FBA Issue 23: November / December 2008
Smoothing out a rollercoaster: Thailand's pork sector attempt to moderate price swings
From about 87 baht/kg towards the end of 2007, Thai pork rose 27.5 percent to a record high of 120 baht/kg by March 2008 - a stunning comeback for an industry almost given up for dead, at least during the most part of 2007. The recovery surge seemed, so, well, pig headed that at one point, the government was worried that prices could reach as high as 150-200 baht/kg.
Prosperity attracts too many entrants
Yet, shortly before the price rally, industry leaders were fretting over a situation where an 100 kg hog, whose average production cost was 4,491 baht, could only sell for 3,757 baht. So, with its many problems including oversupply, skyrocketing feed costs, recurring disease outbreaks, depressed market prices and government price controls, how did the industry recover so quickly?
Market forces and disease outbreaks had much to do with it, says Mr. Surachai Sutthitham, president of the Swine Raisers Association of Thailand. The 2006-2007 pork price depression was inevitable fallout from the 2004-2006 golden years when the rate-of-return for hogs was the highest compared to other sectors in the livestock industry. At the time, a pig's farm price was 52-55 baht/kg liveweight as against a production cost of only 37-42 baht/kg, thereby providing a stellar 26 percent rate of return.
Expectedly, it drew more and more entrepreneurs that in 2006 the country's hog production soared to more than 13.3 million. Unofficial estimates put it at a whopping 16 million, pigs from the previous year's 9 million, which would be an unsustainable annual increase of 77 percent. With an annual domestic consumption of only 12.5 million hogs, this resulted in an absurd oversupply that sent prices and profits plunging. The slump dragged on till towards the end of 2007 when the farm price was raised by the government to 45 baht/kg, 3 baht more than the prevailing farm-gate price then, as cost of production hovered around 44-45 baht/kg.
As oil and feed raw materials started to soar, the price-fixing Internal Trade Department, with little convincing from the association, then allowed another 3 baht/kg increase, bringing the farm price of swine to 47 baht/kg. It wasn't of any help though. As the manager of the association, Ms. Somporn Kamonpornsin, noted, nobody was buying beyond 45 baht/kg because of so much supply in the market.
Disease outbreak rekindles prosperity
Before soon, hundreds of small and medium-sized farms closed down, unable to sustain their operations. Production dropped, keeping the oversupply in check. But the coup de grace came in November 2007 in the form of an outbreak in porcine epidemic diarrhoea (PED), which killed tens of thousands of piglets.
The epidemic did more than balance supply with demand. Hog inventories plummeted and for the first time the country even faced the prospect of a pork shortage, with the industry almost unable to meet the domestic consumption of 40,000 hogs a day.
With only the farm price of pigs under government price control - pegged at 60 baht/kg during this time - there was no way to stop dealers and vendors from taking advantage of the tight supply to spike pork prices, using the spiraling cost of energy as a slim excuse. The result was a big imbalance, with vendors and middlemen getting the most from the pork's record-breaking retail price of 120 baht/kg.
Of course, as far as the small farmers were concerned, the profit "imbalance" happened more in theory than in practice. Unlike at industrial farms, where every output has to be accounted for, small farms don't bother themselves with documentation. Since the government has no way of knowing the transaction, they can sell as much as dealers are willing to pay. And often, especially when the supply is tight, this is at a price beyond what the government had set.
National election leads to price controls
To the Thai government, however, it really doesn't matter which side gets the bigger slice of the cake. Its overriding concern is that the consumer should get most of the cake, even if it means squeezing the last drop from both farmer and dealer. In Spring 2008, with national elections around the corner, a predictable measure came into place. Then Commerce and Industry Minister Mingkwan Sangsuwan, came up in March this year with what it called "consensus" whereby farmers and retailers "agreed" to cut retail pork prices by 18 percent for at least two months to help consumers cushion the impact of skyrocketing oil and food prices.
Interestingly, while Mingkwan emphasised the "voluntary nature" of the price cut, a subordinate, the director of the Internal Trade Department, was quoted in the local media as saying that traders who won't abide by the price cut would face arrest. By fiat, the price of pork went down to 98 baht/kg. But since pig farmers also happen to be voters, the government allowed them to raise the farm-gate price of hogs to 63 baht/kg to also help them cope with rising feed costs.
And to make sure farmers won't be selling elsewhere while professing adherence to the "consensus" price slash, the government suspended hog and pork exports to Cambodia, Laos and Vietnam, where pork prices were better. Thailand usually exports about 50,000 live pigs a year to these countries.
It was supposed to be a happy compromise for everybody, although industry leaders felt it was at the expense of pig farmers. Member of parliament Trairong Suwankhiri said it was this populist approach that was responsible for the high pork prices in the first place. Mr. Mingkwan, according to him, protected crop farmers in the country's North, causing feed prices to rise.
Price swings show lack of consolidation
The secretary of the Swine Raisers Association, Mr. Kiddivong Sombuntham, called it a political solution that "did not take into account the entire structure of the industry and all its stakeholders." From an objective point of view, it could be said that Mr. Kiddivong hit the nail on the head; the industry's problem is deep-seated and structural.
Mr. Kriengmas Punchai, senior vice president for swine integration at Betagro, one of the country's biggest pig raisers, says recent steep increases in pork prices were created by "the instability in the pig feed industry." Unlike the chicken sector, "pig farmers are mainly small and medium-sized operations rather than large-scale farms." As well, according to him, "pig farmers supply live pigs to manufacturers while chicken producers usually have their own manufacturing plants."
As they are only involved in farming, "pig producers have no control of the supply chain as chicken producers do," Mr. Kriengmas says. So when problems occur in the production process, they are hit hard. This setup, he adds, has also been responsible for the pork's price-drop cycle which happens every two to three years.
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