The Phnom Penh Post reports the PM announced that Cambodia will set up a rubber production and export promotion policy in view of increased global demand of the commodity.
The Mong Retthy group even has 2,000 ha of rubber plantation in Sihanoukville province, an area that has hitherto not been deemed ideal for growing rubber trees. Of course, you can plant rubber trees in many types of soil. You just might have to fertilize more heavily.
Mong Retthy also said that such policy would improve the sector very fast. Currently there are about 182,000 ha of rubber trees, both mature and immature, in Cambodia. The official goal is to increase that area to 300,000 ha by 2020.
Mak Kim Hong, president of Cambodia Rubber Association and owner of Chhub Rubber Plantation in Kampong Cham province, said a rubber export goal could attract more investment.
Those statements Mong Retthy and Mak Kim Hong make absolutely no sense to me. In fact, they are complete nonsense. You can set cultivating and export goals, which in itself is fine. But how these goals would improve the sector is something he would need to explain; and how it could attract more investment is also something that lacks any foundation.
Setting goals may expand the area of rubber plantations, as it has done over the past few years, but whether it improves it is highly doubtful. A look at plantations, both producing and maturing, will sometimes paint a different picture. A country attracts investment, regardless of industry, with favorable investment parameters, e. g. tax breaks, special incentives, etc., that are beneficial for the investor and, more importantly, if the investment will earn a nice return.
People cultivate a crop, e. g. rice, as there is local and international demand for it. You can’t practically go wrong with rice as a basic staple for the majority of the world population, notwithstanding the recent flooding of huge areas of rice paddies. Of course, the same goes for rubber. Cambodia has been a rubber producing country since French colonial days. Along with the avowed emphasis on agriculture as one of the main sectors rubber was once again included in official policy as a major product.
The increase in rubber plantations was immense over the last 3 – 4 years; from about 80,000 ha to about 182,000 ha now. Especially Vietnamese and some Chinese companies came in and obtained huge land concessions for rubber plantations. Local smallholders turned to rubber as well, seeing it was official policy and second it was a profitable undertaking. However, that last part is open to debate.
I refer to my post about the Euro crisis and Rubber Prices below. Since then prices have dropped to $3,400/mt for the equivalent of CSK5L on the Malaysian Rubber exchange. A price level we last saw in March of 2010. The difference then was that prices were on an upswing that culminated in over $5,000/mt whereas now that mark was now hit on the downswing; and there seems to be no end in sight.
Prices for CSK5L on the Malaysian Rubber Exchange for November 2011
It is exactly these wild fluctuations that can make or break an entire sector. All of a sudden, people that have invested in a rubber plantation find themselves in the unenviable position of having no return on their investment. After all, they had to wait for 6 years before they could even produce some cash flow. If the downward spiral of prices continues as in the past month that cash flow will be negative.
The following graph for smaller plantations illustrates this, although I very much doubt many a smallholder, and I am sure even some of the larger operators, will realize this. This is based on an investment of $5,000/ha, a production of 1.3 mt /ha p. a., and expenses including operation, amortization, capital expense, but no owner’s benefit. Values are in US dollars except for price/kg, which is in KHR. Naturally, prices for latex are understood to be average per year.
As we can see the breakeven point is at about KHR 7,000, if prices drop to KHR 4000 per kg the owner is losing big time. And it is not that we didn’t have this before. 2008/9 is still in vivid memory. Then prices dropped even below that KHR 4,000/kg.
If the investment is $10,000/ha because of higher land prices and with a medium production the picture looks like this.
It should be noted, though, that the above examples apply to plantations that were started from scratch, with purchase of land, clearing, planting, etc. The whole scenario is radically different if you look at the purchase of a working plantation or one on concession land.
If the investment is $20,000/ha for a working plantation of a little older trees and higher production the picture looks like this.
I will look at the parameters for concession land in a later post.
Looking at the news coming out of Europe, one is inclined to think that the same thing will happen again. What got the ball rolling was first Ireland, then Portugal, then Spain, and finally the worst case of all that in disturbing clarity – Greece. But now Italy is in the crosshairs, and even France is struggling to keep its stable standing in the financial world. Germany, the European powerhouse, with its stubborn chancellor is unwilling to do more than what has already been decided, which leads to great insecurity in the financial markets. The Hang Seng index hasn’t seen positive territory this entire month, it’s a permanent up and down in all the other major markets. Why? Because the signals coming from the European governments aren’t clear enough to make the markets gain confidence to buy their bonds. US banks got rid of their European exposure at the first sign of trouble there. Nevertheless, an unresolved Euro crisis will have its ramifications in the U. S. economy just as much as in Europe proper, with the Asian economies following as most of the Asian products end up on those markets.
I am asking again, ‘Why would this have any effect on rubber prices?’ On the one hand, it is understandable. If countries cannot finance their debts, austerity measures will have to be even stricter, possibly leading to a recession, which many economists predict will happen anyway. Recession means industry output decreases, and rubber will be affected by this as demand drops off. (This is a somewhat simplified explanation.) On the other hand, although nothing concrete has happened that would signify a decrease in demand, the fear of financial markets nevertheless provokes this rollercoaster ride. After all, China’s economy, the largest buyer of natural rubber, still hums along at over a 9% growth rate. Even Cambodia’s economy is set to grow by more than 5%. (If prices continue to decline the PM might have to correct his estimate.) So why do we rubber plantation owners have to suffer from this? Because we are at the bottom of the food chain. Speculators dictate the prices of stocks and commodities. As these speculators feel uncomfortable with what is going on in Europe, they get out of financial instruments that might threaten their profits. Rubber at this point in time is just a victim of the machinations of the financial markets – collateral damage, so to speak.
What we all, both big and small rubber operators here in Cambodia, can only hope for is a clear signal that the Euro zone will not break apart, that those practically bankrupt countries, e. g. Italy, Spain, and Greece, will be put on a safe footing, however that is accomplished, and that financial markets again gain confidence to buy those European government bonds. This coming week France and Germany will submit a plan of the financial restructuring of the Euro zone. Hopefully, this will send this long awaited signal and lead to some buoyancy in the market and thus at least stop the decline of rubber prices.
All this, however, leaves most Cambodian politicians and plantation owners unfazed. They see a marked increase in rubber plantations, and that’s enough for them to be optimistic. That this could come crashing down any time seems to elude them completely. Even the garment sector, not to mention tourism, would be exposed to this if this were to happen. Plantation owners are completely oblivious to what’s going on in the world. I thought maybe they would now be more amenable to lower their prices. But they still want a hefty $22,000/ha for a plantation that won’t produce for another year or so.