THAILAND: Firm on Protecting the Palm Oil Sector

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BANGKOK, Feb 5 (Reporting ASEAN) – At the 27th ASEAN Summit in Malaysia in November 2015, the world’s two largest palm oil producers, Malaysia and Indonesia, signed an agreement to set up the Council of Palm Oil Producing Countries, a cartel similar to what the Organisation of Petroleum Exporting Countries is for petroleum-producing countries.

Thailand is the third largest producer of palm oil, although it accounts for only 3 percent of global production. In the country’s view, oil palm is important in terms of food security and as a global energy. Thanks to its tropical climate, the country can produce significant amounts of oil palm, as global demand for it increases.

Thailand has had shortages of palm oil in the past, but continues to restrict imports. The country also experienced declines in prices, involving both demand and supply factors. Farmers have demanded that the government come up with measures to help prop up prices from time to time.

Thailand has seen an increase in areas for oil palm production over the years. In 2015, the area planted for palm oil totalled 4,400,589 rai, an increase of 6.09 percent from 4,148,168 rai in 2014, according to a July 2015 article by Lersak Rewtarkulpaiboon, director-general of the Department of Royal Rainmaking and Agricultural Aviation, when he was serving as secretary-general of the Office of Agricultural Economics (OAE).

However, the country’s palm oil output in 2015 totalled 12,205,776 tonnes, reflecting a 2.38 percent decline from 12,503,447 tonnes in 2014. This was due to a long period of drought since 2013.

In 2015, Thailand had 2,074,982 tonnes of crude palm oil in the market (local palm fruit has 17 percent oil content). Combined with the early-year stock of 168,000 tonnes, it is estimated that for the entire 2015, Thailand has 2,242,982 tonnes of crude palm oil. The demand for crude palm oil is estimated at 1,854,000 tonnes – 929,000 for consumption, 854,000 for bio-diesel production, and 71,000 for export. If this is the case for the demand for crude palm oil, the stock in late 2015 would have been about 388,982 tonnes.

Price Problems Persist

Since 1991, Thailand’s production of crude palm oil has exceeded domestic demand. Importation was necessary when output was insufficient for the production of bottled virgin palm oil. For instance, during a palm oil crisis and a shortage of vegetable oils in 2011, consumers hoarded these products.

In early 2015, the National Oil Palm Board approved the importation of 50,000 tonnes of palm oil on grounds that the domestic stock was down to only 90,000 tonnes. The country’s demand is about 150,000 tonnes a month, and a safe stock of palm oil should stay at 250,000 tonnes.

Agriculture Minister Gen. Chatchai Sarikalaya, while serving as commerce minister, was criticised for the decline in oil palm prices. He also experienced protests by palm growers from time to time. They demanded that the government buy their oil palm at 5 baht a kilogramme, claiming that it cost them 3.80 baht to produce a kilogramme of fresh palm.

The OAE secretary-general said that although imported oil palm was used to produce bottled virgin palm oil and solved the short-term shortage, the country’s stock of crude palm oil increased by the end of 2015. The government provide support to the growers by basing prices on the cost of 3.38 baht for producing a kilogramme of fresh palm.

Palm-oil extracting factories are required to buy fresh palm at 4.20 baht a kilogramme. Palm oil refinery plants, bio-diesel factories and general buyers of crude palm oil are required to purchase crude palm oil from extracting factories at no less than 26.20 baht a kilogramme. This is aimed at helping consumers as well.

In fact, the controlled price of crude palm oil used for the production of virgin palm oil, set by the Commerce Ministry at 42 baht a litre, is supported by many people although it is a distortion of market mechanisms. The system of setting these prices pushes domestic prices above world market prices, which use Malaysia’s palm oil prices as reference.

In January 2015, the price of Malaysia’s raw palm oil was 21.52 baht a kilogramme, compared to up to 32.50 baht for Thailand’s. In July, Malaysia’s raw palm oil was sold at 20.32 baht a kilogramme, compared to 26.25 baht for Thailand. In the third quarter of 2015, the average price of Malaysia’s raw palm oil was down to 18.10 baht a kilogramme, compared to 24.34 baht for Thailand.

Looking back, the Bank of Thailand said that Thailand’s exports of all types of palm oil declined during the third quarter of 2015 because prices were much higher than world market prices. In addition, soybean oil, which is a substitute for palm oil, was cheaper and served as an alternative for the buyers.

Smaller Growers, Higher Costs

Thailand has more than 200,000 small-scale oil-palm growers who make up the majority of the industry, explains Phansak Jitrat, president of the Krabi Farmers’ Council.

That explains why Thailand’s costs of producing oil palm are higher than in Malaysia and Indonesia, where oil-palm growing is a big agricultural industry. For instance, Thai growers use pick-up trucks or small lorries to carry palm clusters from their plantations to trading grounds. In the competitor countries, large trucks or even rail transportation is used. Thai farmers’ costs in growing oil palm are not only higher, but they lack management skills and knowledge of the industry. As a result, their palm fruit has an average 17 percent oil content, compared to 20 percent for Malaysia’s oil palm.

This is so because Thai growers often harvest their palm before they are fully ripe, as they want to sell their produce early. Yet if they waited longer, the higher oil content in their palm could increase the value of their product by more than 30 satang (0.30 baht) a kilogramme. Judging from a monthly production of one million tonnes, the one-percent increase of oil content in palm would be worth over 300 million baht a month. There is now a campaign underway for growers to avoid harvesting unripe palm fruit.

Because growers harvest both ripe and unripe palm fruit, they lose about 2 percent of oil content – whose total value in a year reaches almost 7 billion baht, points out Samroeng Sudsri, deputy general manager of the Krabi Oil Palm Farmers’ Cooperatives Federation. The federation is able to produce palm with higher 19 percent oil content, compared to the current average of 17 percent.

Krabi’s Educational Council adviser Dr Sanong Posiew, a palm grower who has studied growing oil palm since 1987, has more than 100 rai of oil palm plantations. He finds that that Thai growers and operators of oil palm lack competitiveness.

First, he said, the growers have to rely on imported breeding stock, particularly from Malaysia. “To rely on imported palm seedlings, you cannot be sure that they fit the local climate or if they can give the best output,” he said. Then, palm farmers must have knowledge about correct fertilisation and have improved management systems. He cited Malaysia as a good example, where oil palm is a big industry complete with output buying and transport systems. In contrast, Thailand has small-time growers who have few linkages with one another.

Growers also have to desperately look for factories willing to buy their fresh palm fruit. Assuming they do find them, these buyers often keep prices really low. For their part, factories often argue that their existing containers are full and that they have no room for more palm oil.

Demand Unchanged But Oversupply Stays

In truth, these factories do not want to buy oil palm at high prices set by the government, explains Saksilp Chotsakul, a specialist in the National Oil Palm Board who once served as director of rubber and palm oil promotion group of Department of Agricultural Extension’s Bureau of Agricultural Commodities Promotion and Management.

He said the government’s minimum price was high while the factories could only sell their products at low prices. This was why the factories often come up with excuses to avoid buying palm fruit, including claiming that their factories are closed for maintenance.

The smuggling of palm oil exists but there is no strong evidence to prove that, according to sources in the industry. Although local output is down while the demand remains unchanged, there continues to be an oversupply of palm oil stocks. Samroeng said that the government has to prevent the smuggling of palm oil, which happens when the gap between the domestic and foreign prices is wide. If the price margin between these two is reduced to no more than 3 baht, smuggling would decline because there would not be much economic incentive for it.

Palm Oil For Electricity?

Thus far, the volume of palm oil used to generate electricity remains small, says Samroeng of the Krabi Oil Palm Farmers Cooperatives Federation. The government requires Krabi’s power plant, which is run by the Electricity Generating Authority of Thailand, to use palm oil mixed with bunker oil in generating power and to use palm oil in the production of bio-diesel. This requirement aims at absorbing the palm oil oversupply in the market, but does little to help boost prices. The unclear policy about bio-diesel, the high cost and lower crude oil prices have caused Krabi’s oil palm plantations to suspend their production temporarily.

A strategic plan by the Office of Agricultural Economics for 2015-2026 calls for the expansion of oil palm plantations, from 4.5 million rai to 7.5 million rai, replacement of old plants and increase of yields per rai, from 3.2 to 3.5 tonnes. The plan also calls for increase of oil content in palm fruit, from 17 percent to 20 by 2026, as well as higher demand for consumption, from 1.02 million tonnes in 2015 to 1.35 million by 2026, or an average 3 percent a year.

Moreover, the plan aims to increase the use of palm oil as alternative energy, from 1.32 million tonnes to 2.60 million by 2026, and to maintain the export volume of palm oil at between 300,000 and 700,000 million tonnes a year within three years. The plan also pushes for a standard of palm oil among ASEAN countries called ASEAN Sustainable Palm Oil (ASPO), and for a law on that sets up a permanent organisation to drive research and development on palm oil.

But if the effort to expand the market fails, the increase of plantation areas may lead to oversupply, and prices will stay low. “The export markets overseas are rather saturated now. Palm oil is mainly used in food industries and in consumer goods such as soap and cosmetics. If those sectors want more, demand for palm oil will grow. For bio-diesel, it depends on the government strategy on energy. In Thailand, not many engines consume bio-diesel so there is not much demand for palm oil in this sector,” said Chai Sankavesa, director of the Department of Foreign Trade’s Bureau of Trade Measures, Ministry of Commerce.

Tackling Problem Step by Step, Albeit Comprehensively

Pansak Jitrarat, president of the Krabi Farmers Council, and Samroeng of the Krabi Oil Palm Farmers Cooperatives Federation agree that the oil palm market will be liberalised only after problems are solved comprehensively. Growers have to improve their competitiveness in order to cut costs and increase output. The government must avoid distorting the market mechanism, and provide accurate knowledge to the farmers while formulating policies with a clear direction.

Pansak also agreed with Krabi’s Educational Council adviser Dr Sanong that small-time growers should work together in a bid to reduce costs and strengthen their bargaining power. With good management, they can cut costs substantially. For instance, there should be better water supply for plantations and transporting their palm fruit to the market. Also, they should be open-minded and more cooperative with one another. “This may be difficult for Thai people. When the road has potholes, the state agencies do not repair it. People suggest that the plantation owners share the cost of repairing but nobody wants to pay. They prefer to pay for repairing trucks, which costs higher,” said Sanong.

Patcharin Sai-ngam, head of the sales division at the Krabi Oil Palm Farmers Cooperatives Federation, urged the government to keep the importation of substitute crops such as soybean within local demand, so that they do not compete with palm oil. Large shopping malls also distort the market mechanism by pushing down prices of vegetable oil as part of their sales campaigns, she adds. As a result, the prices of palm oil go even lower.

When it comes to the development of oil-palm breeding stock, Dr Sanong said that the Golden Tenera variety developed by Dr Anek Limsriwilai, award-winning plant breeder of 2010, and the mixed Surat Thani 84-8 variety of the Department of Agriculture, are suitable to Thailand’s climate. They are more reliable than imported types, he said. He urged the government to let the prices of virgin palm oil go up . “If the controlled price is raised from 42 baht to 47 baht, the consumers pay only five baht more and they are not affected, but the growers can survive.” However, a source from the National Oil Palm Board told ‘Econ News’ that a price increase was unlikely because oil palm is a “political crop”.

As long as the growers are unable to cut costs and increase yields, this problem will never be solved; it will simply get worse. “You do not have to wait five or 10 years. When the output is abundant, there will be an oversupply of palm fruit and palm oil again. If the war in Syria and El Nino continue, production will decline and the world market prices will be higher. If that is the case, we are lucky.” The source also said that because the government keeps the controlled prices for palm fruit and palm oil at a high level, Thailand’s competitiveness in the world market would be crippled. Therefore, the government should assist growers by subsidising some production costs, such as that of fertiliser, instead of controlling the prices of palm oil.

Market Standards and Demand

Many palm oil markets, particularly in the European Union, have set conditions in purchasing produce. They opt to buy only palm oil that meets the standards agreed upon at the Roundtable on Sustainable Palm Oil (RSPO), which requires oil palm to be grown and produced in an environment-friendly way. In addition to China, India and Pakistan, the European Union is a major global importer of palm oil.

Indonesia’s palm oil industry, for instance, has been impacted adversely by wildfires and forest fires, which are believed to have been caused by the burning of land by oil-palm plantations. The European Union has pressured Indonesia to stop such practices. In the meantime, the global demand for palm oil continued to increase.

In July 2015, a report by the US-based market research and consulting firm Grand View Research predicted that the value of the world’s palm oil market would grow from 61.090 billion US dollars in 2014 to 88.0 billion dollars in 2022, due to higher demand for diesel and increased public awareness about the environment. If Thailand is unable to improve its competitiveness, it will regrettably miss this window or opportunity for its palm oil.

Liberalisation Within the ASEAN Community?

Non-tariff barriers (NTBs) that are a hurdle to increasing intra-ASEAN have been identified as a challenge to economic integration in ASEAN Community, launched at the end of 2015. As early as 2006, Malaysia’s Trade Minister Rafidah Aziz has been quoted as saying that almost all ASEAN countries adopted non-tariff trade barriers.

These include Thailand, which requires that import of palm oil can be made solely through the Public Warehouse Organisation.

At the time of Aziz’s remarks in 2006, there was an ongoing conflict between Thailand and Malaysia about vehicle import duties and then-minister called on them to revoke NTBs.

Almost 10 years later, Thailand still restricts the import of palm oil, and trade barriers still exist. As the ASEAN Community is now in place, will the dream of free trade within the ASEAN Economic Community materialise given this context?

If palm-oil importation into Thailand is liberalised, the main beneficiaries will be the industries that use palm oil as raw material, such as food, soap and cosmetics, which will benefit from lower costs. Consumers will be able to buy palm oil at lower prices and have access to more product choices.

However, people involved in the oil palm-related agriculture and industries say that there would be more harm than good for Thailand in this scenario.

Saksilp Chotsakul, a specialist in the National Oil Palm Board, says that liberalisation would bring just a few benefits and that Thai growers would not survive it.

Thailand has already liberalised the market for almost all the agricultural products, except 23 items that also include palm oil and palm-seed oil, according to Chai Sankavesa, director of the Department of Foreign Trade’s Bureau of Trade Measures in the commerce ministry.

“This time is not suitable for free imports. If we open the market, [Thai farmers and producers] will see their market share snatched away. We should not open the market if that will bring trouble to our compatriots. We have to take care of people in our home first. Malaysia prohibits export of crude palm oil, and only virgin palm oil is allowed to be exported. It is because they want to keep the work to their palm oil refineries.”

Under its commitments under the World Trade Organisation (WTO), Thailand restricts the volume of imports of palm oil at 4,860 tonnes. Imports under the quota system are subject to duties of 20 percent. Imports outside the quota system are liable to duties of 143 percent. Imports under the ASEAN Free Trade Area (AFTA), which are subject to zero duty, can be made only through the Public Warehouse Organisation.

Thailand has the National Oil Palm Board that is responsible for formulating policies and plans for the management and development of palm oil production.

In a 2013 analysis on the global palm industry, the Kasikorn Research Centre said that Thailand’s production of oil palm was sufficient only for domestic consumption. Thailand exports just small amounts of palm oil. These explain why the Thai government often approaches the fluctuations of palm-oil prices and stock differently from Indonesia and Malaysia, which are both the world’s major exporters.

The Thai government has two major objectives in taking measures aimed at assisting producers and consumers of palm oil and oil palm. First, the measures help ensure that oil palm growers get sufficient income and have decent living conditions. Second, these measures help assure consumers that there are sufficient stocks of palm oil for domestic use.

Government authorities say they set prices for palm fruit and palm oil in case of price fluctuations that affect growers. They purchase large amounts of palm oil to reduce supply in the market in case the domestic stock is too high. Finally, they allow the importation of palm oil in case supply is insufficient for Thailand’s domestic consumption.  (END/Reporting ASEAN)

(*This article was produced with the ‘Making AEC Work: Digging out Non-Tariff Barriers to Trade series’, organised by IPS Asia-Pacific with the support of The Asia Foundation. A version of this story was first published in Thai in ‘Econ News’: http://www.econnews.co.th/ชะตากรรมปาล์มน้ำมัน/)