Thailand To Fund Subsidy To Support Rubber Growers

The world’s largest rubber producer has seen earnings and output plunge this year, with Thailand’s government stepping in to fund subsidy and buying programmes to support its rubber growers against a weak economic backdrop.

Growth remained sluggish in the third quarter due to weak exports with gross GDP up 0.6% year-on-year (y-o-y), the National Economic and Social Development Board said in November. The figure was a small improvement from 0.4% growth in the second quarter, but below analyst expectations.

Weak crop prices in the agriculture sector is dragging on growth, prompting the government to implement a stimulus package worth $11 billion in October and approve cash handouts to rice and rubber farmers, whose income fell by 5.3% in the third quarter as agricultural prices continued to drop. The government’s series of measures to support rubber farmers included setting aside nearly $1bn to finance rubber purchases by the state-run Rubber Estate Organisation.

Falling international demand, particularly from top rubber importer China, has eroded income, but efforts to curb production and attract new investments in downstream industries may help lift the pricing floor.

China syndrome

In 2013, Thailand produced 4.17m tonnes of rubber, accounting for 37% of global output and up more than 10% y-o-y. The commodity is Thailand’s largest single agricultural export, accounting for almost one third of farm sales and averaging more than $9bn in earnings annually. However, a combination of factors, including adverse weather conditions and growers not working their trees due to lower demand and falling prices, mean that output for 2014 may fall as much as 10% to below 3.8m tonnes according to the Thai Rubber Association.

A recent slowdown in China’s growth is also a concern for Thailand as the largest single supplier of rubber to China. A rapid economic expansion of the Asian giant since 2009 has drained off surplus production of rubber and pushed rates up by well over 50%.

According to official data, China’s natural and synthetic rubber imports in October fell to 300,000 tonnes, down 6.3% from the preceding month. Further falls will put additional pressure on global prices, while also leaving state buying agencies with more stock on their hands.

However, after a meeting between Prime Minister Prayut Chan-o-cha and a group of leading rubber enterprises in China, the Commerce Minister Chatchai Sarikulya said in October that Chinese rubber firms are looking to invest in processing plants in Thailand, which may help encourage a rubber price hike. China is looking at Thailand, as well as Myanmar and Indonesia, as sites for possible processing and production facilities.

Another measure that could see China take more Thai rubber came via a proposed soft-loan arrangement struck in November. Under the deal, Beijing would provide funding to Thailand for the construction of three dual track rail lines, with repayment to be made in-kind with rubber and rice, rather than cash. While the terms of the loan arrangement yet to be finalised, it could ensure a guaranteed flow of exports to a determined value.

Short-term relief

The prospect of weak prices for the rest of the year has also prompted leading rubber producers to act. In October 2014, the International Rubber Consortium (IRC) – established in 2002 by Thailand, Malaysia and Indonesia to support the development of the industry and ensure fair market earnings for growers – met with industry representatives from regional producers Vietnam and Cambodia. At the meeting, the IRC agreed to curb supply along with other measures to shore up rates, which fell to a five-year low in November.

Despite the non-binding decisions, the market has continued to come under pressure, with prices dipping further in December, falling below production costs in some cases.

The government has offered a measure of short term relief, announcing in early December it would start buying rubber direct from producers in an effort to push up prices close to production costs, though officials have said it is unclear when such measures will have their desired effect. It is also encouraging rubber farmers to switch to producing palm oil by replacing older rubber trees with other crops.

Reduced output and a projected increase in domestic demand is expected to help reduce stockpiles ahead of 2015, when some projections suggest global appetite for rubber will increase, though still leaving a modest surplus. Industry publication, The Rubber Economist, estimates that 2015 production could see the surplus reduce to 43,000 tonnes, from 292,000 tonnes this year. By 2016, there could be a market deficit of 77,000 tonnes.

– spyghana.com