Erratic Weather Driving Up Crop Prices Early in 2012 (Business Brief No. 3262 Full Ed.)

Global food prices rose during the first two months of 2012, wherein the UN FAO's Food Price Index also climbed to 215.3 points in February, against the 210.8 points recorded in December 2011. The increase was attributable to atypical weather patterns across the globe, e.g., severe drought in South America amid extreme cold weather in Europe, adversely affecting farm produce, including soybeans, sugarcane and other crops. The FAO had previously projected that global food prices would trend lower after 2011.

KResearch is of the view that while rising food prices will benefit Thai farmers and exporters, as they will be able to sell their farm produce at higher profit; this is especially true of refined sugar, since the majority of our sugar is geared toward export. However, higher farm produce prices represent a significant risk to the Thai food industry that is heavily dependent on soybean imports. In addition, animal feed producers and those importing wheat flour will likely be affected.

Regarding the prices of other farm produce, e.g., palm oil, if global prices outstrip domestic prices, this would then induce processors to increase exports, thus affecting domestic inventories needed for local consumption. To ensure sufficient domestic supplies, relevant public agencies should place greater importance on inventory management and inspections. In addition, they should ensure that palm oil prices are maintained at appropriate levels consistent with real production costs and global prices. This would narrow the spread between domestic and global palm oil prices, thus discouraging producers from exporting more palm oil.

Amid rising prices for bottled palm oil used for cooking, if the government wants to curb prices and help relief financial burden on consumers, one viable solution would be to import semi-refined palm oil and sell it to local processors, so that they can retail edible palm oil at prices set by the government. The government, however, might have to shoulder the costs resulting from price differential. It is understood that this would not affect their coffers within the near term unless high global palm oil prices persist.

Meanwhile, reports of falling crop output as a result of an acute drought in South America that may only be short-term as it is expected that new harvests will enter the market in 2H12. Nevertheless, close attention should be paid to weather conditions, plus rising fuel, animal feed and pesticide costs that may push up farm produce prices.