Low rubber prices spur government intervention

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THE rapid decline in natural rubber prices has compelled the government to intervene in the market to protect the country’s rubber smallholders. The Malaysian Rubber Board (MRB) will, for the first time, set farm gate prices for rubber smallholders starting next month while a rubber productivity incentive will take effect in January 2015 should the price of SMR 20 FOB — the benchmark for Malaysia’s natural rubber prices — fall below RM4.60 per kilogram.

Under the rubber productivity incentive scheme, farmers will receive compensation of 30 sen per kilogram for cuplumps and a maximum of 90 sen per kilogram for latex if the price of SMR 20 FOB falls below the threshold of RM4.60 per kilogram. The government has allocated RM100 million for the programme.

MRB director general Datuk Salmiah Ahmad tells The Edge that MRB’s intervention in rubber prices is done to ensure that rubber smallholders receive a fair price for rubber sold, while reducing inefficiencies in the supply chain.

It is noteworthy that about 95% of the country’s rubber production comes from smallholders, which MRB defines as rubber farmers who own less than 100 acres of rubber land. Rubber farmers sell rubber in the form of cuplumps or latex, which are then processed into SMR 20 FOB.

“By right, we should leave it (the prices) to market forces. However, we realised that our smallholders don’t know [about the price movements in the international market],” says Salmiah.

According to her, when rubber prices and discounts are high, smallholders do not feel the squeeze. However, when prices fall, even with a low discount, they would experience a sharp drop in income. The discount is the dealers’ cost plus margins for buying cuplumps from smallholders.

“For example, at the price of RM4.60 per kilogram for SMR 20 FOB, they should get RM1.75 per kilogram for cuplumps but they are not getting it. They are getting prices below that, like RM1.40, so now we are determining the [farm gate] prices.”

Salmiah points out that the supply chain from farmers to processors is not efficient because of the presence of multiple dealers between farmers and processors, which further trims the margins of farmers. Meanwhile, the price of SMR 20 FOB is determined by a price advisory panel that consists of industry players that purchase raw materials and sell rubber.

To drive MRB’s price mechanism for smallholders, it will be enlisting the help of cooperatives, which will pay the minimum of MRB’s farm gate price or higher to rubber farmers. The cooperatives will then sell the cuplumps directly to processors.

“So in this case, if other dealers pay a lower price compared with the cooperatives, smallholders can sell to the cooperatives. That way, we are creating a mechanism where the smallholders should be getting a price right for them,” Salmiah explains.

However, the cooperatives often do not have the volume or right infrastructure to purchase the cuplumps from the farmers, she says. Hence, the government will assist the cooperatives by providing soft loans to them for additional working capital purposes.

Meanwhile, MRB will be collecting funds from the processors when the price of SMR 20 FOB hits RM8.25 per kilogram and beyond. Salmiah says this mechanism will ensure that the incentive plan will be sustainable in the long run and will be used to help the smallholders when prices are low.

An MRB board member opines that the proposal is a good one as it ensures a steady supply of rubber to the end market. Otherwise, low prices may cause farmers to abandon tapping activities, he says, adding that “subsidies, however, are only an immediate-term solution”.

He says the rubber industry is fairly dependent on the global economy. He highlights that many other commodities are also experiencing weakness in prices of late.

“The slowdown in China’s economic growth, from a gross domestic product growth rate of 10% a few years back to 7.3% recently, has affected commodity prices. The growth in [rubber] production is more than the consumption now.”

However, not all parties agree with the government’s move to fix farm gate prices. Lim Kwee Shyan, group CEO of glove maker Careplus Group Bhd, believes it is not necessary as “all prices should react according to market forces”.

Lim says the current depressed price situation is a matter of supply and demand. He points out that when the economy was robust previously, many speculated that the price of rubber would trend higher, which may have led to many building up an inventory and hence, pushing prices up.

“Since the economy is poor now and prices are depressed, no one is willing to hold extra stock and some may be reducing their stock level. This has depressed demand further. Once there is no extra stock hanging around, prices will gradually move up. By having the incentive, we are just slowing down the clearing of the stock by encouraging supply. It is better to find another way to help the smallholders,” he adds.

Getahindus (M) Sdn Bhd managing director Tan Swee Hua opines that if the government does not provide incentives to smallholders, they will cease rubber tapping activities.

“This has happened before. When farmers stop [rubber tapping] activity, supply will dwindle and then prices will increase. This will cause everyone, whether in Indonesia, Thailand or Cambodia, to jump into replanting. Then we will have an oversupply issue and this will cause prices to go down again,” he says.

Rubber prices peaked in 2011, with SMR 20 FOB commanding RM17.25 per kilogram. Since then, prices have been on a steady decline. On Sept 2 this year, they plunged to a five-year low of RM3.35. They have since rebounded some 50%, and ended last Thursday at RM5.06 per kilogram.

The rebound came after the International Tripartite Rubber Council (Malaysia, Indonesia and Thailand), together with representatives from Cambodia and Vietnam, said smallholders have reduced the frequency of rubber tapping.

After that, the Association of Natural Rubber Producing Countries (ANRPC) said prices that were too low were discouraging farmers from tapping and sustainable supply cannot be assured. At that time, prices were hovering at RM4.69 per kilogram. ANRPC’s members produce 90% of the world’s natural rubber.  

Whether rubber prices will continue to increase in future is anyone’s guess. As Tan puts it, the cure for low prices is low prices.

This article first appeared in The Edge Malaysia Weekly, on October 27 - November 2, 2014.