IS THE PLANNED EXPORT POTENTIAL SUSTAINABLE IN THAILAND?
Prepared by Mr Pichai Kanivichaporn for the Sugar and Beverages Group, Commodities and Trade Division . Tables have been omitted due to space limitations and could be made available upon request.
Thailand is a tropical country situated between latitude 5-21 N and longitude 97-106 E covering about 51.20 million hectares. The kingdom has total agricultural areas of 21.6 million hectares and cane occupies approximately 1.0 million hectares or 4.6% share. In the 1996/97 season, the Thai sugar industry produces 5.816 million tonnes of sugar from 56.192 million tonnes of cane. After put aside 1.670 million tonnes for domestic requirement, the exportable surplus is 4.146 million tonnes. The industry is expected to earn total gross proceeds of 49,000 million Baht, which consists of 18,700 million Baht from domestic sales and 30,300 million Baht from exports.
Sugar production in Thailand was first established as a cottage industry during the Sukhothai era (A.D. 1257-1350). The production was then gradually expanded and shifted to commercial scales. During 1930-1935, total sugar output was only 40,000 tonnes per year and approximately 25,000 tonnes of sugar was imported from Java, Indonesia. A new era began in 1937 when the first modern sugarmill with a milling capacity of 800 tonnes cane per day (tcpd) was launched. The initial objective was to develop an import substitution industry. Since then, sugar production has been increased as a consequence of growth, development and new technology. In 1960, Thailand became a net sugar exporter and the industry was found exporting white sugar for the first time in the following year. The exports during 1960-1974 were under 500,000 tonnes. The industry managed to export over one million tonnes for the first time in 1976.
Annual exports during 1976-1981 were slightly higher than one million tonnes except in 1980 when production and export surplus were badly hit by drought. However, due to bumper cane and sugar productions in the 1981/82 season, the 1982 exports leaped to almost two million tonnes.
Beginning with a 1.535 million tonnes level in 1983, sugar exports slid down to 1.206 million tonnes in 1984 but rebounced to 1.697 million tonnes in 1985 and further increased to be almost two million tonnes in the 1986-1988 period. A dramatic surge was found in 1989 when it soared to a new record of almost 3.0 million tonnes in 1989. However, sugar exports of the next two years (1990-1991) turned out to be disappointedly low because they fell to 2.382 million tonnes in 1990 and slightly moved up to 2.715 million tonnes in the following year. Again, the industry managed to strike a new export record in 1992. The new record was 3.519 million tonnes, an enormous stride of a 0.804 million tonnes or about 30 % increase from the previous years.
Sugar exports tumbled in 1993 to 2.297 million tonnes and slightly recovered in 1994 to 2.555 million tonnes. Export performances of the next two years were indeed spectacular. The export records have been successively broken in 1995 and 1996. First the new export record was registered in 1995 at 3.719 million tonnes. Then, the second new record was reported at 4.343 million tonnes in the following year. The 1997 export is forecast to be 4.146 million tonnes.
In sum, sugar exports during 1983-1996 have expanded from 1.5 million tonnes to 4.34 million tonnes, an average growth rate of 14.50% per year. As it is shown in Table 1, no one can deny that the industry has achieved remarkable export growth. However, that achievement is not all rosy because it goes by limps and leaps. Export falloffs were shown in 1984,1990 and 1993. Drastic export surges were found in 1989, 1992, 1995 and 1996. The recent uptrend (1994-1997) seems to be enthusiastic until a pessimistic forecast of the 1997/98 cane production was released in July by the Office of the Cane and Sugar Board. Up to now, the 1997/98 export is estimated to be not more than 3 million tonnes.
During 1983-1989, raw sugar occupied more than 85% of total exports. White sugar exports were marginal and accounted for less than 300,000 tonnes per year. During 1990-1992, the "white" volumes and relative shares have increased continuously, and it was more than one million tonnes in 1992, which were about 34 % of the total exports. Although white sugar exports in the following three years have declined to be less than one million tonnes, they rebounced in 1996 to be about 1.5 million tonnes and recaptured 34% of the total exports. It is forecast that the white sugar exports in 1997 would be about 1.3 million tonnes or 31.35 % of the total exports. All data are shown in Table 1. Traditionally, almost all of Thai sugar exports are raw sugar. The white sugar exports have recently emerged and likely to accelerate in the future. Unless production is undermined by unfavourable climate, white sugar exports would be increased in the future.
All sugar exports from Thailand, raw and white alike, are sold under the standard f.o.b. terms. This in effect allows flexibility in second hand trading of Thai origin sugar. It is quite usual that a cargo of Thai raw sugar is sold and resold several times prior to its final receivers. The same pattern is also found in white sugar but with a shorter string. The industry consequently has no direct control over its export destinations.
From Table 2, it shows that stable export outlets for raw sugar are Japan, Republic of Korea, Malaysia and China. Erratic outlets are the Philippines, Africa and the former USSR. Major outlets for white sugar export are Indonesia, Sri Lanka and the Middle East. Again, the Philippines, India, China and the former USSR are occasionally turned up as destinations of white sugar exports. Major markets for sugar exports, raw and white, are in the Asia region where Thailand is enjoying a geographical advantage. The Middle East is our main customer of white sugar during 1990-1995 but its relative market shares are likely to decline in the future.
The Asia region, which includes the Middle East, is one of the most important regions in the world sugar map. The net sugar trade position of the region during 1982/83-1996/97 is shown in Table 3. Two conclusions can be draw from this table. First, the Asia region is a net sugar importer both in raw and white sugar. The raw net import is generally larger than the whites. During 1994/95-1996/97, the regions raw net import is over 4 million tonnes per annum, while the white net import is declining to 3 million tonnes. Second, Thailand is fortunate to be situated at the proximity of this region and capable of reaping such advantage. The industry is enjoying its freight advantage over other sugar exporters.
Given the net import position of the region and the geographical advantage of Thailand, it is no wonder why almost all of the Thai sugar exports have been taken up by importers in the Asia region. It is also an indicator that all Thai exportable surplus are bound to be continuously bought up every year.
The determinants of export availability
Given the Asia regions net import demand and Thailands freight advantage, the Thai sugar export growth is basically determined by its export availability. Sugar is one of the essential items in Thailand and it is under strict regulations. The industry is allowed to export only its annual surplus of production over domestic requirement. The export availability thus depends on how fast output grows compare to consumptions. Two important determinants of export availability are sugar production and domestic consumption.
The Cane and Sugar Act (1984) stipulates that the Cane and Sugar Board determines annual export quota by deducting domestic consumption figure from total production. Actual annual exports, however, include all sugar shipments in the January-December period. Hence it is possible that the actual figure is slightly deviated from the export quota which is based on the crop year (October-September). Two conclusions can be made from our comparison of sugar production to export figures during 1982/83-1996/97 in Table 4. First, differences between the export quota and annual export figures are very small. Second, export fluctuations are closely related to production changes. Sugar production is hence the most important determinant of export availability during the 1982/83-1995/96 period.
The determinants of sugar production
In general, sugar production is determined by cane production and its sugar yield, while changes in cane output is attributable to cane acreage and its yield per hectare. We compute percentage changes of basic production variables between the 1981/82 and 1995/96 seasons in Table 5. In the cane sector, cane yields growth is only 11% while acreage and cane output grew about 71% and 91%, respectively. This means that during 1981/82-1995/96, acreage expansion accounted for 78% of cane output growth. When we compare growths in sugar production (125%) and sugar yield (18%) for the same period, cane production growth accounts for 73% of growth in sugar output and is the most important determinant. Such production growth can be ascribed to four important factors.
The 70/30 revenue sharing system
Prior to the 1982/83 season, cane prices were fixed by negotiations between growers and millers representatives under the state mediation. It was prolonged and difficult to reach agreement every year. Growers always claimed to be cheated by millers, while millers accused the government of taking sides. The most disputed variable was the expected proceed from exports. This lack of transparency had undermined confidence and trust between growers and millers. At times, this led to grower strike, delay of milling commencement and mill stoppage during the milling periods that cost the industry as a whole dearly.
Under the 70/30 revenue sharing system installed in the 1982/83 season, the Cane and Sugar Board divides annual sugar output into 3 quotas, namely quota A for domestic sales, quota B for exports under the industry long term contracts and quota C for exports under individual export contracts. The industry agreement stipulates the following steps for cane payment determination. First, the gross industry proceed is calculated by adding up all sugar proceeds from domestic sales (quota A ) and exports (quota B+quota C). Second, the net industry proceed is then derived by deducting all industrial expenses from the gross industry proceed. Third, the net industry proceed is allocated to growers and millers at the ratio of 70 to 30. Fourth, cane price equals a division of growers share by total cane tonnage. Fifth, in each season, the average price of the quota B export contracts is the standard export price in the calculation of export proceeds. Given annual sugar output and its allocation, the gross industry proceed is determined by prices of domestic sales and exports. Since price of domestic sales is rather predictable and industrial expenses are predetermined, the net industry proceed is basically depend on the standard export price.
Given the above-mentioned cane payment formula, it contributes three important stimuli to production growth. First, the determination of export proceeds is much more transparent because the growers are responsible for the pricing of the quota B contract. The export proceed is in effect under the growers decision. This installs more confidence and stability back to the industry. Second, the pricing term of the quota B contract is the seller executable order against the NY. No. 11 prices. The resulting export and cane prices are therefore truly reflecting the international sugar markets conditions. Third, the 70/30 system encourages competitions toward productivity upgrading among sugarmills. All variables are valued at the industry average levels. Hence, who ever manage to surpass the industry averages would be allowed to keep the margins as his windfall profits.
The cane prices
During 1982/83-1991/92, cane prices were determined by the formula under the 70/30 revenue sharing system. Prior to milling commencement of each season, a provisional cane price was calculated basing on estimated values of related variables and parameters. This is the price that sugarmills paid all cane deliveries during the milling period. In October, the cane price was recalculated by using actual values of relevant variables and parameters, i.e. domestic sales, export proceeds. The final cane price of the season was then officially announced by the Cane and Sugar Board and all sugarmills have to pay the difference to growers within 7 days.
Up to the 1991/92 season, cane price was determined and applicable to each and every tonne of cane regardless of its quality. A new system of cane payment based on cane quality was implemented in 1992 in order to stimulate productivity improvement. Cane quality is basically measured by its sugar content or c.c.s. unit. The standard cane price is referring to the price paid to cane with sugar content of 10 c.c.s. unit. Every additional c.c.s. unit will receive an extra payment at the rate of 6% of the standard price. Cane with sugar content less than 10 c.c.s. unit is penalized at the same rate as well. In practice, growers are always paid at minimum the standard cane price regardless of their cane quality. We list the provisional and final cane prices for the 1982/83-1996/97 seasons in Table 6 with the industry average c.c.s. data.
Cane production is strongly motivated by relatively profitable cane prices. The final cane price has been increased continuously from the 1990/91 season onwards. The 1992/93-1995/96 prices and the provisional price of the 1996/97 season are all exceeding the 550.00 Baht/tonne level. Hence, growers have received profitable returns since the 1992/93 season. This in effect leads to expansions in acreage. In addition, growers trust that scrambles among sugarmills for cane will continue in all regions. Consequently, growers would be offered an extra bonus of 50-100 Baht/tonne as it was done in the past. It should be noted that attractive cane price has also successfully converted land formerly cultivated other cash crops to canefield particularly those new acreage in the Northeastern region.
The capacity expansion and relocation of sugarmills
During 1982/83-1985/86 there were excess milling capacities in the Central and Eastern regions while milling periods in the Northeastern region were extraordinary long due to excess cane supplies. Several sugarmills in the Central and Eastern regions argued that existing policy of prohibiting new sugarmill and capacity expansion should be altered to realigned the imbalances. The government should allow sugarmill to relocate and expand capacity under certain criteria. The prerequisite is sugarmill must move out from the cane-deficited zone into the cane-surplus zone. Such a relocation would mitigate imbalances both in the deficited and suplus zones. At the same time, small sugarmills had jointly requested capacity expansions to lower their cost disadvantages. Eventually the government decided to allow sugarmill relocation and capacity expansion started in the 19988/89 season. Since then, several sugarmills have been granted the privileges.
In the 1988/89 season, the industrys total milling capacity was 400,466 tonne cane per day (tcpd), and the first relocated mill was approved in this season with a capacity increase of 4,800 tcpd. Up to the 1997/98 season, there are 16 sugarmills that have been granted relocation with total capacity increases of 84,235 tcpd. And the government has also granted 19 sugarmills to expand capacity of 143,225 tcpd. Altogether, the industrys milling capacity has been increased about 227,460 tcpd, and making the 1997/98 season registered capacity to be about 627,926 tcpd.
All relocated sugarmills listed in Table 7 share two common factors. First, they moved out from the Central or Eastern regions into the Northern or Northeastern regions. Second, they increased their milling capacities. The four relocated sugarmills during the 1995/96-1997/98 has increased its capacity either before or after the relocation. When a sugarmill decides to relocate its site with an option of capacity expansion, the most crucial criterion for its survival is an adequate cane delivery up to its new milling capacity. Cane can be drawn from existing supplies and newly cultivated canefields. However, competing for the formerly existing cane is a no-win war, and hence a more practical approach is to encourage new acreages. All sugarmills, new and old alike, must devote all efforts to securing growers commitments by offering favourable terms, mainly financial assistance with free or very low credit cost.
The Northern regions shares in cane and sugar productions started to climb up since the 1990/91 season and they managed to maintain at the level exceeding the 20 % mark throughout the 1990/91-1996/97 period. The Northeastern region has also registered higher shares of cane and sugar from the 1990/91 season onwards and they are continuously increased. The conclusion is the sugarmill relocation and capacity expansion policy has induced fast growing cane and sugar productions in the two regions.
Climate is one of the most important factors affecting cane and sugar productions in Thailand. This is due to the fact that less than 10 % of cane acreage are sufficiently irrigated and almost all of the cane has to depend on rain as the sole source of water supply. When there is bad climate, all cane just stands defencelessly in the field. The severe droughts in the 1989/90, 1992/93, 1993/94 and 1997/98 seasons have inflicted sharp setbacks in production growth. These disruptions are abundant evidences of the climates influences. At the same time, perfectly favourable climate helped producing record bumper crops in the 1994/95 and 1995/96 seasons. The climate in the 1994/95 season was very favourable to cane production. At the beginning of the planting season, drought was expected to prolong from the previous season. However, there was adequate rain in the second quarter of 1994 and since then the climate was very friendly to cane. The rains in the second and third quarters were perfect in terms of quantity and timing. The industry would not be able to establish its new production record this season without strong support from the favourable climate. In addition, normal climate played a significant role in uplifting cane and sugar productions in the 1995/96 season.
Given the existing irrigation facilities and its future developments, climate is going to play an important role in determining actual cane and sugar productions at least in the next ten years.
The domestic consumption
The Cane and Sugar Board is responsible for assigning the annual quota A sugar for domestic sales. There is a tendency to overestimate the requirement in order to avoid panics and speculative hoards. This is generally greeted with applause from the government agents, who always concern about sufficient supply for domestic needs, and growers who enjoy the higher cane price due to higher unit value of quota A compare to the exportable portions. The quota A sugar is sold under strict supervisions of the Sugar Committee to ensure adequate supply at all year round. The consumer welfare is further protected by a maximum price control for domestic sugar sales.
The annual domestic consumption of sugar in Thailand during 1982-1996 is shown in Table 10. Sugar consumption is determined by two important variables, namely population and national income. While a year-to-year comparison is showing a wide fluctuation of increase from more than 20% to as low as 0.3 %, the average growth rate is about 8.50 % per annum for the 1982-1996 period. This is a combined effect of growths in population (1-1.5 % per year) and general economic conditions (8-10 % per year). The average growth rate during 1988-1995 is more steady and higher (9.25 %). The additional growth is ascribed to strong demands from exporters who use sugar as raw materials. The industry started to grant price rebates to this buyer group in 1986. Since then the rebate programme has been expanding over the years.
It is anticipated that the recent currency woes in Thailand would eventually level off the country economic growth to a very un-tigerlike 2-4% a year in the next five years. The sluggish economic trend is attributable to high inflation caused by the Baht devaluation, a value added tax increase from 7% to 10%, an austere budget policy and tight credit conditions. This in turn will slowdown sugar consumption growth. Domestic sugar consumption is therefore expected to shudder to an average growth rate of 4% a year during 1998-2002. Given such a much lower growth rate and a 30% ratio of domestic consumption to total output, the impacts of domestic consumption in countering export availability is bound to be marginal. The most dominant factor in propelling export growth is the sugar production.
The Thai sugar industry has done extremely well in the past decade, thanks to high cane prices, more stability and confidence in the industry, successful government initiatives in mill relocation and capacity expansion policy and good weather conditions. The industry is presently recognized as one of the five largest world sugar exporters and indeed a very dynamic one. The question is whether its recent export growth is sustainable.
The 1998 export outlook
The 1998 export outlook is definitely going to be much bleaker than the previous years, because severe drought in 1997 has caused a sharp falloff in cane output and the 1997/98 sugar production is estimated to be as low as 4.60 million tonnes. Due to the on going economic slowdown, the 1998 domestic consumption is forecast to be 1.70 million tonnes. This finally brings the 1998 export availability to a dwindling 2.90 million tonnes.
The 2002 export outlook
The 2002 export outlook is projected under three basic assumptions. First, it is assumed that all sugar self-sufficiency campaigns in various Asia countries have yet to materialize. Second, domestic consumption grows at lower rates (3-5 %) due to sluggish economic conditions in Thailand. The last but most important assumption is that the climate is normal.
Judging from the industrys track records of surviving under stormy weathers during the past years, the industry outlook in 2002 is still encouraging. Although the sugar output and exports in 1997/98 are expected to be disappointedly low, the industry is looking forward to healthy recovery in the near future. By 2002, the cane production should be no less than 70 million tonnes and the sugar production should be about 7.70 million tonnes. Given an anticipated slowdown in domestic demand due to economic recession in the 1998-2000 period, the domestic consumption should be 2.10 million tonnes in 2002. The 2002 export thus is forecast to be 5.00-5.50 million tonnes.
Our optimistic projection is based on three major factors.
(a) The industrys total milling capacity is now about 628,000 tcpd, and presently is under-utilized. Given an average milling period of 120 days per season, the 70.00 million tonne cane should be processed with adequate capacity. Unless output is undermined by the abnormal climate, producing 7.7 million tonnes of sugar is viewed to be within reach for the next five years.
(b) The industrys export sector is well equipped to handle such tonnages of exportation both in terms of storage and loading facilities. Our preliminary survey shows that the industry now has 13 units of export terminal with 7 units in Bangkok, 2 units in Cholburi and 4 in Angthong. All together they have storage capacity of 770,000 tonnes for bulk sugar and 920,000 tonnes for bag sugar. They are capable of loading at the rates of 400-500 tonnes per hour for bulk and 100-150 tonnes per hour for bag sugar. Given normal shipment distribution of 500,000-600,000 tonnes per month, such an existing capacity should be sufficient in handling the 5.0-5.5 million tonne export.
(c) The Asia region is a net sugar importer of at least 6 million tonnes during the last four years. The world sugar demand expands at the annual rate of 1-2% during 1984/85-1994/95, while Asias consumption growth is more than 4% per year. Given rapid industrialisation in several Asian countries, the Asia region is bound to become the most fast growing sugar consumption region. Additional export availability from Thailand should be easily absorbed by Asias import demand.
When an export of 5.5 million tonnes by 2002 is projected, this is much easier to say than to achieve. The immediate task is to rebounce from its 1997/98 production slump which is not easy by all means. The industry then will have to make great strides to achieve the planned export by 2002. But much more needs to be done if it is aiming to surpass the 5.5 million tonne mark. The Thai sugar industry has to be a cost competitive producer by international standard. This is prerequisite because the industry must be able to effectively compete in the world market without any freight advantage. To achieve such an ambitious plan, the industry has to address and prescribe solutions to various problems related to cost ineffectiveness both in the canegrowing and sugarmilling sectors. The first and most crucial problem is how to uplift the cane yield per hectare which has been kept low by a host of factors. The next problem is that cane harvesting has to be mechanized with proper designs of machine and equipment. In addition, there is one more problems in the milling sector waiting to be genuinely tackled, that is the under-utilization of milling capacity. It generally worsens the scrambles among sugarmills for cane, and eventually costs the industry as a whole.
When the first modern sugarmill was established in 1937, the initial aim was to develop an import substitution industry. At present, Thailand is one of the five largest world sugar exporters. Export growth is mainly propelled by caneacreage expansions and climatic conditions via annual production changes. In spite of an expected sharp setback in export for 1998, the industrys export outlook is forecast to be promising during the next five years. Given normal climate, the industry should be able to make available about 5.0-5.5 million tonnes of exportable surplus in 2002. However, faster growth is extremely uphill. The industry has to overcome various hurdles in the cane and sugar sectors to achieve higher productivity and a cost competitive producer by international standard. Canecost improvement is vital in this ambitious mission. Again, climate is the most important and uncontrollable factor. To get through it all, the industry may not need a miracle, but a little luck would not hurt.