BANGKOK (Sept 15): Thailand is likely to come under pressure to free up its retail sugar prices ahead of ASEAN Economic Community (AEC) integration next year that could open the floodgates to cheaper imports and prompt local refiners to ditch domestic produce.

The world's No.2 sugar exporter fixes its retail price above market rates to ensure profits for farmers. But with around 3 million tonnes of Thai sugar still unsold and global prices down over 13 percent this year on ample supplies, Thailand needs to cut its retail price to avoid a further build up of stocks.

"We fear cheap sugar from other countries could flood Thailand as the AEC provides zero tariff for buyers and consumers to import, especially when domestic prices are high," said Chalush Chinthammit of Khon Kaen Sugar, Thailand's No.4 sugar producer.

The regional common market will come into force at the end next year and will allow freer flow of goods, services and labour forces among ten Southeast Asian nations, including key sugar importers such as Indonesia, the Philippines and Malaysia.

While Thailand's neighbours are not sugar exporters, there are fears that once the trade zone is set up, sugar from big producers such as Brazil could find its way into Thailand via border trades from AEC members such as Cambodia, Laos and Malaysia, Chinthammit said.

The Thai domestic retail sugar price is currently at 23.5 baht ($0.73) per kg, about 5 baht higher than it should be, based on a global price of 15 baht, millers and refiners say.

"We are about to propose to the military government to free up domestic prices," said Sirivuthi Siamphakdi, the spokesman of the Thai Sugar Millers Corporation Limited (TSMC).

The army-backed interim Thai administration, which is due to be in power for around a year, needs to act soon given the looming boost to supply from the November crushing season, analysts said.

"We are about to submit a plan to the new minister about how to react appropriately to the AEC stuff. But we have to support our farmers as well," said Somsak Suwattiga, head of the Office of Cane and Sugar Board that oversees Thailand's sugar industry.

The large rural population is a major influence on Thai politics, with governments keen to curry its support. The failure of a rice subsidy scheme was a major factor in the downfall of former Prime Minister Yingluck Shinawatra.

"Do not tell us about liberalisation. We just need the 5-baht-per-kilo subsidy to stay," said Theerachai Sankaew, head of the Northeastern Cane Growers' Association, a powerful group that forced the government to raise retail rates in 2008.

BOOSTING SUGAR OUTPUT

The new Thai government is now trying to limit rice areas by persuading farmers to switch to sugar, hoping greater market access following the AEC could help absorb rising Thai supply.

It is looking to boost annual sugar production to 14-15 million tonnes over the next few years, from the current 9-10 million tonnes, according to the TSMC.

Thailand normally keeps 2.2-2.5 million tonnes for domestic consumption, so the remaining around 12-13 million tonnes would have to be exported. Millers and traders already hold up to 3.5 million tonnes of unsold sugar from the current 2013/14 crop.

The International Sugar Organization expects a global sugar surplus of 1.3 million tonnes in 2014/15.

Thai raw sugar, which usually trades above New York futures , has flipped into a discount for the first time since 2009 on ample supply. But demand is sluggish as consumers turn to better-quality raws from Brazil.

Thai raws are being offered at a 35-point discount to NY futures while the Brazilian sweetener is about 30 points below.

"There will be plenty of sugar in Asia, even cheap sugar from Brazil is coming. No one buys expensive sugar at home if you can import cheaper sugar from everywhere in ASEAN," said an analyst at Thai leading sugar refinery firm.

(1 US dollar = 32.2600 Thai baht)