Farmers face tumbling commodity values

Looking to become the "Kitchen of the World", Thailand will face falling values for its farm commodities this year due mainly to weakening oil prices and a shrinking global economy, Achara Pongvutitham and Petchanet Pratruankrai write in the first of a two-part series.

The happy hour of high commodity prices has passed. The government will have a hard time carefully introducing price-intervention measures when the world enters into the worst part of an economic crisis and sliding oil prices will pull down farm prices in 2009.

Boosting farm prices is one of the priorities of Prime Minister Abhisit Vejjajiva and his economic team. They have to focus on how to balance benefits among farmers, traders and consumers.

The farm sector will also be counted on to help absorb surplus labour from business and manufacturing, as the worldwide economic meltdown is predicted to have a direct impact on the real sector in 2009.

At least 1 million workers are expected to be laid off during the toughest times.

In 2008, Thailand ran through four prime ministers, including Abhisit. Most of them did not have to face any farm-price problems thanks to the global food crisis and skyrocketing oil prices, which drove up crop prices. The good times for agricultural prices lasted through the third quarter. As a result, the government had no idea of introducing price-intervention programmes.

Only rice has enjoyed support measures. However, the last government started implementing price subsidies for other crops, namely maize, palm oil and tapioca, in the fourth quarter.

The Cabinet is now preparing subsidies for other crops such as rubber, whose price is in the downward cycle now.

Government agencies have forecast not only that the world's farm production but also Thailand's output will expand, while demand will soften.

However, the gloomier global economy this year will constrain consumer confidence and spending. Although food is still a daily necessity, consumers will be concerned more about value for their money by spending less but getting high quality.

Any intervention measures should concentrate on factors including production costs, both domestic and export prices and total production.

The government's price-intervention programme in practice sets higher-than-market prices, which always distorts the market mechanism. The artificial prices encourage speculation and graft, while spilling massive red ink for the government.

Spiralling oil prices in 2008 spun off a domino effect, pushing crop prices sky-high and creating a global food crisis. The world community turned its attention to fuel crops such as sugar cane, tapioca and palm oil, which go into producing biodiesel and gasohol.

The crude oil price peaked at US$147 (Bt5,150) per barrel, while the rice export price surged to $1,238 per tonne for jasmine rice and the natural-rubber price jumped to $2.84 per kilogram. Not only did prices soar for fuel crops, but also for other crops such as those used in animal feed.

At the annual seminar of the Agricultural Economics Office last month, participants agreed that the farm sector would be hard hit from a looming global recession this year. This was already confirmed in October farmer income, which declined 0.6 per cent year on year.

Thailand should focus on exporting its farm surplus to the world market. However, the country's exporters would need appropriate assistance measures from the government, as China is feared to dump its farm production surplus on the world market, which would hurt Thailand's export competitiveness.

Exporters suggest the government should consider imposing some stringent restrictions such as import quotas to stem the flood of cheap imported crops.

Dhanin Chearavanont, chairman of the country's biggest agro-industrial conglomerate, the Charoen Pokphand Group, recently said the government should push up farm prices in line with oil prices. Good prices will give farmers more income and beef up their purchasing power.

Dhanin said oil prices would fluctuate in 2009 and global economic sentiment would hit bottom in the first quarter or the middle of the year. After that, everything would return to normal.

"Everything that already hit the bottom line, will be reversed to its standard level, so we should not think oil prices will continue declining below $40 per barrel," he said.

The government should consider the appropriate price and measures for each crop, he added.

Thailand should export more farm goods that China cannot grow, he said. That will open an opportunity for the Kingdom. Besides, Chinese farm prices are 60 per cent lower than global market prices, and China plans to push its prices further down.

Many food exporters shared the view that people still have to eat, so food prices will not drop sharply. The government and the private sector should boost exports to new markets rather than rely heavily on the traditional major markets - the United States, European Union and Japan.

The exchange rate will also become a critical factor for buyers and exporters. Importing countries with weaker currencies may cut back on volume and seriously bargain for the best deal. Exporters also have to get into the futures market to hedge against exchange risk.

Manufacturing and inventory management should be fine-tuned to minimise production costs. Exporters also said global prices of food and finished products would drop by 10-15 per cent in 2009.

The pain from falling crop prices will be offset by the decline in prices for raw materials, including oil and animal feed. Exporters and manufacturers will have to work hard to maintain their sales this year.

On the other hand, rubber and shrimp farmers have agreed to reduce output by 10 per cent and 20 per cent, respectively. The plan was drawn up to trim supply in order to shore up both domestic and world prices.