporter of primary commodities, in particular rice, rubber, tapioca, frozen shrimps and chicken. Unfortunately, expanded exports did not bring bigger profits because of tough competitions domestically and internationally.

PRICES REMAIN LOW

Prices of farm items remain low and fluctuate seasonally. As a result, the government has had to increase its role in both production and marketing of many farm items, resulted in high subsidies whenever traders are unable to absorb high volumes during harvest seasons, according to Dr Somkiat.

The problem with the greater state role, he said, was that the government was no good at marketing farm products and ultimately the economy suffered.

For example, the government spent more than 20 billion baht propping up rice prices in the 2001-02 crop year, allowing farmers to pledge 4.7 million tonnes of Hom Mali paddy and one million tonnes each of white and glutinous paddy. Now comes the hard part: selling the rice at prices that cover its costs.

The government has made sporadic attempts to break the vicious cycle of subsidies through alternative management approaches. The current government, for example, has tried to stabilise the pineapple market by estabto pull out and let the private sector fend for itself.

Another government initiative in the post crisis period was the creation of the Thailand Futures Market, with the goal of helping farmers obtain more accurate information on crop price trends before planning cultivation. However, the opening of the market has been delayed and it is not certain whether it will succeed in minimising price problems.

Dr Somkiat said the government had done little research and development to help farmers increase production efficiency, and there was no proper plan to introduce new commercial crop varieties to farmers and markets. He cited market confusion between fragrant rice and a new variety, Pathumthani 1, that has aroma properties similar to fragrant rice but can be grown in the central region.

Another weakness has been the failure to upgrade post-harvest technologies, from processing to packaging, with the result that only large agro-industry conglomerates would do well in international markets as they had capital for development, said Dr Somkiat.

But small farmers, who make up the vast majority of the farm sector, have no knowledge or resources to pursue development and continue to hover around the poverty line. Many have switched to mixed-crop agriculture, rather than single crops, just in order to have sufficient food to feed their families.

UNSETTLED PROBLEMS

Ajva Taulananda, chairman of the Thai Chamber of Commerce, said the advantage of a weaker baht had diminished, since the currency had stabilised in a range between 42 and 45 baht to the dollar for the past two years. As a result, he said, farm prices may be forced down in the future as countries continued to subsidise their farmers, notably in the United States.

He said products with growth potential should receive government support to improve productivity and competitiveness in the world market. Primary commodities should be processed to avoid risks from price fluctuation and add value.

Items with low potential should be phased out, but only after proper plans were in place to help planters make the transition to higher-value crops, he said.

One positive development in the past five years was the creation of the Farmers Rehabilitation and Development Fund, initiated in 1997 when Gen Chavalit Yongchaiyudh was the prime minister. When it formally began operations in 1999, the fund was given a budget of 1.8 billion baht, with another 12 billion to be made available as needed.

The concept was to allow farmers to manage the fund themselves, as they had always complained that their problems were never understood by the bureaucrats who usually managed farmer-related funds.

Twenty elected farmers along with civil servants and eminent persons were appointed to manage the fund, but nothing has gone smoothly since then. Several changes of the executive board and secretary-general have brought work to a virtual standstill. Not a single satang has been disbursed.

Any farm group with more than 50 members can apply for project assistance and 200 have done so but none has been approved because of the management problems. In all, 56,028 groups, covering an estimated 6.7 million farmers nationwide, have registered with the fund to apply for financial assistance. But without a management overhaul and an end to infighting, the fund will be unable to function.

Farmers and grassroots groups have received priority attention from the Thaksin Shinawatra government since it took office early in 2001. Its most popular vote-getters were the three-year debt suspension for small farmers, one-million-baht funds for 70,000 villages, and the One Tambon, One Product project to help villagers develop items for commercialisation.

The programmes were warmly welcomed by the grassroots despite strong criticism from economists and some officials.
Dr Ajva said the policies themselves showed the government's good intentions, but there were no proper and sustainable measures to ensure the permanent well-being of farmers.

BIG IS NOT BEAUTIFUL

On the private-sector front, the crisis forced several agro-industry groups to rationalise and concentrate on core businesses.

A good example was the consolidation of 12 subsidiaries of the Charoen Pokphand Group into Charoen Pokphand Foods Plc (CPF) in mid-1998. Two years later, CPF took control of other CP operations in Vietnam, India, Taiwan and Turkey.

CP was also forced to sell its non-core businesses including a brewery and motorcycle manufacturing operation in China, as well as reducing its stake in the retailing business in Thailand.
The STC Group, another large venture specialising in rice and tapioca trading, also got out of property development.

The potential remains good, however, for farm-related companies to emerge stronger after a few years of struggling if they have the vision to upgrade their production to meet international standards.

Thongchai Tavanapong, the managing director of Union Frozen Products, an exporter of seafood items, said Thai food companies had to realise four key factors in producing food to supply world markets: food safety, food quality, good service and reasonable prices.

He said the government should assist farmers who supply raw materials to food processors, so that they have more knowledge about their crops and subsequent processing.

In 2000, the Board of Investment revised its investment incentives for agriculture in a bid to strengthen Thailand as a food producer and exporter. The measures have succeeded in raising investment in the sectors, particularly in food and rubber production.

In the first quarter this year, the agency approved privileges for 53 projects with combined registered capital of about 11 billion baht, a rise of 82% from the same period in 2001 in project numbers and and more than double in terms of registered capital.

More systematic approach needed

Phusadee Arunmas

Previous governments failed to seize opportunities after the outbreak of the 1997 economic crisis to strengthen the farm sector and the current government has done little better than its predecessors, according to a farm expert.

Ananta: Farmers know best

Ananta Dalodom, a senator and chairman of Senate Committee on Agriculture, said farmers had long been experts at surviving on their own but no government had solved chronic problems ranging from debt to land holding in a systematic way.

Decades of talk had failed to produce concrete plans for water allocation and a long-term irrigation policy even though water was the most essential element in agriculture, said Mr Ananta, who was a former director-general of the Agriculture Department.

As well, he said, failure to resolve the thorny issue of land holding meant that farmers continued to cultivate crops in reserved forests. "This problem may heat up and lead to a confrontation between government and farmers in the future."
On a more hopeful note, Mr Ananta said that theories of mixed-crop agriculture and a self-sufficient economy had been put into practice more in recent years. Farmers have also turned more to organic crops for sustainable development. However, the role of the Agriculture Ministry has been weakened in the post-crisis period, with some duties taken over by the Commerce Ministry, notably in the area of food standards for key exports such as poultry and shrimps.

Mr Ananta said that Prime Minister Thaksin Shinawatra had paid scant attention to farm issues. While high-profile workshops had been devoted to other sectors, no such events focused on farming. As well, the agriculture minister had never accompanied the premier on any trips abroad, despite agriculture's key role in the economy and exports. The biggest setback, he said, could result from a lack of bio-technology development for the farm sector. He disagreed with the government's decision to stop controlled field trials of genetically modified crops to study the pros and cons of GM agriculture.

Mr Ananta said many rivals such as China, India, Vietnam and Indonesia had accelerated their research and development of bio-technology to ensure their competitiveness in the world market but Thailand was now behind them.

The Thaksin government has won farmers' hearts with its suspension of their debt repayments for three years. However, Mr Ananta said that career rehabilitation plans designed to complement the debt moratorium were not working. Farmers were unlikely to be in any better position three years hence to resume repaying debts.

He said the government had set a small budget of 5,000 baht per head for farmers who entered career rehabilitation schemes _ 2,000 baht for training and the rest to buy production essentials for their chosen activities.

"There is no linkage of financial measures and activities to increase production and there is no sign that farmers will have the ability to pay debts," he said.