Growing up: New visions and goals give the sector set a fresh position in the global marketplace

Lending credence to the promotional campaign that markets Thailand as the “Kitchen of the World”, the agricultural sector does indeed supply global kitchens with a great many products. Thailand is the world‘s largest producer of shrimp, processed chicken and canned tuna, and it has developed a reputation for turning out high-quality food products for well-developed markets such as Europe, Japan and the US, as well as in developing countries.

EXPORTS: In 2011 the country exported $24.23bn worth of agricultural products and $28.88bn of agro-manufacturing products representing 11% and 13% of total exports for the year, respectively, according to data from the Bank of Thailand. The primary categories include crops such as rice, rubber, tapioca, fruits, crustaceans and fish. Agro-manufacturing exports include processed products like sugar and cereals, as well as canned, prepared or preserved fish, crustaceans, meat, pineapple and other fruits.

These high levels are the culmination of substantial growth in both the value and quantity of exports since 2009 when agricultural and agro-manufacturing exports were worth $12.65bn and $17.65bn, respectively. According to the Office of Agricultural Economics (OAE), just over one-third of Thais made their living growing crops in 2011.

TOP DOWN: Self-sufficiency is a central tenant of the government’s formation of the National Development Plan 2012-16, and the agricultural sector will have a large role to play in meeting sustainability goals. According to the plan, agricultural development emphasises a “green agricultural economy”, food and energy security, and agricultural extension in the form of clustered networks.

These targets are to be carried out through the implementation of four primary strategies that are aimed at improving the quality of life for farmers, enhancing agricultural production capacity, using agricultural resources efficiently, and increasing management efficiency in agricultural cooperatives.

Food exports have also been aided by the Ministry of Industry’s “Kitchen of the World” campaign to boost the recognition and distribution of Thai food products. The government allocated BT80m ($2.55m) for promotional efforts in 2012 to penetrate the upper-end market, particularly with the aim of increasing sales of higher value-added products and health foods. To achieve these expanding production levels while maintaining high levels of quality and food safety, some of the biggest international food producers – as well as home-grown outfits – have developed large-scale cultivation and processing facilities in Thailand to maximise efficiency.

RICE: Long a staple food in Thailand, rice cultivation is still among its most important crops, both for domestic stocks and for its export value. The commodity was by far the largest agricultural export in terms of tonnage in 2011, with 10.81m tonnes worth BT196bn ($6.25bn) exported, up from the 9.02m tonnes and BT172.1bn ($5.5bn) in 2010, according to data from the Board of Trade of Thailand.

Although rice consumption is expected to continue increasing throughout both Asia and western markets in 2012, Thailand will likely play a less prominent role, at least in the short term, following the impact of the 2011 floods on production and as result of India’s resurgence to rice exportation. Rice production was severely curtailed in the first two months of 2012 due to damage caused by the floods in late 2011, falling 51.96% in January and February 2012, from 1.55m tonnes in 2011 to 744,668 tonnes in the same period of 2012. Thailand’s OAE estimated the damage at 2.4% of the main rice crop, bringing the forecast for 2012 output to about 24.5m tonnes. Nigeria, Bangladesh, Indonesia, Iraq and Iran are the main importers of Thai rice.

While the flooding has undoubtedly affected the rice harvest this short-term setback is by no means the only factor influencing the sector. After several years of banning rice exports bulked the country’s surplus to an estimated 80m tonnes, India returned to the global market in 2010 with a parboiled rice commodity priced approximately $150 per tonne less than competing Thailand products, according to the Thai Rice Exporters Association (TREA). Chookiat Ophaswongse, the honorary president of TREA, told local press in January 2012, “We have zero exports of parboiled, and if this continues, we are looking at a total of 7m tonnes in rice exports by the end of the year.” During that same month the US Department of Agriculture (USDA) released its forecast of around 8m tonnes of rice exported from Thailand for 2012, 2.8m tonnes lower than 2011.

SUBSIDIES: Compounding this problem is the governmental policy that essentially subsidises rice farmers at the expense of global competitiveness. Rice farmers have long enjoyed generous support from populist government policies, most notably through domestic prices being set above market prices. The latest iteration of these policies enacted by the ruling Pheu Thai Party at the end of 2011 is to guarantee farmers a minimum price of BT15,000 ($478.50) per tonne of plain white rice and BT20,000 ($638) per tonne of jasmine rice. The resulting increase in Thai-grown rice costs has pushed exports above global market prices, which has contributed to the dip in export volume, even if the value remains high.

In a similar bid to garner support from this constituency, the previous Thaksin government employed a programme in which it purchased 10.5m tonnes of rice in 2008 for approximately BT130bn ($4.15bn), according to data from the Bank for Agriculture and Agricultural Cooperatives. Much of the supply purchased was warehoused before eventually being sold off at an estimated loss of BT43m ($1.37m) later that year. The current government has announced it could spend as much as BT400m ($12.8m) on a similar type of programme.

According to figures from TREA, as of April 2012, prices of Thai Mali grade-A rice (crop year 2011/12) stood at $1070 per tonne, with white rice 5% at $581 per tonne and parboiled rice at $607 per tonne. These rates were substantially higher than white rice 5% prices in Vietnam ($430 per tonne) and India ($445 per tonne), as well as Indian parboiled rice, which sold for $485 per tonne.

MARKET DYNAMICS: Although the export price for grade-B Thai rice hit a record peak of $1038 per tonne in 2008 as a result of the commodities price spike, sustaining a similar price elevation may be more difficult in 2012. The USDA predicts a surplus in the global rice supply in 2012, as opposed to 2008 conditions when India, China and Vietnam all curtailed exports. In 2011 the USDA raised its estimates for the 2011-12 global rice production to an all-time high of 458.4m tonnes, driven by larger-than-expected harvests from Brazil, China and the Philippines.

With other Asian countries such as Vietnam and India selling less expensive rice on the international market, Thailand has been competing on the basis of higher quality and targeting niche segments in order to compete. Thailand focuses on products such as organic rice, which is increasingly popular in Western markets and fetches a higher price. The well-regarded, high-grade Thai jasmine rice (especially the Hom Mali variety) preferred by affluent Asian consumers also commands a premium.

As with crops across Thailand, another major challenge for rice farmers is to increase their relatively low yields. Some of this low productivity is due to the frequent draughts that affect the north-eastern region of the country, where more than half of the nation’s rice fields are located.

To help remedy this problem, the Rice Department has developed its second five-year rice master plan, running for the 2012-16 period. The scheme takes a three-pronged approach targeting research and development, increasing the quantity and quality of production, and strengthening farmers’ capacity. Some methods used to further these goals include developing new, more productive strains of rice, providing training and equipment for farmers, and researching more efficient irrigation techniques.

RUBBER: As the world’s largest rubber exporter, Thailand has a long history in the cultivation and harvest of this commodity and now has some of the largest rubber plantations and processing facilities in the world. Downstream applications are also well-developed, with the likes of tyre makers such as Goodyear, Bridgestone and Michelin all running local domestic operations. Other producers manufacture a wide array of products, including rubber automotive parts, rubber gloves, condoms, balloons, cushions, hoses and elastic bands.

In the first half of 2011 Thai rubber plantations produced a total of 1.58m tonnes of rubber after producing 3.25m tonnes for the entire year in 2010, according to the Rubber Research Institute of Thailand. Of the 2011 mid-year total, standard Thai rubber (STR) was the most actively produced at 599,377 tonnes, followed by ribbed smoked sheet (RSS) at 394,327 tonnes, concentrated latex (268,139 tonnes), rubber compounds (252,367 tonnes) and other rubber products (63,100 tonnes). In the first eight months of 2011 Thai rubber producers exported 2.46m tonnes valued at BT339.9bn ($10.8bn), according to data from the Thai Customs Department.

This production was carried out over a harvested area of 12.71m rai (6.25 rai is 1 ha, 2.03m ha), yielding an average of 261 kg per rai (1631.25 kg per ha), according to statistics from the OAE. The total harvest area has slowly but steadily crept upwards over the past decade, increasing each year from the 9.52m rai harvested in 2001, while yields have remained fairly steady, averaging 271.92 kg per rai in 2001-11.

HIGHER TARGETS: This plantation coverage is expected to expand dramatically in the coming years due to a drive by the government and spearheaded by the Natural Rubber Committee under the Office of Rubber Replanting Aid Fund (ORRAF) to boost rubber production by 220,000 tonnes per year through 2017. Initiated in 2010, the BT8bn ($255.2m) programme extends credit to roughly 160,000 small farmers so that they may buy new rubber plots varying in size from 2 rai and 15 rai of land for a combined total of 800,000 rai.

The scheme is projected to boost plantation acreage in northern and north-eastern Thailand by 150,000 rai and 500,000 rai, respectively, while another 150,000 rai would be spread across the east, central plains and the south of the country. In addition to low-interest loans, the government is also providing subsidised rubber saplings, fertiliser and technical support to participants for the first three years.

MAJOR PLAYERS: While the majority of output is sourced from small-scale farmers, approximately 18% of Thailand’s total production volume is churned out by the country’s rubber giant, Sri Trang AgroIndustry, which cultivates 2800 ha of rubber plantations. In 2011 Sri Trang produced 952,000 tonnes of sales volume (out of a total capacity of 1.1m tonnes per annum) from its 21 processing facilities located throughout Thailand and Indonesia.

The bulk of the 2011 revenues were accounted for by sales of STR (72% of the total), followed by RSS (19%), latex (7%) and others. The company rolled up profits and revenues of BT1.33bn ($42.4m) and BT133.7bn ($4.3bn), respectively, in 2011 compared to BT3.84bn ($95.7m) and BT83.85bn ($2.7bn) the previous year. Although revenues shot up some 60%, profits were down 65%, which the company attributed to volatile natural rubber prices. After peaking at $6.18/kg on the Singapore Commodity Exchange in February 2011, the price of No. 3 rubber smoked sheets fell to $3.66/kg in November.

In 2011 Sri Trang also announced plans to invest BT5.4bn ($172.3m) over the next two years to boost plantation size and production capacity for ribbed smoked rubber, block rubber (both of which are raw materials for tyres) and medical gloves. It has plans to add another 1680 ha of land for a target capacity of 1.5m tonnes by 2013, which would make it the largest producer in the world in terms of capacity. Some of these investments will be funded by an initial public offering on the Singapore bourse in early 2011, which netted Sri Trang $419.27m. Other prominent local rubber producers are Thai Hua Rubber Company and N.C.R. Rubber Industry Company.

The price vacillations that had such a dramatic impact on Sri Trang’s bottom line in 2011 continued in 2012, amplified by efforts by Thai producers and the government’s National Rubber Committee to prop up prices in the early part of 2012. After initially announcing a plan in January 2012 to drive up local rubber prices to BT120 ($3.82) per kg by purchasing inventory at above-market prices and curbing production, the government revised its target up to BT150 ($4.79) per kg in April 2012, with a goal of reaching BT180 ($5.74) per kg by 2013.

The government is funding the programme through BT15bn ($478.5m) in interest-free loans from the state-run Bank for Agriculture and Agricultural Cooperatives so that the Rubber Estate Organisation and other industry cooperatives will be able to purchase the product at above-market rates. Prices for No. 3 RSS on the Singapore Commodity Exchange increased from $3.08/kg in December 2011 to approximately $4/kg in February 2012 before receding slightly to $3.92/kg in March that year.

SUGAR: As the second-largest sugar exporter in the world behind powerhouse Brazil, and as the fourth-largest producer behind Brazil, India and China, Thailand’s modern sugar industry dates back to 1937 when the first mill was set up in the town of Lampang. After decades of growth, the sector has evolved into one of the world’s premier sugar producers, shipping 6.56m tonnes valued at some $3.68bn in 2011, according to data from the Bank of Thailand. This was a 43.86% increase over the 4.56m tonnes exported during 2010, with a corresponding 67.27% rise in value from around $2.2bn.

In total, the country has approximately 8.7m rai of sugarcane fields under cultivation, concentrated primarily in north-eastern and central Thailand, with an average yield of 50-55 tonnes per ha. The sugar harvest was largely unaffected by the 2011 floods, with only around 200,000 rai among the country’s sugar plantations reporting damages, according to the Office of the Cane and Sugar Board.

In its annual report for 2011, the KSL Group recorded some 95.63m tonnes of sugarcane crushed in that year, up 39% from the 68.49m tonnes in 2010 due to favourable weather conditions and growers’ enthusiasm over rising returns. A similar trend is expected for 2012, although the increased supply will most likely drive down prices.

The Thai sugar industry includes 47 sugar milling operations producing 6.5m-7.2m tonnes of sugar per year, but the industry is dominated by a small number large sugar manufacturers that have managed to corner a significant share of the market. These major operations include Mitr Phol and the KSL Group’s Khon Kaen Sugar Industry. Thailand’s largest producer, Mitr Phol, expanded its capacity further when it acquired a controlling stake in Australia’s third-largest sugar producer MSF Sugar in February 2012. Mitr Phol paid $4.57 per share in the takeover for a total cost of $321.85m.

STATE ROLE: Similar to the rice industry, the government plays a role in regulating commodity prices, generally favouring the 1m-strong sugar farming community. Since global sugar prices plummeted in 1984, prices have been set each year by a consensus of the government, millers and farmers, based on preliminary estimates of output and market rates. Millers then pay this set price to farmers throughout the year until a final cane price is determined by ultimate real output at the end of the crop season in October. If this final price is greater than the original, millers are required to retroactively pay farmers the difference, and the government pays the millers the difference if the price is lower.

Sugar is divided into three quota types, each subject to different regulations with regard to sales. Quota A is the amount of sugar allocated each year for domestic consumption, estimated at 2.4m tonnes for 2012, and must be sold at the regulated wholesale price. The Quota B allocation, standing at 800,000 tonnes for 2012, is a cumulative sample collected from all millers that is then sold by the Thai Cane and Sugar Corporation, the average price of which is used to determine the final price. Millers are unfettered by any further export regulations for the remaining Quota C category.

SEAFOOD: With 2600 km of coastline, an Exclusive Economic Zone encompassing a total area of approximately 316,000 sq km, and another 3750 sq km of inland waterways, Thailand has a well placed fisheries sector. The combination of rich marine fishing grounds in the Gulf of Thailand and in the Andaman Sea and a strong industrial base make it the world’s largest seafood-exporting centres. This industry excels not only in domestically harvested products, but also in value-added services of imported seafood.

In 2011 the country exported fishery products worth $3.1bn, up from $2.88bn in 2010, according to central bank data. This included 209,738 tonnes of crustaceans valued at $1.8bn, 376,928 tonnes of fish at $743.4m and 62,945 tonnes of cephalopods at $415.35m. In addition to fresh and frozen exports, the processed seafood sector exported 781,140 tonnes of canned, prepared or preserved fish worth $2.94bn and 215,491 tonnes of similarly prepared crustaceans valued at $2.1bn.

ADDED VALUE: Thailand’s strongest seafood commodities are shrimp and canned tuna, for which it leads global production. Although the country has developed an extensive aquaculture industry, particularly for products such as crustaceans and shrimp, it is still dependant on traditional fisheries for other products, like tuna. For instance, 1.47bn tonnes of fresh, chilled and frozen fish were imported into Thailand (primarily from Taiwan, the US and China) in 2011 compared to 395.39m tonnes of chilled, frozen, prepared and preserved fish and 304.27m tonnes of fresh, chilled, frozen fish exported the same year, according to data from the Thai Frozen Foods Association. By contrast, the country was able to produce substantial quantities of shrimp domestically through aquaculture as it registered 585,762 tonnes of fresh, chilled, frozen, prepared and preserved shrimp while importing only 13,831 tonnes.

The kingdom’s unique combination of infrastructure and access to productive fisheries has attracted some of the largest seafood processors in the world. It also serves as fertile ground for domestic processors, including Thai Union Frozen Products (TUF), CP Group, Kingfisher Holdings, Safcol ( Thailand), Royal Foods Company, SK Foods (Thailand) Public Company, Asian Alliance International Company and Pan Asia (1981) Company.

CHALLENGES: Although Thailand has so far been successful in leveraging its natural resources and industrial sector into a powerful and well-regarded agriculture industry, the country still faces a number of obstacles. As addressed in the government’s National Development Plan 2012-16, output could be significantly boosted even without additional acreage if the relatively low yields currently being recorded could be increased.

These low yields can be attributed to a number of factors – the inefficiency bred from small plots lacking economies of scale, a need for modern technology and knowledge of farming techniques, and a range of government policies which fail to stimulate competition, among other issues.

According to Jindarat Twiltermsup, the president of the Farmers Federation of Thailand, the average rice yield in Thailand is approximately 400 kg per rai, well below its estimated potential of around 1200 kg per rai. Sugar production is similarly below its potential, with an average yield of around 5-7 tonnes per rai when its potential yield is estimated at 15-25 tonnes per rai. Rubber and oil palm trees average 300 kg and 2.6 tonnes per rai, respectively, although one rai could potentially produce up to 800 kg and six tonnes, respectively.

As the country’s agricultural exports have grown in recent years, so too has the import of chemical fertilisers as the use of organic fertiliser is still underutilised. “Soil is the most important thing, and it needs to be renewed to attain the proper pH level,” Jindarat told OBG. “If the soil is too acidic and the microorganisms die, it will make it more difficult for the root systems to expand.”

This has in turn put pressure on the sector, due to the rise in price for such products, like urea, which has increased from an average of BT12,000 ($382.80) per tonne in early 2011 to around BT20,000 ($638) in early 2012, according to Jindarat. Over the same time period, urea exported from China has increased in price by around 75% since 2010. Training in the proper utilisation of fertiliser is also important, including the tilling in of fertiliser so it absorbs into the soil and does not remain on the surface and run off during heavy rains. In part to alleviate the reliance on price-sensitive chemical fertilisers, and to ease concerns over the safety of Thai-produced crops, the government is moving forward on a number of fronts to implement a more sustainable method of boosting yields. Alternative options include liquid biofertilisers and organic spreads.

OUTLOOK: Damage to the agricultural industry from the flooding has been fairly limited overall, and the sector looks ready to make a strong push in growth as inventories are restocked domestically and demand for food (processed pork and shrimp, in particular) continues to grow both in traditional high-value Western export markets as well as the high-growth regional markets.

According to the OAE, falling global production should provide a boost to food prices and subsequently Thailand’s agricultural sector, which the OAE expects to increase by 5% in 2012. The National Food Institute has high expectations of the sector and is projecting food exports to reach BT1trn ($31.9bn) by 2013, also driven by increasing food value. However, these gains will likely come at the expense of quantity in some subsectors, particularly those in which the government is more active with pricing schemes. Thus, Thailand, the world’s top rice exporter for the better part of four decades, may see its leading position eroded in the coming years unless it addresses the domestic policies that squeeze local exporters at a time of rising global competition.