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December 16, 2011

Tragedy and hope after Thailand's floods
 
Destruction of both corn and cassava crops exposed Thailand's latent feed grain import dependence. Despite such serious challenges, strong domestic prices and export liberalisation may yet make for a strong recovery.
 
An eFeedLink Hot Topic
 
by F.E. OLIMPO
 

 


Two months of heavy rain have given Thailand its heaviest rainfall and worst flooding since 1942. Dams, lakes, canals and rivers overflowed, turning 30 provinces in central and northern Thailand, including densely populated parts of the capital Bangkok, into a murky ocean.
 
While Bangkok's flooding gets most of the publicity, the inundation's damage was mostly in the countryside, the resource base of the country's feed and livestock sector. The Thai Military Bank, in an analysis, said 13% of the country's more than 1,000 animal feed factories were severely flooded.
 
 
Floods cut domestic corn supplies…
 
A private think tank, Kasikorn Research Centre, says about 2 million hectares of farmlands have been inundated, with rice and corn plantations the most hard hit. The president of the Thai Feed Mill Association, Pornsilp Pacharintanakul, sees corn output falling by as much as 1 million tonnes this year as a result.
 
For Thailand, a million tonne feed corn shortfall is a problem of crisis proportions. This is because while Thailand lacks the feed resources of major meat exporters like America or Brazil, its domestic corn crop plays a key role in keeping meat exports price competitive.
 
In all, the corn lost to floods represents about 25% of the country's average yearly output of 4-4.2 million tonnes. By December, as flood-hit feed mills began picking up the pieces, prices of key feed ingredients such as corn and rice byproducts, had already jumped 10%.  And they are predicted to rise further once existing inventories dwindle without being fully replaced, something that worries meat exporters. Higher feed costs would make Thai poultry less competitive in the word market than those from Brazil, which is self-sufficient in feeds, or China, where labor is dirt cheap.
 
The expected shortfall couldn't have come at a worst time. Due to high profitability, with pork and chicken meat prices hitting record highs at certain points during the year, Thailand's livestock sector has been in rapid expansion mode, anticipating higher exports from Japanese and EU liberalization of the country's raw poultry exports. In such a situation, it needs more feeds, not less, to sustain the ongoing livestock output expansion.
 
Even before the current rash of agribusiness investment, Thailand's feed consumption was already exploding. In 2010, Thai feed demand leaped by 7.7% or 1 million tonnes to 14 million tonnes. This has increased feed mills' usage of local corn produce to 74%, up 14% from the previous year and drove corn imports up to 700,000 tonnes, up 40% from 500,000 tonnes in 2009.
 

…and cheap ASEAN corn is no longer available

Fearing a possible post-flood feed crisis, Pornsilp Pacharintanakul, president of the Thai Feed Mill Association, quickly asked the Ministry of Commerce to allow feed makers to import at least 160,000 tonnes before the year was over. But this was just enough to tide them over while they mulled over other options - which includes increasing imports from neighbours like Laos and Cambodia, which offer corn at below world-market prices.
 
But there's only so much low-cost corn that can be sourced from its Southeast Asian neighbours. From January to October 2011, Thailand's corn imports from Laos had already reached 138,498 tonnes, 37% more than the 101,215 tonnes it imported during the same period the previous year. And Laotian supply is down too, due to an anticipated drop in its own corn output.
 
Due to Laos's severe 2010 drought, about 4% of Laotian corn farmers have shifted to cultivating sugarcane and cassava, which are more drought-tolerant. The shift was also spurred by China's buying of Southeast Asian cassava, which boosted its price and profit margins. As a result, Thailand's Office of Agricultural Economics estimates Lao corn production in 2011 to be around 375,850 tonnes, down 5% from the previous year.
 
Moreover, despite its bountiful crop, nearby Cambodia isn't likely to be of much help either. If it has to, it will be at a higher cost - literally. Armed border conflicts between Thai and Cambodian soldiers strongly motivated Cambodia to diversify its feed corn exports beyond Thailand. With corn in high demand around the world, this is not hard for Cambodia to do.
 
Enjoying its current status as the feed bowl of Asia, Cambodia has been spreading its export wings, no longer limiting its markets to Thailand and Vietnam. It now ships corn to South Korea and Taiwan - and most probably China beginning this year. Cambodia's Commerce Ministry has reported that Chinese experts recently checked the quality of Cambodian corn and certified it as good enough for China's import needs.
 
With Cambodian corn exports soaring by 38% during the first two months of 2011, Cambodia has been selling its corn at a higher price. Last year, Vietnam had to buy it at US$120-130/tonne (US$3.05-US$3.30/bushel). While that is a real bargain compared to corn from America or Argentina, Cambodia is charging 25% more than it did in 2010.
 
Having found more engaging buyers, some farmers even sneer at Thailand and Vietnam as "unpredictable" markets not worthy of dealing with. "Sometimes they buy at a low price, and sometimes they don't buy at all," a farm leader was quoted in the press saying.
 

Floods, ethanol curtail cassava substitution scope

Even the situation with domestic feed corn alternatives has been made problematic. Local cassava remains a popular feed ingredient alternative to corn among Thai feed millers. Unfortunately, large tracts of cassava plantations were also destroyed during the flooding. In fact, even before the floods hit, 2011 cassava harvests were estimated to be down 10% from earlier projections.
 
Furthermore, at the start of 2012, the government's ethanol production plans went full throttle. This entails banning the sale of conventional gasoline at gas pumps in favor of ethanol-mixed fuels. This will create a spike in cassava demand from country's nearly 30 ethanol plants -and reduce the scope for substituting this feed alternative in place of the lost corn.
 
But the destruction of feed corn and cassava inputs is only one of the Feed raw many problems the flooding has created for Thailand's livestock industry.  Superficially, damage to Thailand's chicken industry was ruled minimal by the Livestock Development Department, which claimed that only 1% of broiler farms were directly damaged by the floods. Nevertheless, it is the post-flood scenario that scares experts.
 
Dr. Chaiyapoom Bunchasak, head of the Department of Animal Science at Kasetsart University in Bangkok, says that after every flood, disease outbreaks usually follow. Coupled with Thailand's unusually cold December weather, he fears an outbreak of avian flu could not be far behind, a prospect that could have serious repercussions to the country's broiler export industry.
 

Disease outbreak could ruin the export plans

Since the 2004 Asian bird flu epidemic, Europe and other countries have banned imports of frozen chicken from Thailand. The ban blocked Thai exporters from exercising the country's 90,000-tonne EU quota for salted chicken, not mention several more times this quantity of frozen chicken.
 
But after years of lobbying and three years of being bird-flu free, Thailand was finally given a break. The EU is scheduled to lift the ban in June, a prospect that has triggered a recent rash of expansionary investments in Thailand's broiler sector.
 
Needless to say, if floods lead to a new bird-flu outbreak occurs before June's lifting of the EU export ban, that would be both an economics and public relations disaster. In November, about a million chickens were found dead in closed farms in flood-hit Ayutthaya, triggering fears of a disease outbreak. Government teams quickly descended on the province to contain -and perhaps bury- the problem.
 
When 2011 started, Thailand's livestock and aquaculture were very bullish about the export market. Overseas shrimp sales grew 9.75% to 438,500 tonnes in 2010 from 399,412 tonnes in 2009 and Thai producers were confident the growth momentum could spill into 2011.  Imports by the U.S., which accounts for nearly half of Thailand's shipments, expanded by 1.40% in 2011, and local exporters read it as a sign the American economy was on its way to recovery.
 
Thai poultry farmers were just as bullish. While the final numbers are not yet in, 2011 poultry exports (mostly cooked chicken) appeared to have risen by as much as 17.9%, to approximately 480,000 tonnes.  This after jumping by 11.17%, to 407,978 tonnes in 2010, from 366,983 tonnes in 2009. And all this was accomplished despite a continuing ban by the EU, Japan and other countries on frozen Thai frozen chicken.
 
In fact despite the current credit crisis in the Eurozone, demand for Thai chicken remains high in the EU, which explains why, a few months before Thailand's big flood, Saha Farms, the country's number one frozen chicken exporter before the 2004 bird-flu crisis,  invested THB15 billion (US$4.8 billion) to increase its production capacity.
 

Domestic prices to the rescue

Yet, integrators do see one positive side-effect arising from the mass flooding: GFPT, another leading Thai chicken exporter and integrator, foresees a chicken supply shortage once the waters have receded.  In an analysis sent to its investors, it said that it expected domestic chicken prices rise sharply, the way they did after an earlier, less destructive flood in May 2011.
 
"The scope for a chicken price surge might not be as great as the May 2011 jump when it peaked at TH55/kg [US$1.76/kg]," GFPT said, but it would be a respectable 10-15% rebound within the price range of THB45-48/kg [US$1.43-US$1.53/kg]during the early part of 2012.
 
Hence, the overall impact is mixed but problematic. To maintain production and meet rising export commitments, the country has no choice but to import more expensive corn from outside Southeast Asia. Unless the Thai Baht falls or the Brazilian and Chinese currencies appreciate in value, this could undermine the competitiveness of Thai exports in 2012.
 
On the other hand, enhanced revenue  from higher chicken prices in Thailand itself can go some ways towards mopping up any export losses. Amid all these known factors, the flood's impact on disease outbreaks, remains the wild card. All these factors considered, the floods have increased the country's vulnerable corn import dependence but if bird flu can be kept at bay, European and Japanese demand could still make this a banner year for poultry exports.
 


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