Business strategies of Thai rice exporters
By Jon Fernquest |
Today's Bangkok Post has an insightful article on the way that rice exporters operate and survive in highly competitive commodity markets with volatile prices.
Kamolkij Group is one of Thailand's leading rice exporters:
"Kamolkij was established in Bangkok in 1912 to operate a river transport and commodity trading business. The group's businesses now include rice exports, vegetable oils, animal feed products and cattle and fruit farming, generating sales revenue of about six billion baht a year.With annual rice sales exceeding 400,000 tonnes, or more than US$160 million in value, the group is considered one of the world's biggest parboiled-rice exporters."
Recently the rice export business in Thailand has become more difficult, facing low margins, growing competition and market volatility.
Volatility and unpredictability of global rice prices seems to be the biggest problem.
At least in theory, rice exporters could protect themselves against volatility by hedging with futures or options.
(Apparently, this is not yet possible in Thailand, perhaps because trading on local commodity exchanges with forward contracts is just too thin to make it cost effective and worthwhile. The government rice mortgage scheme in the past has distorted market prices, offering farmers well above market prices, so this has probably added an additional unpredictable complexity to the rice export business.)
"Korbsook Iamsuri, the CEO of Kamolkij Group, said rice prices had been volatile for the past few years and the tight supply for exports had further exacerbated the situation.The domestic price of a 100- kilogramme sack of white rice rose 16% to 1,400 baht this week, from 1,170 baht quoted early in January. The price of Hom Mali fragrant rice also shot up by 200 baht from last month to 2,300 baht.
Though soaring prices have benefited farmers, the rapid jump could hurt exporters, she said.
The price swing has deterred exporters from making long forward sales, limiting themselves to accepting orders of only one month in advance to avoid possible losses. Meanwhile, the soaring prices not only leave them with smaller margins but also could cause them to default on their orders and eventually damage the country's reputation as the world's largest rice exporter, she said."
Market pressures have driven Thai rice exporters to search for new value-added products to differentiate their offerings from the competition and stake out new less competitive markets.
The cooking oil made of rice-bran that one commonly finds on the shelves of retailers has become a commodity product.
The competition that producers face in commodity markets like this is sometimes so stiff that producers decide to exit from the market.
Kamolkij Group, although not completely withdrawing from the market, has chosen to withdraw from some distribution channels:
It [the Kamolkij Group] would gradually remove its Chim rice-bran oil brand from the shelves of some discount stores due to fierce competition in the cooking-oil industry and tough requirements by the retailers."The costs of displaying products at discount stores are high. They ask for entry or listing fees and pass marketing expenses on to suppliers," he said."Given such a tiny volume of rice-bran oil, it is not worthwhile to distribute it through this channel."
The other reason is cost-effectiveness, since paddy provides a relatively small amount of oil.
"To produce just 500cc of rice-bran oil, we need about half a rai of rice. To put it in perspective, 800 kilogrammes of milled paddy would leave 40 kilos of bran, from which only three kilos of refined rice oil can be made."
...Kamolkij's oil products, including rice bran, soybean, sunflower and corn oil, account for 4-5% of the seven-billion-baht local cooking-oil market.
Thailand's total cooking-oil output for retail sales stands at 200,000 tonnes a year, with palm oil accounting for 64%, soybean oil 30%, rice-bran oil 4% and sunflower and corn oil the remainder.
One strategy for cooking oil producers is to start producing higher grade cooking oil. Foreign companies with overseas marketing experience have even been enlisted to help:
"But its [Kamolkij Group] executives are well aware that relying largely on raw commodities would not get them anywhere in the current market situation and have decided to make and ship more higher-value and value-added products made from rice, starting with rice bran oil.According to Varapong Supachok, chief operating officer of Kamolkij Co, the company will shift its focus to producing and supplying premium-grade rice bran oil.
...As a result, Kamolkij has shifted its focus to higher-grade oil instead. It started making premium cooking oil seven years ago and repositioned its Alfa One brand in 2004, appointing New Zealand's Old Fashion Foods Inc to market the oil in the local market and overseas.
Today, about 800 tonnes a month of premium-grade oil are shipped to many countries including Australia, Britain, Japan, South Korea, Canada, Belgium, Singapore and Hong Kong under the Alfa One, Rizi, and Natural Harvest brands.
Mr Varapong said the strong market growth had prompted the company to spend 400 million baht to add more refineries and extraction plants this year. The investment is part of the 1.2-billion-baht expansion plan it has been carrying out since 2003. So far, about 60% of the total outlay has been used."
Another strategy is to craft products to exploit newly emerging niche markets:
"The plans also call for the production of healthy food products for niche markets such as packets of rice mixed with rice bran oil and lecithin extract from rice oil, which are sold primarily to food processors.With these new projects, he hopes earnings from rice-bran oil and other processed products would rise from 25% of six billion baht in total revenue."
(Source: Bangkok Post, business section, Walailak Keeratipipatpong, page B1, 19-02-08, temp-link)
Vocabulary:
commodity - a homogeneous product (every unit is the same no matter which company produces it), bought in bulk, usually a raw material such as oil, cotton, cocoa, silver (See The Economist glossary on commodity and commoditisation)
raw commodities - same as "coomodity" above, but stressing that the commodity has not yet been used in a product that is not a commodity
volatile prices - the amount by which the price of a good or asset swings up and down, a measure of risk in financial and commodity markets (See The Economist Glossary on volatility)
Kamolkij Group - established in Bangkok in 1912 to operate a river transport and commodity trading business. The group's businesses now include rice exports, vegetable oils, animal feed products and cattle and fruit farming, generating sales revenue of about six billion baht a year (See website)
animal feed - food fed to farm animals such as cows or pigs
parboiled - boiled until partially cooked
low margins - low profits
in theory - according to economic theory (but probably not in real world practice)
hedging - protecting oneself from unexpected price changes by purchasing "derivatives" such as futures or options contracts
thin trading in a market - very few buy and sell transactions in a market
further exacerbated the situation - made the situation worse
X deterred Y from doing Z - X does not want to do Y anymore because of Z
a short sale - selling something that you don't have, hoping that the price will fall and you can buy the asset at a lower price later to fulfill your obligation and make a profit.
a long sale - selling something you do have
sold X forward - the seller agrees to provide X at a fixed price on a future date
long forward sales of X - the seller agrees to provide X at a fixed price on a future date, since the seller already has X or is growing X if it is an agricultural commodity, the seller will effectively lose money if the price
smaller margins - smaller profits
default on their orders - decide not to send the product that customers have ordered in advance
a reputation - the opinion that people have about how good something is
damage the country's reputation - make people think that the country isn't as good (at rice exporting) as it used to be
value-added - the value added to a product by one stage in processing
differentiate a product - make a product different from the competition to carve out a new market and increase sales
stake out - claiming new teritory as your own
bran - the hard outer layer of grain, can be milled from any cereal grain, including rice, wheat, maize, oats, and millet, rich in dietary fiber, contains starch, protein, vitamins, and dietary minerals (See Wikipedia)
rice bran oil - cooking oil extracted from rice, has a mild flavor, making it suitable for high-temperature cooking methods such as stir frying and deep frying, popular as a cooking oil in several Asian countries, including Japan and China (See Wikipedia and rice bran as a biofuel)
withdrawing - taking away from, taking out of (here no longer selling a product in a superstore)
distribution channels - the way that a product gets from the factory to the consumer, usually through a chain of intermediaries, middlemen, or wholesalers (See Wikipedia on distribution)
entry or listing fees - money paid to a large superstore to get a product on the shelves
pass marketing expenses on to suppliers - suppliers pay for marketing, not the stores themselves that you would normally expect
worthwhile - worth the time, money, or effort
cost-effectiveness - given the costs of doing it, it is worth doing
to put it in perspective - to see something as less extreme, by comparing it with other things
enlisted to help - persuade someone to help or support you in an activity
premium-grade - higher quality than normal
brand positioning - positioning of a product in a customer's mind, what customers believe about a product: what it is, what it can do, etc...
reposition a brand - change what people think and believe about the brand (for example after upgrading the quality of a product the company wants people to think "higher quality" when they see the brand)
prompted X to Y - caused or motivated person to do Y
refineries - factories that turn raw materials into a finished product that can be sold in stores (for example, a sugar refinery or an oil refinery)
extraction of X from Y - getting X out of Y
extraction plants - a factory for getting the oil out of rice
outlay - the money needed to get a new project or business started
niche markets - small specialised markets for customers with special needs
