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FOREIGN COUNTRIES' POLICIES AND PROGRAMS
South American Crop Shortfall Creates Opportunity for U.S. Rice Exports to Brazil
With over 300,000 tons of new crop rough rice sales already on the books, Brazil is poised to become one of the largest markets for U.S. rice in 1998/99. The last time Brazil turned to the U.S. for significant imports was in 1994, when purchases of more than 280,000 tons (milled) made it the second largest destination for U.S. rice.
The current Brazilian buying spree began in early May as the outlook for South American rice crops plummeted, sending domestic prices soaring. Brazilian rice production in 1997/98 is estimated at 8.5 million tons (rough), a one million ton decline from the previous year, and the lowest level since 1989/90. The crop shortfall is due to a decrease in estimated area as well as reductions in yield due to adverse weather attributed to El Nino. The crop in the Rio Grande do Sul area, which normally accounts for about 50 percent of Brazil’s rice production, suffered from heavy rains, below normal temperatures, and lack of sunlight. Meanwhile, drought reduced production in the Northeast. Although higher than normal rains in areas of the Center-West have increased estimated dryland yields, the decline in overall production means additional imports will be necessary. Imports are forecast to reach 1.2 million tons in calendar year 1998, up from 850,000 tons in 1997.
Typically one of the largest rice importers in the world, Brazil normally sources almost exclusively from Argentina and Uruguay. However, these two countries have also experienced crop shortfalls. Combined 1997/98 production in Uruguay and Argentina is estimated down nearly half a million tons (rough), or about 20 percent, from the 1996/97 level. As a result, export availability in both countries is expected to decline. With limited quantities of rice available for export from South America, and with major Asian exporters Thailand and Vietnam focused on filling demand from Indonesia and the Philippines, Brazil is looking to the United States to meet the shortfall.
The expected increase in import requirements and the need to look outside of the Mercosul trade group have prompted the Government of Brazil (GOB) to take a number of policy actions to ease import restrictions. On June 10, brown and milled rice were removed from Brazil’s exception list to the Mercosul common external tariff. This action results in a reduction in the tariff on these products from the 1998 rate of 21 percent to the common tariff rates of 13 percent for brown rice, and to 15 percent for milled rice from non-Mercosul members.
The GOB has also removed restrictions on short-term import financing until the end of August for product cleared in Brazil by November 30, 1998. The temporary removal of these restrictions opens a potential window of opportunity for the use of the GSM credit program. However, use of GSM credit will likely depend on a number of factors, including stability of the Brazilian currency and attractiveness of bank terms. Further, if prices in Brazil do not stay significantly above U.S. prices, high shipping and handling costs could make the cost of imports prohibitive.
Brazil, Argentina, and Uruguay are expected to respond to this year’s crop shortfalls and subsequent high prices with increased production in 1998/99. The initial projection for Brazilian production is 9.8 million tons (rough), a 1.3 million ton increase over 1997/98. Imports in 1999 are projected at 1 million tons, a 200,000 ton decline from the 1998 level. Argentina and Uruguay are expected to increase production by a total of nearly 500,000 tons, which is expected to translate into over 200,000 tons in additional exports in 1999, virtually all of which can be expected to move into Brazil.
Based on reports by the Office of Agricultural Affairs, American Embassy, Brasilia. For further information, please contact Linda Kotschwar at 202-690-1147.
Despite Crisis, Thailand’s Corn and Wheat Imports Hold Steady
After a decade as one of the "Asian Tiger" economies, Thailand experienced a series of financial and economic crises in 1997 which resulted in its phenomenal growth coming to a halt and its currency being devalued by over 40 percent. Gross Domestic Product (GDP) growth in 1997 was stagnant while 1998 is likely to see a contraction. At this time, forecasts for 1999 are for modest growth as there are signs that some sort of recovery could be underway. Swine numbers are down by some 30%, but producer prices have recovered to the point where profitability has been restored. Slack domestic poultry demand has been offset by strong export sales.
Although potential and pent-up feed grain demand remains strong, stable exchange rates are needed before mills will begin to rebuild production. This could take several months. Even agribusiness giants such as Charoen Pokphand have found themselves restructuring in an entirely new economic environment. Thailand’s recovery is likely to be a long, slow process.
Summary Statistics (1996)
Agricultural Imports (Million U.S. $) $3,950
Agricultural Imports As a Percent of Total Imports . . . . . . 5.0%
U.S. Market Share of Agricultural Imports . . . . . . . . .19.7%
Consumer Ready Food Product Imports (Million US$) . . . . . . $1,236
Ag. Trade Balance with the U.S. (Million U.S.$). . . . . . . . +$920
Total Population (Million) . . . . . . . . . . . . . . . . . . . 59.8
Population Growth (Percent). . . . . . . . . . . . . . . . . . . . 1.3%
Urban Population (Million) . . . . . . . . . . . . . . . . . . . 11.0
Urban Population Growth (Percent). . . . . . . . . . . . . . . . . 1.9%
Major Metropolitan Areas (Number). . . . . . . . . . . . . . . . 11
Female Population Employed (Percent) . . . . . . . . . . . . . . 44.%
Per Capita Gross Domestic Product (U.S. $) . . . . . . . . . $3,063
Per Capita Food Expenditures (U.S. $). . . . . . . . . . . . $1,236
Exchange rate (08 July 1998): $1.00 = THB 41.30 (baht)
Macroeconomic Situation
After a generation of intensive development, Thailand appeared poised to join the ranks of the newly industrialized countries. Decades of stable economic policies based on a competitive, export-oriented, and free-market philosophy paid off as Thailand experienced high annual growth rates, averaging more than 8 percent, from the mid-1980's through 1996.
This growth, and the optimism for continued expansion in the near term, came to a dramatic halt in 1997, following a 2-year increase in the current account deficit and years of excessive property development. The bubble finally burst in mid-1997 when the weaknesses in Thailand's financial system, exacerbated by a large number of nonperforming property development loans, were revealed. The government closure of a number of financial firms at mid-year attracted increasing international pressure on the baht which had been closely linked to the U.S. dollar for a number of years. The unpegging of the baht in early July promptly resulted in a 40 percent devaluation and the resultant property and finance sector crisis spread into all sectors of the economy. The Thai government sought international relief, and in August, an IMF-sponsored rescue package was announced.
Thailand has not faced an economic crisis this severe in recent memory. The slowdown and its causes have raised questions about Thailand's economic policies and financial system and stimulated a much-needed debate over restructuring the economy. Its rapid economic growth over the past decade has had some drawbacks as infrastructure bottlenecks remain a problem and environmental degradation has worsened considerably in recent years. For example, metropolitan Bangkok's public works (communications, ports, electricity grid, roads, and mass transit) have been greatly overtaxed.
In addition, the level of education of the workforce will have to be raised to maintain Thailand's development pace and competitiveness vis-a-vis neighboring countries with lower wage rates. Although half of the Thai labor force remains engaged in agriculture, the manufacturing, construction, trading, and services sectors now account for the bulk of economic output.
The Agricultural Sector
Thailand's strong economic performance the past few years had a positive impact on the agricultural sector by increasing consumer demand for a wider variety of food products. The burgeoning food processing and manufacturing sector, particularly those firms producing for the export market, has also been a contributing factor to growing demand for agricultural commodities. Thailand's agricultural exports, notably fisheries products, rice, sugar, rubber, and poultry meat provide a significant boost to the overall economy. Thailand is the world’s largest rice exporter.
However, the current economic and currency crisis presents a serious challenge to the country’s agricultural sector because of high prices for imported inputs such as fertilizer, chemicals, and feed ingredients. Domestic consumer demand, an important part of the agricultural economy, is also depressed. Furthermore, the crisis may delay needed improvements in the productivity of the agricultural sector. Advances in productivity have been stimulated by a shortage of farm workers, but this may be thwarted as surplus urban workers move back to the countryside.
On the positive side, the baht devaluation has boosted Thailand's export competitiveness, especially for commodities such as rice and sugar that have little or no import component. This advantage has been tempered by the currency devaluation that has also taken place in competitor countries within the region and, to a lesser extent, by the increased cost of imported inputs.
Ports and Infrastructure: The need to improve infrastructure in Thailand has been recognized by the government and seaport development and expansion projects are planned. Region wide, there are ideas for developing a Southeast Asian grain port and merchandising center. This would help with quick turnaround times on orders as well as risk management, possibly via a futures market. However, plans for a futures market in Thailand, which would include corn, rice, and sugar, have been put off until next year because of the Government’s tight budget. Other major infrastructure projects are also on hold.
Major ports include Bangkok; Sattahip, Si Racha and Si Chang on the east side of the Bight of Bangkok; and Pattani and Phuket on the Malay Peninsula. Most grain is currently landed at Si Chang Island and lightered to Bangkok, a distance of some 60 to 80 km. Cape-size(80,000 deadweight tons) and Panamax vessels call at Si Chang island with its 40-foot draft. Despite the distance, the port remains competitive because port charges there are very low at $0.50 to 0.60 per ton, about 20-50% less than other ports.
Commodity Highlights
Corn and wheat are the principal grains imported. Both are handled in direct, private sector buyer-seller transactions.
Corn
Major suppliers of corn include China, Argentina, and this year, Indonesia. Although the United States was the leading source of corn in 2 of the last 4 years, no U.S. corn has been imported since 1995/96 (Oct/Sep). This is due in part to Thai consumers' preference for yellow chicken meat which necessitates high-carotene corn (or feed additives) such as that supplied by Argentina. In addition, U.S. corn is considered expensive; Thai buyers have been particularly price-sensitive since the onset of economic difficulties in 1997.
About 70 feed mills, with a total annual processing capacity of almost 7 million tons of commercial feed, buy high-quality corn. Compound feed prices are controlled at the farm level; price increases can be requested by the Thai Feed Mills Association and take one to two months to approve by the Department of Internal Trade, Ministry of Commerce.
In an effort to promote the use of high-yielding corn hybrids, the Ministry of Agriculture and co-operatives have offered seed to farmers at a price of THB 8 per kg for seed, a subsidy of about 90 percent. However, the budget is low and typically covers less than 10 percent of the growing area. The Ministry plans to reduce the subsidy to about 50 percent by 1999/2000.
The Thai government also provides some marketing support at harvest time, offers credit facilities, and administers the corn import quota.
Quota and Imports: Thailand announced a 300,000 ton corn import quota at zero duty for this year. Unfortunately, the window for arrival of imports is 01 March through 15 July 1998 and the official allocation of the quota came just as it was to be opened. Current demand is strong but the timing of the delivery requirements--as well as price and quality factors--favor Argentina over the United States. The current economic environment could be opportune for the Thai government to consider improving corn market access because that could enhance Thailand's own export competitiveness in poultry (corn as an input) by keeping input costs reasonable. In addition, this would help to keep a lid on domestic inflation.
Recently, China and other non-WTO suppliers have been granted access to the zero-tariff quota and there are unconfirmed reports that a new, unlimited quota will be open until December 31, 1998. The Thai feed industry had requested an increase in the quota and an extension of the window, given expected delays in the local corn harvest. (Under WTO bindings, the "official" corn Tariff Rate Quantity [TRQ] will increase to just 54,700 MT by the year 2004.)
Until the beginning of this decade, Thailand was an important exporter of corn. But with the rapid increase in demand from the flourishing domestic poultry and pork sectors and flat production levels, imports have been necessary to cover consumption requirements. During MY 1998/99 (July/June), Thailand is expected to import 250,000 tons.
Quotas are allocated based on historical usage with typically over 50 percent going to the Animal Feed Industry Association. This year, importers were required to notify the Ministry of Commerce of the amount that they expected to import. If its prospective allotment is underused, then the importer will have its quota reduced the following year by a like amount. Other importers may use the additional unfilled quota this year, subject to the same delivery window.
Increases in the import quota are possible if corn prices at Bangkok are excessively high. There are no producer support prices of domestic corn in 1998, but corn target prices of at least THB 4.80 per kg (approximately USD 120 per ton) are a precondition for the Government to increase the import quota. The target price of THB 4.80 per kg (basis Bangkok) was last year's target price and would not necessarily be the same from year to year. The determination of the quota assumes 4.0 million tons of domestic production, a level that has not been reached in over nine years.
Authority over TRQ’s is governed by the Food Policy Committee, a 6-member body chaired by the Minister of Commerce. The committee membership is comprised of the ministries of Commerce, Agriculture, Finance, and Industry.
Tariffs: The TRQ duty for corn is normally 20 percent. However, Thailand has a puzzling tariff system for nonquota corn imports: WTO members are subject to a 77.8 percent import tariff (the final WTO commitment rate is 73%), plus an additional surcharge of THB 180 per ton (about USD 4.50). Non-WTO countries are subject to a 6 percent tariff rate plus THB 1,000 per ton, or about 27 percent at present Bangkok prices(THB 6,000 for corn). This excludes two most-favored nations, Laos and Cambodia, which are allowed up to 100,000 tons of the 300,000 ton quota.
Wheat
Millers have sought U.S. wheat for reasons of protein specifications and cleanliness. Northern Spring and Dark Northern Spring wheats account for about 50-60 percent of total U.S. wheat into Thailand while the balance is Soft White Wheat and Hard Red Winter wheat. The United States and Australia each normally supply about 35-40 percent of Thailand’s wheat imports; hard and soft wheats are supplied by both the United States and Canada. Despite the sharp growth in demand for soft noodle wheats, the Australian Wheat Board has been aggressively marketing Australian Prime Hard as a substitute for high-protein U.S. wheats. For the ten months ending April 1998, the United States exported 212,000 tons of wheat to Thailand. During MY 1998/99 (July/June), Thailand is expected to import 800,000 tons of wheat from all sources.
Thailand's eight flour mills are currently operating at about 50-60 percent of total capacity of about 3,900 tons per day. Because of this excess capacity, millers have no plans to build new plants or to expand in the near future.
The Ministry of Agriculture continues to promote wheat production in northern Thailand through distribution of seed and some fertilizer to farmers but production remains negligible.
Tariffs: The import duty on wheat remains unchanged at 1.00 baht per kg (about USD 25 or 17% per ton). The government has granted an import tax rebate to mills exporting wheat by-products (bran pellets) during the period 01 March to 31 August 1998. The rebate varies but is presently THB 430.95 per ton (about USD 10.50). The tariff on wheat flour is THB 3.13 per kg (about USD 75 per ton).
Export Credit Programs Available to Thailand
Thailand has not had a GSM program for many years but a GSM-102 program for FY 98 was approved in the amount of $300 million covering all grains and many other commodities. As of early July, some $95 million had been used, primarily for oilseeds. In late June, a $90 million Southeast Asia Region GSM-102 program was announced covering all grains and many other commodities on an f.o.b. or c&f basis. Thailand is part of this new initiative, which is for both FY 98 and FY 99.
Thailand is also eligible to use the $50 million Southeast Asia Region Supplier Credit Guarantee Program for most grains and pet food. So far, usage has been less than $1 million dollars. The region also has available $40 million for the Facility Guarantee Program; no funds have so far been used.
There are no restrictions on the use of GSM credits. However, depending on the length and depth of the financial crisis, the Bank of Thailand may initiate some controls on foreign debt given the low level of foreign exchange reserves.
U.S. export credit offerings are welcome and timely, especially for oilseeds and protein meals. However, to the degree that the program is new for grains, then the program may not be used by those who are averse to trying new management tools during difficult economic times. Importers complain that banks do not pass along benefits of the program although it has been reported that under GSM, some companies are able to borrow at a savings of 2.5%. The Australian Wheat Board (AWB) is said to be offering more generous credit terms than either the United States or Canada. Multinational commodity houses have apparently been offering some credit to Thai feed mills (for soymeal and possibly corn) for products of Argentine origin.
Risk management strategies such as hedging (both commodity and foreign exchange) appear to be greatly underutilized in Thailand and not well understood.
As Thailand's agricultural sector becomes more integrated with world agricultural markets, it is increasingly influenced by regional and international forces. The sector is already feeling some impact from Uruguay Round WTO commitments and requirements. Indeed, Thailand has been an advocate for liberalized trading rules for agricultural and food products within Asia. However, in the near term, it is likely to be preoccupied with economic recovery.
Based on reports from the Office of Agricultural Affairs, American Embassy, Bangkok; and information from the writer’s trip to Thailand in February 1998. For further information, please contact Rick O’Meara at (202) 720-4933.
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