Food prices must rise, says CP chief

"Food producers are still bound by high competition in the global market, and they have so far maintained their price quotations. However, once things are settled, the price hikes will take place, most likely this year," he said, adding that prices could rise 5-10 per cent at a time.

Vegetable-oil prices will be among the first to rise, because some output has been diverted to biodiesel production. Out of fear that domestic shortages will further increase retail cooking-oil prices, the Commerce Ministry has decided to allow imports.

Meanwhile, manufacturers of more than 500 goods items in 13 categories anxiously await ministry approval of requested price hikes.

Because of the uncertain costs of animal feed, CP, the country's largest chicken and shrimp exporter, has announced it will not take orders more than three months in advance. It will also raise export prices for its chicken products.

Last year, animal feed reportedly rose 15 per cent from 2006, and the Animal Feed Producers' Association estimates that the cost of raising animals will increase another 20 per cent this year.

Pornsilp expects the trend to continue, due mainly to rising demand for ethanol, which is being used as an alternative fuel to avoid the high cost of imported crude oil, for which prices are nearing US$100 (Bt3,300) per barrel. Corn and tapioca - the main ingredients in animal feed - are increasingly being sought as raw materials for producing ethanol. Prices for both crops are rising, and the cost of animal feed is following.

Compared with Bt5.41 in the first quarter of 2006, corn was Bt8.18 per kilogram in last year's fourth quarter, an increase of 51.2 per cent. Over the same period, soybean hulls rose from Bt11.58 a kilogram to Bt16.31 - a 40.85-per-cent increase.

Corn prices have been driven by rising global demand, particularly after the US announced it would use more corn to produce ethanol. The higher prices encouraged farmers to grow corn, leaving smaller areas for other food crops, particularly soybeans and wheat.

Wheat flour, which cost Bt12.66 per kilogram in the first quarter of 2006, rose to Bt21 in last year's fourth quarter, an increase of 65.88 per cent.

Also driving animal-feed prices up are higher freight rates, with China and India demanding more shipments by sea. Shipping soybeans from South America to Asia cost US$35 per tonne in 2006. Last year, it rose to $110.

Fortunately, the higher costs are being experienced equally everywhere in the world. To maintain their share of international markets, animal farmers and exporters must maintain their prices. As the cost of animal feed is out of their control, they must control other costs by introducing new technology.

Pornsilp sees this as the beginning of a conflict between the food and energy sectors over particular crops that can be turned into energy. He believes the situation will intensify over the next few years if Thailand does not have a clear policy of controlling agricultural output for food and energy.

The seriousness of the price impact on animal feed will depend on global oil prices and the government's policy of increasing the output of fuel crops, he said.

Amid local constraints on cropping areas, a contract-farming concept could help if Thai companies were able to contract crop production to farmers in neighbouring countries. At present, Thailand imports about 100,000 tonnes per year from Laos, Cambodia and Burma. However, the volume of soybeans coming in across Thailand's borders remains small.

Pornsilp cautioned that such contract farming carried a risk.

"When oil prices climb further, what if the [neighbouring] countries introduced a requirement that crop output must be converted into ethanol before being exported to Thailand, so as to reap additional benefits?" That would mean even fewer raw materials for animal feed, he said.

Ultimately, the higher costs will make 2008 a tough year for Thailand's food exports, because increased food prices will result in a drop in consumption, said Pornsilp.

"The value of Thailand's total food exports this year should not grow much above 2007's level, which was about Bt600 billion," he said.

He favours the idea of raising minimum wages to alleviate the burden faced by Thais in meeting higher food prices. This would avoid plunging Thailand into a state of high inflation amid low consumption - or "stagflation".

The higher minimum wages would force private companies to raise salaries, but he added: "We can get it back when the situation improves. When wages are to be increased, the increase can be postponed. But in the present situation, we need to help them."

Tomorrow: The plans of the Agricultural Economics Office.

Achara Deboonme

The Nation