Impact of AFTA free trade agreement on Thailand's palm oil sector
By Jon Fernquest
Malaysia
and Indonesia produce a
lot more palm oil than Thailand produces (See
table below). A new regional free trade agreement for the ASEAN region will open up Thailand to palm oil imports from Malaysia and Indonesia.
This will make life more difficult for Thailand's palm oil producers.
They will have to become more competitive if they want to survive.
Read a previous article about ASEAN free trade agreements.
(Map on right compares the palm oil production of different countries in the world with the top producers in green at 100%, yellow meaning 10% of the top producers and green meaning 1% of the top producers. As you can see the differences in production are great.)
Today's article starts after the vocabulary.
palm oil - an
edible plant oil used in cooking and also to make biodiesel fuel for
cars (SeeWikipedia)
Free Trade Agreement (FTAs) - an agreement between a group of countries to eliminate many tariffs, quotas and preferences on goods passing between them (See Wikipedia)
regional free trade agreement - a free trade agreement between all the countries in region such as ASEAN
ASEAN - the political and economic organisation that unites and gives one voice to the 10 nations of Southeast Asia (See Wikipedia)
Asean Free Trade Area (Afta) - an agreement between Southeast Asian countries to lower tariffs and other barriers to trade in order to: 1. make the region as a whole more competitive, and 2. encourage Foreign Direct Investment (See Wikipedia and official website)
compete (verb) - when many people are all trying to get some limited thing
competitive (adjective)
competition (noun)
survive - continue to live and exist in a difficult situation (no not die or disappear)
Free Trade Agreement (FTAs) - an agreement between a group of countries to eliminate many tariffs, quotas and preferences on goods passing between them (See Wikipedia)
regional free trade agreement - a free trade agreement between all the countries in region such as ASEAN
ASEAN - the political and economic organisation that unites and gives one voice to the 10 nations of Southeast Asia (See Wikipedia)
Asean Free Trade Area (Afta) - an agreement between Southeast Asian countries to lower tariffs and other barriers to trade in order to: 1. make the region as a whole more competitive, and 2. encourage Foreign Direct Investment (See Wikipedia and official website)
compete (verb) - when many people are all trying to get some limited thing
competitive (adjective)
competition (noun)
survive - continue to live and exist in a difficult situation (no not die or disappear)
PALM OIL
Winners and losers from Afta tariff cuts
5/12/2009Post Reporters
Tariff cuts under the Asean Free Trade Area (Afta) to be implemented in 2010 will pressure the Thai palm oil industry.
However, the cuts will benefit Thai consumers due to the expected influx of cheaper oil from Malaysia and Indonesia, says Kasikorn Research Center.
a tariff - a tax on
goods entering a country from other countries
tariff cuts - reduction of tariffs
influx - large numbers of people coming into a place
Kasikorn Research Center - Thailand's top private economic research center (See website)
tariff cuts - reduction of tariffs
influx - large numbers of people coming into a place
Kasikorn Research Center - Thailand's top private economic research center (See website)
Under the Afta agreement, six Asean countries, including Indonesia, Malaysia and Thailand, will be obliged to cut tariffs on palm oil to zero from Jan 1 next year. Newer Asean members such as Vietnam have until 2015 to reduce tariffs.
The cut, along with the removal of import caps, is a major concern for both farmers and entrepreneurs in the Thai palm oil sector as domestic oil is expected to lose out to Malaysian exports. Large-scale farms in Malaysia enjoy lower production costs. Their fertilisers and agricultural chemicals are half the price of those available in Thailand and farmers also benefit from direct rail links from farms to processing plants.
obliged to - must
do, required to do
obliged to cut tariffs - required to reduce taxes on goods imported into the country
cap - a limit (cannot go above this level, like a "cap" on a jar)
removal of import cap - ending the limit on imports into the country
direct rail links - can travel by train and railroad directly from one place to another place
process (verb) - preparing food or raw materials in a factory so it can be sold in a store
processing plants - factories for preparing food so it can be sold in a store
obliged to cut tariffs - required to reduce taxes on goods imported into the country
cap - a limit (cannot go above this level, like a "cap" on a jar)
removal of import cap - ending the limit on imports into the country
direct rail links - can travel by train and railroad directly from one place to another place
process (verb) - preparing food or raw materials in a factory so it can be sold in a store
processing plants - factories for preparing food so it can be sold in a store
Malaysian palm oil sells for 25% less than Thai oil, but this had been balanced out in the Thai market by a 20% import tariff and transport costs.
But next year's tariff cut under Afta will result in Malaysian oil selling for 20% less than Thai oil in the local market, said Kasikorn Research Center.
The Malaysian industry produces both high- and low-grade oil while Thailand can only produce the low-grade product. Once tariffs are cut Malaysia is expected to push its exports to Laos and Burma.
The impact of cutting tariffs will depend on two factors, says Kasikorn Research Center. First, global demand is up 5.7% to 44.1 million tonnes, with China and India the largest importers, while supply is down due to a recent drought in Indonesia, the world's largest producer, which will raise prices by as much as 7% in the first quarter of 2010, following a 31% rise this year.
high- and low-grade
- high and
low quality
oil
drought - a period when there is very little rain or water in an area (See Wikipedia)
drought - a period when there is very little rain or water in an area (See Wikipedia)
In Thailand, palm oil is expected to be about 4 baht per kilogramme in late 2009 and early 2010, an improvement after prices slumped earlier this year triggering government intervention in the market. Thai prices depend largely on the cost of unprocessed oil in Malaysia, which has also risen significantly.
As a result, the key players in the Thai palm oil industry, comprising some 55 companies and 64 factories, are rushing to buy unprocessed palms and to expand production bases. Competition is expected to intensify as the prospect of quick returns attracts Thai entrepreneurs.
prices slumped - prices fell to very
low levels
trigger - cause
government intervention - when a government enters into an activity it normally does do
triggering government intervention in the market - caused the government to enter the market to change supply, demand, and prices
unprocessed oil - oil that has not been turned into a product in a factory yet
unprocessed palms - palms that have not been to the factory yet (to be turned into products that can be sold in stores)
expan production bases - make more factories
competition is expected to intensify - people believe that there will be more competition in the future
prospect of quick returns - the possibility of fast profit
trigger - cause
government intervention - when a government enters into an activity it normally does do
triggering government intervention in the market - caused the government to enter the market to change supply, demand, and prices
unprocessed oil - oil that has not been turned into a product in a factory yet
unprocessed palms - palms that have not been to the factory yet (to be turned into products that can be sold in stores)
expan production bases - make more factories
competition is expected to intensify - people believe that there will be more competition in the future
prospect of quick returns - the possibility of fast profit
The second key factor is palm oil output from Indonesia and Malaysia. With rising demand from China and India as well as from the biodiesel industries, Indonesia is projected to increase its exports next year by 6.3% to 15.58 million tonnes, mostly to China, India, Malaysia and Singapore, although Malaysia's exports are likely to shrink by 2.6% to 15.7 million tonnes next year.
As a result, Thailand's best option is to implement the Afta tariff cut rather than delay it and to pay compensation, said the research centre.
But once the tariff is lifted Malaysian and Indonesian oil will likely flood into the local market with imports to Thailand expected to increase by 38.6% to 230,000 tonnes.
The impact will be felt throughout the industry, said the research centre, and may result in a surplus of unsold Thai oil.
key factor - an important thing
that will determine what happens (in the market for palm oil)
biodiesel - fuel for diesel engines made of renewable organic raw materials such as palm oil, cassava, or sugar as opposed to oil and natural gas (See Wikipedia)
best option - the best choice
implement the Afta tariff - make the Afta tariff (put the plan into action)
compensation - money paid for damage or loss caused (as a penalty for breaking agreement)
delay it and to pay compensation - if they do not follow the agreement, they must pay a penalty or fine
surplus of unsold Thai oil - have extra oil that they could not sell
biodiesel - fuel for diesel engines made of renewable organic raw materials such as palm oil, cassava, or sugar as opposed to oil and natural gas (See Wikipedia)
best option - the best choice
implement the Afta tariff - make the Afta tariff (put the plan into action)
compensation - money paid for damage or loss caused (as a penalty for breaking agreement)
delay it and to pay compensation - if they do not follow the agreement, they must pay a penalty or fine
surplus of unsold Thai oil - have extra oil that they could not sell
Processing factories will face pressure from the cheaper imports and will need to rapidly improve their production processes in order to remain competitive. Farmers, especially independent ones that are not linked to factories, will be negatively affected and will face uncertain domestic demand unless government efforts to promote the use of palm oil in biodiesel are successful.
But certain sectors may benefit from the tariff cut. Thai industries that use palm oil in production will gain from the influx of cheaper imports. Consumers will enjoy a better choice and lower prices.
Kasikorn Research Center said Thai entrepreneurs and farmers should improve their production quality and use relevant technology to remain competitive once the tariff is lifted. The government should also assign a governmental agency to act as the sole palm oil importer in order to control imports. Such activities do not violate the Afta agreement and are already in practice in both Malaysia and Indonesia.
In addition, the government should encourage farmers to adapt or to switch to more viable crops, and provide low-interest loans for those choosing to stay in the industry, said the centre.
face pressure - a
situation or people will try hard to make them change, to force them to
change
adapt - change (when situation requires change)
viable - will be successful and not fail
more viable crops - crops that will be successful and fail
adapt - change (when situation requires change)
viable - will be successful and not fail
more viable crops - crops that will be successful and fail
(Source: PALM OIL, Winners and losers from Afta tariff cuts, 5/12/2009, Post Reporters, link)
