Foreign competition in the Thai rice market?
By Jon Fernquest[Introduction | Vocabulary | Article | Reading Questions | Answers]
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The rice export market in Thailand is open to foreign competition. Rice farming and milling are not open.
Thai rice exporters are feeling competitive pressures and they feel that this is coming from foreign firms entering the market.
Some say that large foreign investment in the market threatens to drive them out of the market.
The Thai rice industry is also not able to enforce standards on their premier product Thai Hom Mali rice.
Some local and Chinese traders substitute the cheaper and lower quality Pathum Thani variety for Hom Mali, even using rice sacks that imitate the sacks Thai firms use for Hom Mali.
Today's article really addresses two problems, not just one. Some Thai rice exporters are worried about small fly-by-night rice exporters ruining the reputation of Hom Mali. Others are worried that foreign investment from a variety of different countries is so great in the rice export market that it will drive out Thai companies.
Straight protectionist measures, restricting foreign participation in Thai rice markets, might cause a backlash though, as Thailand invests in the very countries that might be causing competitive pressures in the Thai rice export market.
Enforcing standards and issuing certificates of authenticity might provide greater transparency and protect the reputation of Thailand's rice export market. The already existing Thai Rice Exporters Association is probably the most appropriate organisation to do this.
This article is sure to stimulate debate. Rice is an important part of Thai culture and thus an emotional issue. Economic analysis, though, requires logic and careful reading.
The main issue is how open Thai markets should be. Don't forget that openness may be dictated by WTO regulations and FTA terms and that reciprocity is essential in trade. If Thai markets are closed to foreign firms, then Foreign markets will likely be closed to Thai firms.
Many people believe that Thailand's sufficiency economy is compatible with international trade and globalisation, exactly how much is up to the Thai people to decide.
Reading Questions
Here are some questions to guide your reading (See answers at end):1. What has attracted foreign firms to set up operations in Thailand's rice market?
2. What countries do the firms that set up export operations come from?
3. What other agricultural export markets do foreign firms operate in?
4. What parts of the rice production and marketing are foreign firms allowed to particpate in?
5. Are foreign firms using Thai nominees to hold more than 49% ownership in Thai rice export firms?
6. What worries Thai firms about foreign investment money in the Thai rice export market?
7. How have some companies hurt the Hom Mali brand of rice?
8. What constraints makes Hom Mali production less than Pathum Thani and thus more expensive?
9. Which strain of rice accounts for more of the rice export market, Hom Mali or Pathum Thani?
10. Which country's traders are "misleading customers" according to the article?
11. What measures have been suggested for combatting dishonest traders?
Bangkok Post Article: November 20, 2006
Crowded market threatens Hom Mali
Foreign competitors accused of operating under potentially illegal nominee structuresWALAILAK KEERATIPIPATPONG and JUNJIRA PHUENGVIRIYA
The sweet scent of Thai Hom Mali, the country's trademark jasmine fragrant rice, has proved strong enough to lure a number of foreign rice-trading companies to set up operations in Thailand.
Global giants like Padiberas Nasional Berhad (Bernas) of Malaysia and Herba, a unit of Spanish group Ebro Puleva, have already set up shop, and traders from China, India, Singapore, Hong Kong and the United States have also established offices here.
Their arrival has prompted some local players to claim they are operating under potentially illegal nominee structures, and may be taking business away from domestic exporters.
"I've known for a long time that there were nominees in farm export firms, especially for fruit and vegetables, and most of them are companies from Taiwan and Malaysia," said Ananta Dalodom, a former Surat Thani senator and chief of the Agriculture Department. "Some have caused a bad reputation for Thai produce."
The value of Thailand's commodity exports was large and attracted foreign traders, he added.
Thai laws banned foreigners from rice farming and milling, but allowed them a 49% stake in export operations, said Yanyong Phuangrach, deputy permanent secretary of the Commerce Ministry.
A source in the rice industry said that nobody was sure how many of these foreign firms had Thais counterparts that were acting as nominees.
"What worries me is their huge amount of funds, which makes it easy for them to control the market," said the source, speaking on condition of anonymity.
But local exporters seemed less worried about the problem of nominees.
"As long as they have followed the law and join the Rice Exporters Association, they are eligible to export," said Korbsook Iamsuri, the association's secretary-general.
She said foreign rice-trading firms were putting more pressure on the already- crowded Hom Mali rice market. Thailand's renowned commodity this year sold for more than US$500 per tonne, or twice as much as white rice.
The market is now crowded with more than 300 players, only 180 of which are members of the association.
Charoen Laothamatas, president of Uthai Produce Co, said a number of these players were small traders who sold the grain in small amounts, leading to a price war and substandard rice delivery.
Some companies have hurt the Hom Mali brand by instead shipping Pathum Thani rice, a cheaper strain of jasmine fragrant rice of lower quality.
Generally, the Pathum Thani rice strain is grown in the central area with several crops per year. But Thai Hom Mali rice needs the softer soil of the Northeast and produces only one crop per year. Consequently, the price of Pathum Thani fragrant rice is about 2,500 baht/tonne lower than Hom Mali rice, and about $100/tonne less in the export market.
Mr Charoen said Chinese traders had bought a lot Pathum rice and authorities had received reports of them trying to pass off the inferior grain as Hom Mali.
Rerngchai Hongjamrassilp, assistant vice-president of CP Intertrade Co, which is a leading rice exporter to China, said the practice had gone on for years.
Besides misleading customers with different rice, he said, some firms had copied the rice bags of Thai companies.
"They put lower-grade rice in the bag that says Hom Mali rice, bearing brands of Thai companies," Mr Rerngchai told millers and rice traders at a seminar in Ubon Ratchatani last week.
About 200,000 to 300,000 tonnes of Pathum rice are sold to China each year, but local traders neglect to verify the authenticity of the strain to customers.
To protect Thai Hom Mali rice, Mr Charoen suggested the government impose measures to screen for genuine exporters. These could include making them carry working stock, have higher registered capital and forcing them to join the Rice Exporters Association.
"The requirements give them more responsibility and prevent traders who just do business with empty hands," said Mr Charoen, who is also vice-president of the association.
He said the government should lower prices of Pathum rice under its price intervention scheme to make the difference between it and Hom Mali rice greater, which would deter farmers from growing the strain. Last year, the pledging price for Pathum fragrant rice was 7,500 baht a tonne, compared with 10,000 baht for Hom Mali rice.
"If Pathum rice falls to 6,000 baht a tonne, farmers in the central area will go back to planting white rice," he said.
Vocabulary
imitate - copy (try to make something similar)
rice milling - creating a finished product sold in stores from raw rice taken from the fields
fly-by-night - businesses that appear and disappear rapidly (often a temporary company set up to deceive customers, with little capital, buildings, or employees, the company can close easily if there is a problem and the operators can disappear; See Wikipedia on fly-by-night)
backlash - a suddden and strong negative reaction against something new
authenticity - is really and truly what it claims to be
transparency - (See Wikipedia on transparency and radical transparency)
is imperative - is very important
x is compatible with y - x and y can exist at the same time (they both have objectives that can be achieved at the same time)
Thai Hom Mali, jasmine fragrant rice - a long-grain variety of rice that has a nutty aroma and subtle flavor (See Wikipedia on Jasmine rice)
nominee - named but not actual owner (a Thai national who volunteers their name for a foreign owner, so it appears that the foreign owner owns less of the business than it actually does)
nominee structures - different ways of dividing ownership between Thai national and foreign owners to get around foreign ownership limits
trademark - a legally protected name or a symbol that a company uses for its products
to lure - to attract or trick into doing something
Padiberas Nasional Berhad (Bernas) - in Malaysia this private rice industry monopoly came into being when the government organisation overseeing the rice industry was privatised in 1996
Responsibilities include "conserving, maintaining and managing the National Paddy/Rice Stockpile, representing the government on the management and disbursement of subsidies to paddy farmers, managing the Bumiputera Rice Miller scheme, purchasing paddy from farmers at guaranteed minimum price and acting as the buyer of last resort. In return, BERNAS was given the responsibility to be the sole importer of rice into Malaysia till 2010, with the option for renewal for another five years, subject to approval."
(See website)
Ebro Puleva - "Ebro Puleva is the leading Group in the Spanish food sector, by turnover, profits, market capitalisation and international presence. Ebro Puleva is world leader in the rice sector, No. 2 pasta manufacturer, leading Spanish sugar group and leads the marketing of value-added dairy products in Spain." (See website)
counterparts - people who do the same thing but in a different place (same function but different place)
speaking on condition of anonymity - the newspaper promised that the person's name would not be used, so the person provided the reporter with information
Rice Exporters Association - Thailand's rice export trade association (See website)
eligible to - meets the requirements or qualificationes that allows them to do (for example they are above hte minimum age)
a price war - when companies compete to attract customers by lowering their price lower than their competitors, prices fall as they compete
a rice strain - a type or breed of rice
CP Intertrade - the subsidiary of the CP Group responsible for food exports
misleading - makes you belive that something is true, but it isn't
lower-grade rice - lower quality rice
verify - check to make sure that something is true
neglect - fail to do something that you should have done
impose measures - make rules or regulations to achieve a result
screen for - check for
registered capital - the amount of money that can be put into a Limited or Unlimited company in the form of shares. The term Nominal capital is also sometimes used. For Public companies this is known as Authorised capital. (See Wikipedia on Public Limited Companies)
deter - make someone not want to do or continue doing something
pledging price - the price that the government offers farmers for their rice as part of its intervention programme in rice markets
Answer Key:
1. What has attracted foreign firms to set up operations in Thailand's rice market?
Thailand's fragrant Jasmine rice (Hom Mali).
2. What countries do the firms that set up export operations come from?
Malaysia, Taiwan, Spain, China, India, Singapore, Hong Kong, and the United States.
3. What other agricultural export markets do foreign firms operate in?
Fruit and vegetable exports.
4. What parts of the rice production and marketing are foreign firms allowed to particpate in?
Foreign firms are barred from rice farming and milling, but are allowed a maximum "49% stake in export operations.
5. Are foreign firms using Thai nominees to hold more than 49% ownership in Thai rice export firms?
Despite rumours of "illegal nominee structures," no one is sure "how many of these foreign firms has Thai counterparts that were acting as nominees."
6. What worries Thai firms about foreign investment money in the Thai rice export market?
That the investments are so large that they will control the whole market.
("What worries me is their huge amount of funds, which makes it easy for them to control the market")
7. How have some companies hurt the Hom Mali brand of rice?
Some companies have tried to "pass off" cheaper but lower quality Pathum Thani rice as Hom Mali.
This raises the question of why quality standards are not enforced.
("Some companies have hurt the Hom Mali brand by instead shipping Pathum Thani rice, a cheaper strain of jasmine fragrant rice of lower quality.")
8. What constraints makes Hom Mali production less than Pathum Thani and thus more expensive?
a. Pathum Thani rice can be grown in the central region with several crops per year.
b. Thai Hom Mali can only be grown in the "softer soil" of Northeastern Thailand with one crop per year.
9. Which strain of rice accounts for more of the rice export market, Hom Mali or Pathum Thani?
Hom Mali.
("Pathum Thani fragrant rice is...about $100/tonne less in the export market.")
10. Which country's traders are "misleading customers" according to the article?
Traders from China.
("Chinese traders had bought a lot Pathum rice and authorities had received reports of them trying to pass off the inferior grain as Hom Mali... Besides misleading customers with different rice, he said, some firms had copied the rice bags of Thai companies. 'They put lower-grade rice in the bag that says Hom Mali rice, bearing brands of Thai companies'...About 200,000 to 300,000 tonnes of Pathum rice are sold to China each year, but local traders neglect to verify the authenticity of the strain to customers.")
11. What measures have been suggested for combatting dishonest traders?
The government should "screen for genuine exporters" and require them to "carry working stock, have higher registered capital" and force them to "join the Rice Exporters Association."
("The requirements give them more responsibility and prevent traders who just do business with empty hands," said Mr Charoen, who is also vice-president of the association.")
