Thailand has moved to quell growing resentment in its rural areas by offering to buy natural rubber directly from farmers at a premium, boosting prices across Asia.
The Thai cabinet resolved to buy around 200,000 metric tons of rubber at no more than 60 Thai baht ($1.65) a kilogram, significantly higher than the 35.19 baht to 35.52 baht a kilogram range quoted by the Thai Rubber Association on Wednesday.
The government is attempting to reverse the fortunes of the agricultural commodity, whose price has fallen 37% since June and was Tuesday languishing around its lowest level since March 2009 on China concerns.
The move caused rubber prices to rally across Asia.
“When the Thai government bought rubber two years ago, it stopped prices sliding as quickly as they might have done. So, certainly if they do buy and hold, it does change dynamics in the market,” said Chris Pardey, head of physical trading at RCMA Group, a company that trades commodities and provides logistical support for the industry in Singapore.
The Tokyo Commodity Exchange’s benchmark six-month rubber contract closed its day session up 5.5% at 155 yen ($1.32) a kilogram.
Still, analysts are cautious over how far prices can rise, as concerns about Chinese demand continue to cast a shadow. China is the world’s leading rubber consumer, accounting for around 40% of demand.
Investors covered short positions made last week after the Thai government announced its plans, pushing prices higher, said Gu Jiong, an analyst at commodity-trading firmYutaka Shoji in Tokyo.
However, since the bulk of the move seemed to be on short covering than new long positions, it is unlikely prices can rally much further, he said.
The announcement came as a surprise as the military government has tried to distance itself from agricultural subsidies due to the failure in 2014 of a rice-buying programintroduced by the previous government that left Thailand with a paper loss of about $15 billion.
The move came after rubber farmers threatened to protest, as sharp falls in prices hurt revenue.
“I used to make more money, but this has fallen even though my expenses are the same,” said Sai Inkham, who started growing rubber trees on around 5 acres of his farm in northern Thailand in 2004 when there was government support and rubber prices were higher.
The government’s rubber purchase is expected to be used in the manufacture of rubber gloves, dummies for medical-training courses and in road construction.
It will be used almost immediately in manufacturing, with factories already looking to use 100,000 tons of rubber, said government spokesperson Maj. Gen. Sunsern Kaewkumnerd.
A supply glut and signs of weakness in the Chinese economy have kept the pressure on prices.
“Natural rubber will turn from a small surplus in 2015 to a much larger one during 2016-2017, pushing global natural-rubber stocks to pass the record level of 3.09 million tons set in 2014 and reach 3.70 million tons by the end of 2017,” said Prachaya Jumpasut, managing director of London-based The Rubber Economist.
Yet stocks may start to moderate as low prices are prompting farmers to lay off tappers or cut down trees, said Uthai Sonluksub, president of the Federation of Rubber Farmers Association of Thailand.
“No one would want to grow rubber trees when rubber prices are like this,” he said.
