Thai Rubber Crashes after Rice

Eight months after Thailand’s military junta started selling rice into an oversupplied global market, the officers are taking a different tack amid a rubber glut.

But this approach by Thailand, the world’s biggest exporter of both commodities, may cause as many problems in global markets as the old one, analysts say. That’s because while the rubber purchases revived domestic prices that touched a five-year low in October, they’re failing to cut a global production surplus that is entering its fifth year, according to data from the International Rubber Study Group.

Demand is slowing in China, the world’s top buyer and tire exporter, and natural rubber faces stiffer competition from synthetic material made from crude oil, which costs half what it did a year ago. Rubber prices are down more than 70 percent from their 2011 peak as trees planted in Asia over the past decade matured and flooded the market. That hurt farmers and cut costs for users of the raw material, including Goodyear Tire & Rubber Co. and Michelin & Cie.

In addition to buying at above-market prices, the government makes direct payments to growers and helps with borrowing costs. While the junta has ruled out purchasing rice, it also makes payments directly to farmers and subsidizes loans to help millers and growers with storage.

Former Prime Minister Yingluck Shinawatra was overthrown last year and now faces criminal charges related to her administration’s rice-buying program, which the finance ministry estimates lost $16 billion. The junta began selling off record stockpiles, prices have tumbled, and the country is reclaiming its place as the world’s biggest exporter.

Yingluck’s opponents say the rice program was part of a pattern of corruption by politicians allied with her brother, Thaksin Shinawatra, who was deposed as prime minister in 2006. Since his ouster, the country has been divided between Shinawatra family loyalists - mostly farmers in the north and northeast - and urban and middle-class opponents. Yingluck denies the corruption charges.

Curbing Exports

Thailand, Indonesia and Malaysia, which account for two-thirds of world production, said in November they would limit exports to tighten supply. The global surplus will narrow to 51,000 tons in 2016 from an estimated 77,000 tons this year, the International Rubber Study Group said in January.

Prices of ribbed smoked sheet grade 3 in Bangkok, the Thai benchmark, averaged 58.59 baht ($1.80) a kilogram in March compared with 52.79 baht in October. That was lower than rubber on the Shanghai Futures Exchange, which averaged about 12,802 yuan a ton, or 67 baht a kilogram. The contract in Shanghai increased 1.1 percent to 12,765 yuan on Thursday.

The junta in Thailand is also encouraging farmers to fell aging trees over an area of 400,000 rai (158,000 acres) annually, with some land being turned over to palm oil. That may reduce production by about 100,000 tons a year, according to data from the Office of Agricultural Economics. Output will be 4.3 million tons in 2015, the Association of Natural Rubber Producing Countries estimates.