Agriculture remains crucial to Thailand's economic growth

Although Thailand in recent years has focused on creating a more forward-thinking, modern economy, ranking second only to Singapore in financial clout within the ASEAN block, the country’s agricultural sector still remains a crucial cog in the engine driving the country forward. It continues to capitalise on its long-standing farming tradition and favourable climate as it retains its enviable position as a key exporter of products – including widely consumed agricultural commodities such as rice, sugar and rubber – around the world.

With rapid development in manufacturing, service, retail and other sectors over the past few decades, the direct economic impact of the agricultural industry has been declining, although it remains a vital social backstop for Thais who have a lower income. Agriculture, the rice subsector in particular, is still the dominant economic activity in many of the rural regions of the country, in places where other modernisation and economic development efforts have not yet made a significant impact.

In 2016 the agricultural sector accounted for 8.3% of the national GDP at a value of BT1.2trn ($31.6bn), up from BT1.19trn ($33.5bn) in 2015, according to data from Thailand’s National Economic and Social Development Board. Agriculture, forestry and hunting accounted for the vast bulk of this total with the fisheries segment accounting for less than 10% of the total sector, although this relatively small contribution is largely the result of the expansion of the manufacturing and services sector rather than the result of a significant decline in agricultural productivity.

This incremental increase marks a turnaround from recent years, in which droughts and other factors, for example, reduced commodity prices, had a detrimental effect on the industry, which resulted in a significantly lower output.

As a whole, the value of agriculture has declined from a high of BT1.46trn ($41.1bn) in 2013, with 2016’s contribution only slightly above the BT1.14trn ($32.1bn) that was registered in 2010.

Cash Cow

Second in export value only to machinery, food shipments out of Thailand are a big business, with the country producing a wide array of products around the globe, ranging from Jasmine rice to canned tuna. A total of BT940.69bn ($26.50bn) worth of food was sold to other countries in 2016, amounting to 12.5% of total exports, up from BT913.59bn ($25.74bn) the previous year.

Broken down by commodity group, unprocessed agriculture products were valued at $15.04bn in 2016 – significantly less than the record $23.68bn exported in 2011 – marking the third consecutive year in decline. As the sustained period of high prices began to lose steam, the softening of market prices affected not only the energy and metals markets, but also food commodity prices. Within the agricultural sector, rice is a dominant subcommodity of Thailand’s agricultural economy and has also long been an important source of the country’s export earnings. In 2016 foreign rice sales netted Thai farmers $4.4bn for a volume of 9.88m tonnes for the year. Strong sales of rubber, amounting to 3.6m tonnes, netted the country’s producers another $4.4bn, along with $2.56bn worth of tapioca, $1.4bn worth of fruits and $1.5bn worth of horticulture products, with the fisheries sector bringing an additional $2.05bn.

Valuable Exports

Thailand has also been highly successful in expanding its downstream, value-added manufacturing capacity within the agricultural sector to establish one of the largest export-oriented agri-business hubs in the region. The successful extension of this value chain has fuelled the industry to become the third-most-valuable manufacturing subsector, with exports valued at $25.77bn ($15.04bn) in 2016, placing it third behind electronics, valued at $31.17bn, and automobiles, at $33.38bn. Manufactured rubber products are the most lucrative agro-manufactured products. In 2016, $3.9bn worth of rubber products were exported, followed by $2.6bn of canned, prepared or preserved fish, $2.37bn of sugar and $2.2bn of canned, prepared or preserved poultry along with significant amounts of crustaceans, fruits, vegetables, cereals, beverages, paper products, wood products and other products.

Working The Fields

Apart from just the tangible economic benefits derived from the large amounts of foreign currency being brought in through agricultural exports and supplying the domestic market with food, the sector also plays an important role as the country’s single-most prolific employer. Workers in the agricultural industry make up by far the largest single labour block in Thailand, accounting for 31% of the total labour force, equal to 11.8m workers out of a total labour pool of 38.3m in 2016. This figure is nearly double that of the next closest employment sector in the country, wholesale and retail, which employed 6.3m workers in 2016.

Yet, to the detriment of the sector, this wide lead in labour has been diminishing for years, to the point that the industry is now experiencing labour shortages in certain sectors and seasons of the year. In the past five years alone, more than 3m agriculture workers have left the sector as its ranks thinned from 14.9m in 2011 to the current level of 11.8m. No one factor is at the root of this decline, although the primary issues stem from increased retirement of an ageing workforce, urban flight as more younger Thais move to the cities, greater mechanisation of farms and an increase in jobs in other industries. The retail and manufacturing sectors, for instance, have been rapidly adding the jobs now being shed by the agricultural sector, with these industries adding 294,400 and 987,140 jobs, respectively, from 2011-16 with the non-agricultural industries as a whole adding a total of 2.36m jobs over the five-year period.

Restructuring Rice

Rice production and consumption has long been a driving factor in Thailand, with the success or failure of the primary food staple often inextricably linked to the social, economic and even political fortunes of the country. Fertile rice paddies stretching across large swaths of the country employ millions of Thais, providing them with a generally stable, although not generally lucrative, income source. This block of the population is also large enough to garner the attention of competing political parties, with politicians often implementing policies designed to curry favour (and ultimately votes) with farmers. While these policies can make for strong political support, the larger macroeconomic effects can sometimes prove counterproductive to both the agricultural sector and the economic development of the country as a whole.

The roots of this problem extend back to the turn of the millennium, when the government of Thaksin Shinawatra came into power in 2001 and attempted to sway rice farmers through generous assistance to farming villages. As a result, subsequent politicians became loathe to alienate this powerful voting block and were thus reluctant to implement any agricultural reforms that could cost the farm vote. Farmers’ incomes spiked, and the migration of labour away from agriculture towards other jobs was temporarily stemmed, although efficiency failed to improve. These farm assistance programmes continued over the next decade in various forms, culminating in an ultimately unsuccessful price support scheme rolled out by Thaksin’s sister, then-Prime Minister Yingluck Shinawatra, whereby the government effectively bought the grain for 50% more than the market price, leading to higher prices, lower quality and reduced competitiveness in exports.

Although the scheme proved effective in providing favourable prices for farmers, the plan became entangled in a cyclical loop of debt that was difficult to break without incurring substantial economic losses. As stockpiles ballooned on the back of artificially inflated prices, these market distortions were passed on to the global commodity market which took into account large worldwide surpluses in pricing. As a result, the gap between what the government originally paid for the rice and the market price at which it could sell the stocks on the open market grew increasingly large, leaving the authorities with two equally unpleasant options. First, to hold onto the stocks in the hopes of achieving a more favourable selling price in the future, or second, to sell off the rice immediately at a substantial loss. Ultimately, this dilemma was inherited by the new military-led government formed in the wake of the 2014 coup; it promptly abolished direct price subsidies, while still granting some concessions to the farmers, for instance, the approval of BT50bn ($1.4bn) in interest-free loans for farmers in 2016 after the price of high-quality rice dipped to a 10-year low.

Hitting The Market

With the subsidies now scrapped for the past two years, the government has turned its attention to eliminating the massive build-up of rice stocks accumulated during this scheme. The sell-off picked up pace mid-2016 when the Committee on Rice Policy and Management announced on April 25 that the Ministry of Commerce would be accelerating sales in May and June with the intention of offloading 11.4m tonnes of rice. These stocks were to be auctioned off in roughly 1m-tonne blocks consisting of approximately 200,000 tonnes of good-quality rice, 7.5m tonnes of substandard staple rice and 3.7m tonnes of industrial grade rice (of which 1.3m tonnes are food/feed grade and 2.4m tonnes are non-food/feed grade).

By November, the government had successfully auctioned off tenders for 9.3m tonnes of government rice with 3.9m tonnes sold (the majority of which was classified as non-food rice). As of January 2017 state holdings had fallen to roughly 8m tonnes, consisting of 3m tonnes of food-grade rice, which can be reprocessed for export; 3.15m tonnes of substandard rice, which can be used for animal feed; and 1.85m tonnes of deteriorated rice, which is not suitable for human or animal consumption, but could be used for industrial operations such as feedstock for ethanol production. The entire remaining surplus is planned to be sold in 2017, although the demand for industrial-grade rice may not be consistent enough to create a strong market for the product.

According to local media, as of June 2017 the government controlled around 2.9m tonnes of stocks, 2.7m tonnes of which is poor quality and decaying grain, for industrial use and animal feed. State rice stocks fit for human consumption dropped to 160,000 tonnes after the government sold 1.66m tonnes out of 1.82m tonnes at auction in May 2017.

Reforming Sugar

The government, private farmers and agri-businesses are also moving forward with plans to revamp Thailand’s sugar policy in a similar manner to ongoing changes in the rice segment. Regulations governing the important export commodity are long overdue for an overhaul, and stakeholders have hammered out a draft for a new policy which is expected to diverge from the previous plans in numerous significant areas.

The main thrust of the reform will be to eliminate or restructure government subsidies paid out to sugar farmers; payment which drew a formal complaint from leading sugar producer Brazil to the World Trade Organisation (WTO) in March 2016. Brazil’s assertion was that Thailand’s subsidies kept domestic sugar prices low and helped Thailand gain global market share at the expense of Brazil’s, while also softening already weak international prices for the sweetener.

In order to avoid potentially damaging sanctions by the WTO, Thailand will need to reform its existing quota system and other price support measures. Currently, the scheme employs a three-tiered arrangement in which three sugar quotas are set aside each year in order to head off any possible domestic shortages. Quota A reserves approximately 2.2m-2.5m tonnes for domestic consumption, quota B reserves another quantity for state-run sugar exports while quota C is allocated for private sugar mill exports. The country’s pricing policy will also have to be reworked to a free or semi-float system from its current state in which the government imposes a price ceiling. The price cap is intended to reign in food inflation on the domestic market, although other unintended consequences can result in the smuggling of low-priced sugar to neighbouring countries by profiteers. In the 2015/16 crop year the government provided farmers with a BT180 ($5.07) per tonne direct payment, since the world market minimum prices (which averaged $0.12-0.14 per lb during that year, compared to $0.23 per lb in 2016/17) did not cover their production costs.

Additional changes to the industry’s profit-sharing system are also likely to be made. Profits are currently split between growers and millers, in a system that is underpinned by the quota scheme, according to statements made by the country’s Office of Cane and Sugar Board to the press in December 2016. A floating domestic price is the most likely system to replace the previous one, which has been framed as operating as a cross subsidy.

Potential Impact

Although the reforms are expected to officially come into effect during 2017, the full impact of the changes is not likely to be felt for several years. The effects on the market from the abolition of the quota system, for instance, are likely to be largely mitigated by the introduction of government buffers, which will set aside a quantity of sugar for the domestic market and have a very similar effect to the current quota system.

Maintaining the unfettered operation of the sugar cane industry is crucial for the Thai agricultural sector, as it currently ranks second in the world in terms of annual sugar exports. For the 2016/17 crop year, sugar production is projected to decline by around 5% to 9.3m tonnes, compared to the 9.7m tonnes projected in 2015/16, according to the USDA’s semi-annual sugar report. The reduced output is attributed largely to the severe drought during the vegetative growth stage between January and May 2016, during which cumulative precipitation was 38% below normal and 15% lower than the same period in the previous year. Weather-related shortages of cane seedlings in the northern and central plains regions – which account for half of total sugar cane cultivation – also resulted in some farmers switching to corn production. Thailand averaged sugar production of 10.97m tonnes annually from 2011 to 2015, exporting 8m tonnes each year.

Rice Output

Thailand has two annual rice-growing periods: the wet season, which generally accounts for around 70% of the annual output, and the less productive dry season, which is heavily dependent on water levels stored in mountain reservoirs. The rice sector has experienced trying times in the past few years, with producers facing the double threat of drought and the end of the subsidisation schemes. In spite of these setbacks, the sector experienced only minor difficulties in its production for 2015/16 and is expected to make a full recovery in 2017. Domestic production dipped from 20.5m tonnes of milled rice in the 2013/14 crop season to 18.8m tonnes for the 2014/15 season, followed up by 15.8m tonnes the next season, with the losses primarily attributed to the country’s prolonged drought.

Thailand’s rice farmers seem to be recovering as normal precipitation returns. They are expected to produce an estimated 18.6m tonnes in the 2016/17 season, according to USDA’s grain and feed update. This improvement was aided substantially by bountiful rainfall during the wet season which replenished important reservoirs that supply the agricultural sector and enabled the government to lift restrictions on irrigated rice acreage during the 2016-17 dry season. Much of these projected gains are attributed to a 52% increase in off-season rice planting as reservoir levels expanded to approximately 9.2bn cu metres in January 2017, compared to just 3.8bn cu metres the previous year. Interestingly, the removal of rice subsidies has so far had minimal effect on domestic production, with the annual fluctuations in output attributed largely to weather conditions, rather than any price disincentives for farmers. “Even when we removed the subsidies, production was not significantly reduced and the number of farmers remained the same,” Thawatchai Dechachet, senior professional policy and planning analyst and acting expert on international agricultural policy at the Thailand Office of Agricultural Economics, told OBG.

Rice farmers in Thailand worked only slightly less land following the removal of the aforementioned subsidies, with a total of 11.23m ha under production during the 2014/15 season compared to 10.65m ha during the 2016/17 season.

Unable to compete with other Asian countries, such as Vietnam and India, that produce and sell lower-grade rice at higher volumes on the international market, Thailand has been competing internationally on the basis of higher quality, and is targeting niche segments. Organic rice, for instance, is increasingly popular in western markets and fetches a higher price, while the well-regarded, high-grade Thai jasmine (in particular, the prestigious Hom Mali variety) rice preferred by affluent Asian consumers also commands a premium price (see analysis).

Outlook

Thailand is set to continue to play an important role as a global food exporter, particularly in the key commodities of rice, sugar, rubber and produce. As the effects of El Nino dissipate, production across the board should also continue to rebound and output should expand significantly over the next few years, barring any unforeseen major weather event. Ongoing regulatory and subsidisation reforms should also help with reducing market distortions and inefficiencies going forward, although their effectiveness will ultimately depend on the willingness of policymakers to implement genuine reforms in the agricultural sector, rather than just rearranging subsidisation in addition to other assistance schemes.