Monthly Archives: September 2006

Focus on Thailand

‘Kitchen to the World’ is the largest exporter and importer of food products in Southeast Asia.

“Kitchen to the World” is a phrase sometimes used by official promoters of Thailand’s thriving export-oriented food industry. Hyperbole aside, there is much truth to this slogan. The country has been the world’s leading rice shipper for almost 25 years and is among the biggest suppliers of aquaculture and seafood products to the international market. Also, the CP Group, a global player in feed and poultry production, is a Thai company. The record is quite impressive for a medium-sized, middleincome country. Among the nations of Southeast Asia, Thailand is both the largest exporter and importer of food products, though it is only fourth largest in population and trails both Malaysia and Singapore in per capita wealth.

Food processing of all types is a vibrant sector that has attracted much international investment targeting both the domestic and foreign markets. It has also been a source of new business start-ups. There are at least 1,200 medium and large companies registered and several thousand more small firms or producers at the cottage-industry level.

Challenges to this key part of the Thai economy have been many. Recently, the Avian flu has been of great concern. Another ongoing and persistent threat is low-cost competition from Vietnam, India and other countries that are opening themselves more and more to the world economy. But Thai producers have shown a resilience that has come from the ability to adapt and move into new higher value-added niches.


Rice gave Thailand its start as a major food exporter. Milled rice production in recent years has been stable at about 18 million tonnes. Steady per capita consumption of 110 kg leaves over half the crop for export and other uses.

Thai exports in 2005 fell to 7 million tonnes from 7.3 million tonnes the previous year, as Vietnamese white rice, the cheapest category, gained a substantial share in African countries on prices U.S.$20 to U.S.$30 per tonne lower than Thai rice. At the same time, competition from India reduced Thai exports of parboiled rice, a category that is about 25% of all Thailand’s rice trade. However, shipments of high-priced fragrant jasmine rice, for which the main markets are the U.S. and China, continued to go up. Thailand’s position in the last major category, premium white rice, which primarily goes to Iran, Iraq and other Middle East countries, is still strong due to inadequate supply from Vietnam.

Paralleling the drop-off in exports, there has been a sharp rise in rice stocks to record levels approaching 5 million tonnes, from just 1.7 million tonnes at the end of 2003.

Indeed, domestic market prices and the level of exports are usually a function of government intervention buying, a practice designed to stabilize production and farmgate prices. Exports will rise in 2006 as the government must dispose of its stocks, thereby lowering the average price for Thai rice.

Maize is the second-leading grain crop and a major contributor to Thailand’s feed industry. The sector, now recovering from the impact of the Avian flu on poultry demand, will consume all but about 150,000 tonnes of a total crop of 4.2 million tonnes from two annual growing seasons. In 2004, maize exports had reached nearly 400,000 tonnes, mostly to Indonesia and Malaysia.

The government still operates a mortgage program for maize farmers to stabilize domestic prices. Thanks to higher loan rates, government purchases under the program doubled to more than 115,000 tonnes in 2005. There are no quotas or tariffs on maize trade between Thailand, Myanmar, Laos and Cambodia under the terms of the Joint Economic Cooperation Agreement between the four countries.


Charoen Pokphand, or the CP Group as it is usually known, is one of Thailand’s best known, wealthiest and globally focused companies. It got its start as a humble feed trader more than 80 years ago. The feed industry has played a vital role in the development of Thailand’s agro-industrial complex, and the rise of the CP Group has mirrored that development.

Thailand should produce close to 11 million tonnes of feed in the current year. CP Group is by far the largest producer, though it faces competition from regional and multinational players that have invested in its backyard.

Poultry production and seafood each account for half of the total feed value. The large share of demand from aquaculture is special in the case of Thailand. About 90% of fish and shrimp production gets exported. Thailand is the world’s number one exporter of king prawns. It was the world’s leading seafood exporter until overtaken by China a number of years ago.

In addition to operating several plants dedicated to production fish and shrimp feed, CP Group has integrated vertically and forward into farmed seafood production, just as it did with poultry earlier. Export demand for frozen shrimp remains strong, particularly from the U.S., and domestic consumption of farmed fish is going up at the expense of poultry.

The CP Group now owns feed plants in seven Association of Southeast Asian Nations and 30 countries around the world. In the 1980s and 1990s, it made a major push into China, where it built 100 plants. In Thailand, it has diversified into telecommunications, petrochemicals and other industrial products.


Shrimp and fish farming are also a major source of demand for Thailand’s wheat flour milling industry. About 30% of all flour production is used either as a binder for pellet production or for breading of finished products.

Thailand has about 10 modern flour mills that will grind 1.2 million tonnes of wheat in 2006. Two new mills have contributed to a 30% expansion of national milling capacity. Wheat flour production has been increasing at an annual rate of 10% recently.

Another segment of wheat flour demand is instant noodles, which are gaining favor among urban consumers at the expense of rice. Flour demand for bread, cake and pastry has also been going up, thanks to higher incomes.

Thailand has been one of the major import markets for flour in the region due to the relatively high cost of domestic production. But millers have been given a boost by a new tariff rate structure on wheat of only U.S.$2.50 per tonne compared to five times as much for flour. This will help keep imported flour at around 5% of total consumption.


Thailand has long tried to stimulate domestic soybean production as a second pillar alongside maize to supply its feed industry. However, domestic production has stagnated at below 250,000 tonnes even though total demand for soybean meal has steadily climbed. Farmers prefer maize, which has had much better improvement in yields.

As a result, soybean crushers in Thailand depend on imported soybeans. Total soybean imports are expected to decline due to a decreased domestic crush of just 1,030 tonnes. In general, soybean crushers face a difficult environment due to price controls on soybean oil, competition from imported palm oil, which is approaching 1 million tonnes and is monopolized by the government, and increased use of whole soybeans for human food and for full fat feed.

Overall soybean meal demand continues to increase. Despite a 5% tariff versus none on beans, soybean meal imports should exceed 2 million tonnes in the 2006-07 marketing year, compared to 1.7 million tonnes in 2004-05. One factor is a fall in fishmeal production, though still important at over 400,000 tonnes per year.

Focus on Brazil

After years of remarkable expansion in the agricultural sector, South America’s largest country is encountering numerous problems that are hindering growth.

Brazil is an agricultural powerhouse. Its net food trade surplus of U.S.$29 billion in 2005 — the greatest of any country — is sufficient testimony to that.

In the past 20 to 30 years of rapid development, the country’s agricultural and food processing sectors have gone from strong to stronger. While orange juice and coffee were the original basis for its export successes decades ago, oilseed and feed-based industries have more recently shown the most dynamic growth.

Brazil’s total soy complex (beans, meal and oil) exports have now surpassed the U.S., thanks to rising soybean shipments in 2005. It is also the top exporter of poultry meat with volume projected to reach 3 million tonnes this year. Brazil is second in pork and among the top five in beef exports.

Overall, Brazil’s agricultural exports have increased remarkably from U.S.$13 billion in 1990 to U.S.$32 billion last year. But after years of heady expansion, there is now a building sense of crisis brought on by a convergence of challenges: a strong currency; repeated droughts; plant diseases; inadequate transport infrastructure; environmental conflicts; food safety issues; low international commodity prices and farmers that are heavily in debt.

The international competitiveness of Brazil’s economy itself presents a major problem to agricultural enterprises. In just two years, the Brazilian Real has appreciated from about 3-to-1 to 2-to-1 against the U.S. dollar. This has removed much of the profitability from Brazilian farming by lowering the local currency price that producers receive for exported products.


The aforementioned problems have had the greatest impact on soybeans, the unrivaled king of Brazilian farming. The soy complex accounted over one third of agricultural exports and 12% of all Brazilian exports in 2004. But record global soybean production in 2005-06 exceeds demand by about 10 million tonnes, and is causing a buildup in stocks and lower prices. Consequently, the area planted to soybeans in Brazil will shrink for the second year in a row in the 2006-07 growing season to about 21 million hectares.

Costs of basic inputs such as fertilizers and fuel, which are mostly imported, have gone up much more than the Brazilan Real, and are further squeezing profits.

Most of the expansion of soybeans has been in the frontier region of Mato Grosso, which has poor soil that requires heavy use of fertilizers.

Cheap land and labor, good technology and economies of scale make Brazil the world’s lowest-cost producer of soybeans, but much of this advantage is lost after factoring in the expense of getting beans first to ocean ports and then to major international markets.

New cultivation in Brazil is as far as 2000 kilometers (km) from seaports, compared to a maximum of 300 km for most Argentine production. Three quarters of U.S. soybean production reaches export ports via river barges, but in Brazil the same proportion is moved by truck over congested, often pot-holed and unpaved two lane highways. Transport costs in the delivered value of Brazilian soybeans to major markets like Europe or China are a multiple of U.S. beans.

The fragmentation and dispersed location of the Brazilian soybean crushing industry has caused it to lose ground against arch-rival Argentina, whose huge port-based plants, some with capacities of more than 12,000 tonnes per day, have enabled it to increase its share of oil and meal exports at the expense of Brazil.

Brazil has about 80 operating oilseed plants scattered around the country that are owned by around 50 companies. The largest is about 4,000 tonnes per day, which is only medium-sized by today’s standards. More than a dozen plants have been shut down in the past few years, and total daily crushing capacity, at about 137,000 tonnes, is now less than Argentina’s, which has greatly expanded capacity at ports.

A 12% tax on beans transported among Brazil’s 27 states for processing also work against economies of scale and consolidation in the crushing industry, and further skews production toward exports, which do not face this extra tax. Thus, soybean exports have steadily increased as a share of soy complex exports.


The rapidly expanding Brazilian feed industry presents a much brighter picture than oilseeds. Indeed, it is an example of a move upward on the value chain by producers confronted by low margins in basic commodities. Compound feed production in Brazil should reach 47 million tonnes in 2006, up from less than 20 million tonnes in 1994. This makes the South American giant the third-largest producer after the U.S. (145 million tonnes) and China (96 million tonnes).

In addition to abundant soybean meal, the feed industry benefits from Brazil’s self-sufficiency in maize. Annual production has rebounded to 41 million tonnes, of which 30 million is used in industrial feed. Brazil had been a net maize importer for many years, but it now exports more maize to Europe than it imports from Argentina in most years.

Poultry consumes 57% of feed production. The Avian flu has yet to reach Brazil and has been a boon for Brazilian frozen chicken and turkey exports, particularly to Japan, at the expense of Thailand and Europe.

The biggest national swine and poultry producers and exporters are Perdigao, Sadia, and Seara Alimentos, which is owned by Cargill. However, several large agricultural cooperatives in the state of Parana have made major investments in modern, integrated poultry production, in order to capture added value from their members’ maize and soybeans and to benefit from proximity to container ports. Parana now accounts for 25% of Brazilian poultry.


Wheat for flour milling is the biggest line item on the negative side of the food trade balance. Indeed, the country ranks among the world’s major wheat importers. Brazil’s 206 mills, owned by 150 companies, grind almost 10 million tonnes of wheat per year. Wheat production in the southern states of Santa Catarina, Parana and Rio Grande do Sul supplies up to half of the demand in a year with good rainfall, but on average about 6 million tonnes get imported, mostly from nearby Argentina. Due to the Mercosur free trade zone, there is no import duty on wheat from the southern neighbor, but all other wheat faces a 10% duty.

Annual per capita wheat consumption in recent years has been steady at about 50 kg versus 38 kg for rice. During the last decade, wheat consumption has risen and rice has fallen.

Bunge, with a 100-year history in Brazil, is the largest milling company in the country. Cargill has had operations in Brazil for more than 40 years but entered the wheat flour market only a few years ago with the acquisition of a couple of mills.


It could be argued that the global competitiveness of Brazil’s agriculture and food processing sector has been due in large part to the abandonment of subsidies, intervention programs and high external tariffs by the government in the 1980s, requiring producers to respond to international market signals.

Government payments were only 3% of Brazil’s farm receipts in 2005, according to OECD figures, versus 18% and 34% for the U.S. and E.U.

Brazil was a member of the group of the six key countries in the now suspended WTO Doha round, and it stood firmly for the freeing up of agricultural trade through the elimination of subsidies and tariffs in rich economies like the U.S. and Europe.

But faced with a farm crisis at home, the Brazilian state has begun to intervene on a scale not seen in recent decades with purchases, payments and guarantees to help insolvent farmers.

Will the failure of the Doha round and huge farm losses in grain and soybeans cause Brazil to give up its relatively laissez-faire agriculture? That seems unlikely given the many successes generated by Brazil’s agricultural model.