A major player: As production continues to grow, challenges remain

Showing steady and continuous growth in output and value added since the early 1960s, Thailand’s agriculture and plantations sector has been a major contributor to national income and the fight against rural poverty. With its products renowned throughout the world, particularly its rice, Thailand has also been an important international granary at times of global food need. Today, however, the sector faces some important challenges as it seeks to develop further. Debate surrounds the role of the state in the sector’s future, particularly regarding the government’s price support policies. Locally, raising productivity and managing the agricultural labour market are also proving challenging. Externally too, the further removal of trade barriers, as ASEAN moves toward a unified economic community in 2015, combined with increasingly vibrant competitors in the region, also adds to the sector’s concerns. Nonetheless, with a long tradition of agricultural exports and increasing recognition of the need for greater investment in research and development (R&D), in addition to improved mechanisation and sustainable farming practices, the country’s strong global brand names look likely to continue to feature highly in world marketplaces.

Early Foundations

According to the World Bank, during the 1960s, the agricultural sector contributed an average of 32.19% of the country’s GDP, a greater share than industry, which contributed 22.15%. Back then, Thailand’s agricultural products were one of the country’s main foreign exchange earners, with this income encouraging a rapid expansion in the amount of land under cultivation. In 1961 approximately 80% of the population worked on the land, with some 8% of the country’s national budget dedicated to the agriculture sector. Yet during the 1960s and following decades, government policies aimed at boosting the industrial and service sectors, along with increasing foreign investment (most notably from the US and Japan) in these more urban-based trades led to agriculture scoring a declining share of GDP, while rural employment also fell. This was despite continuing agricultural growth in real terms. Indeed, in the late 1970s, high global agricultural prices made Thai rice exports one of the principal pillars of the country’s near double-digit economic growth. Between 1960 and 1980, agricultural production grew an average 4% per annum and by the end of that period, provided around 30% of all merchandise exports by value. By 1980 some 70% of the population still worked in agriculture, with the sector contributing 23.2% of GDP.

Falling Impact

The following years, up to the Asian economic crisis in 1997-98, however, were marked by low global agricultural prices and an acceleration in the growth of industrial, manufacturing and services in the Thai economy. As a result, agriculture’s share of GDP continued to decline, falling to 12.5% by 1990. Indeed, while agricultural GDP grew some 12.3 times between 1960 and 1990, non-agricultural GDP grew by 55.9 times, according to a report from the Japanese Research Institute of Development Assistance. Meanwhile, the rural population declined in real terms, along with the percentage of the population engaged in agriculture. The latter reached just under 60% by the time of the 1997-98 Asian crisis. The sector did relatively well during that two-year downturn, though, as it was dominated by international exports and domestic demand for food remained solid, even as demand for manufactured goods fell. During this period, the sector thus demonstrated one of its other central attributes: it is a major bulwark against poverty, demonstrated by the many urban Thais who depended on family connections in rural areas to get through the crisis.

After 1997-98 the sector then grew again, although its percentage contribution to GDP continued to decline. By 2000 agriculture contributed just 9% to the country’s GDP. Yet by 2007, that share had climbed back up to 10.7%. World Bank data for 2011 then show a 12% share of GDP, while estimates since put the figure around 13%. This turnaround has happened while the agricultural population has also continued to decline, to 50% by 2007 and approximately 40% in 2014. Therefore, despite dwindling numbers of farmers, the sector has scored a remarkable success in reversing a long-term decline in share of GDP. Driving this has been a shift in policy towards higher-value, more specialised products, with more targeted markets and promotional campaigns, combined with increased mechanisation, diversification and productivity on the ground. Alongside agri-business and farmer cooperatives, the government has been a major force behind this move, with this policy focus largely independent of the shifting fortunes of political groupings in Bangkok.

A Varied Geography

Agriculturally, Thailand can be divided into four main regions: the northern, north-eastern, central and southern. Each region enjoys a slightly different climate, terrain and soil distribution, while the country also boasts a long coastline, giving its approximately 10,000 fishing boats access to the Gulf of Thailand and the Indian Ocean’s Andaman Sea, two bodies of water with vastly different weather cycles.

Starting in the northern region of the country, agricultural production there takes advantage of the more mountainous terrain and cooler climate to produce a variety fruit and vegetables. The smaller population and the difficult topography of the north make for smaller landholdings (land in Thailand is measured according to a unit called a rai, which is around 1600 sq metres, or 0.16 ha). The region traditionally practices wet rice farming in the valleys, with shifting cultivation on the uplands.

There is also some forestry, though deforestation in recent years has taken its toll on the segment. This has also had some environmental impact, exacerbating seasonal flooding that then spreads down the northern tributaries of the Chao Phraya River, affecting the central and Bangkok areas.

The north-east, meanwhile, is the region with both the highest number of agricultural workers and the lowest productivity. Also known as Isan or Esarn, conditions are generally poor, with the main plateau, the Khorat, relatively dry. Where irrigation is used, sticky rice is one major product, while sugar cane, cassava (which is mainly for export as animal feed) and rubber are also major crops.

The southern region, which is located between the Gulf of Thailand and the Andaman Sea, experiences year-round rainfall, making it ideal terrain for rubber cultivation. For many years, this has been the crop contributing the highest value to the country’s agricultural exports. Thailand’s main rice basket is the central region, which has a higher-than-average productivity level and the most irrigated land.

With the central region also home to much of the country’s manufacturing and industry, however, agriculture contributes the smallest percentage to regional GDP here of the four areas mentioned.

Fisheries & Crops 

The nation’s fisheries, meanwhile, have traditionally been concentrated in the Gulf of Thailand, with transport and refrigeration issues meaning that fishing grounds are often close to main population centres. In recent times, however, overfishing in the area has pushed Thai boat further out into the South China Sea.

Taken as a whole, according to the latest Food and Agriculture Organisation Statistics Office (FAOSTAT) data, of Thailand’s 51.09m ha total available land, 15.76m ha was given over to arable use in 2011, with 4.5m ha under permanent crops and 18.99m ha under forest cover. This distribution has remained generally constant since 1996, when the respective figures were 16.56m ha for arable land, 3.5m ha for permanent crops, and 19.22m ha for forest.

For many years, crops have been the main agricultural output, followed by fisheries, livestock, forestry and agricultural services. For 2012, FAOSTAT listed rice the number-one crop by value amongst the Thai top-10 agricultural commodities. The production value of paddy totalled $9.43bn, more than twice that of the number-two crop, rubber, at around $4bn. Sugar cane was third, at $3.17bn, although in terms of quantity, this crop came first, with 96.5m tonnes produced, compared to 37.8m tonnes of paddy and 22.5m tonnes of cassava, which occupied the fourth spot in terms of value, at $2.21bn. Rubber output was fifth, at 35m tonnes.

Other significant commodities by production value include maize, tropical fruits (such as mango, guava and pineapple), chicken and pork, and eggs.

In terms of export value, however, rubber tops the list, with Thailand the world’s largest producer and exporter of natural rubber, according to the Thai Rubber Association (TRA). The latest statistics available from the TRA, for the January-September 2013 period, show a total of 2.53m tonnes exported. In terms of value, the latest figures from the Ministry of Commerce, for January-September 2012, put rubber exports at BT227.58bn ($7.44bn).

Sugar follows rubber in terms of export value, although 2013/14 is likely to see high output and a global glut reduce value per tonne. Globally, Thailand comes after Brazil as the world’s second-largest sugar exporter. Thailand exports both raw and refined sugars. Other significant export products by value include canned chicken, cassava (both dried and starch), pet food and pineapples. The main export market for agricultural products is China, followed by Japan. According to the US Department of Agriculture (USDA) Foreign Agricultural Service, total China-Thailand agricultural trade increased 3.6% in 2012, year-on-year, to stand at $10.8bn. Most of this comprised Thai commodities going to China, with these up 1% to $8.6bn, mostly composed of rubber, cassava and non-coniferous wood.

More Than Rice

While rightly world-famous for its grains, Thailand’s agricultural sector also produces and exports a wide variety of other products. In livestock, chicken accounts for much of recent growth, with Europe in particular developing as a major overseas market since the 1990s. According to USDA figures, broiler production rose from 1.28m tonnes in 2010 to 1.35m tonnes in 2011, and an estimated 1.6m tonnes in 2013. Exports regularly account for around a third of the total, while domestic consumption has also been growing – from 839,000 tonnes in 2010 to 901,000 tonnes in 2012, according to USDA estimates. Official figures suggest that livestock production as a whole increased 3.2% in 2012, with pork, eggs and raw milk also driving the segment forward.

Fruits and vegetables are also important products, with tropical fruits such as pineapple, durian, guava and mango shipped globally. FAOSTAT figures for 2012 show 2.65m tonnes of mangos, mangosteens and guavas produced with a production value of $1.59bn, and the same tonnage of pineapples, worth $755.3m. Tropical fresh fruit accounted for a further 2.22m tonnes, valued at $909.4m. These three fruit classes were the seventh, ninth and 10th most valuable agricultural commodities produced.

Sea Challenges

Thailand’s fishing industry is also a major exporter, but in recent times, one of its principle products, shrimp, has been hit badly by early mortality syndrome (EMS).

This has badly affected production, with the Ministry of Agriculture and Cooperatives (MOAC) suggesting fisheries overall had declined 2.7% in 2012 as a consequence. In December 2013 the Thai Shrimp Association (TSA) declared that for the first 10 months of 2013, 175,713 tonnes of shrimp were exported, a figure down 38.4% on the same period the year before. Total shrimp production fell from around 0.54m tonnes in 2012 to 0.25-0.30 tonnes in 2013, the TSA added. This decline in output due to EMS has also forced up prices, which doubled locally during 2013.

Nonetheless, the TSA states that Thailand likely remained the world’s top shrimp exporter in 2013. Its main market is the US, which grants Thai fisheries tax privileges under a Generalised System of Preferences. The sector is widely forecast to recover production and exports during 2014.

In 2013, eight large private sector fisheries outfits signed a memorandum of understanding vowing to increase sustainable fishing and production. Under this, efforts to ease exhaustion of fish stocks by declaring seasonal moratoriums and increasing net mesh sizes to help young fish grow will form part of a pilot project.

Government Interventions

In terms of land ownership structures, Thai farms have traditionally been divided into a small number of larger holdings – often tied to agribusiness ventures – and a much larger number of small holders.

The last major official Thai Agriculture Survey, conducted in 2003, showed that nationwide, the average size of an agricultural holding was 19.8 rai, or 3.17 ha, with the largest farms in the central region (24.3 rai, or 3.89 ha, on average) and the smallest in the south (17.3 rai, or 2.77 ha).

Agribusiness is a relatively new phenomenon, with most small holdings being family affairs, passed on and often divided further at inheritance. They also increasingly suffer from urban drift amongst the young. Given small sizes, pressure on labour and generally low levels of income, developing mechanisation and irrigation have often been challenging. Up-to-date statistics are unavailable, but the most recent, given by FAOSTAT for 2008, show the number of combine harvesters/threshers per 1000 ha of arable land and land under permanent crops to be 2.5. In nearby Vietnam, the figure had reached 10 times that by 2001, when it stood at 25.39.

Meanwhile, Thailand’s total area equipped for irrigation stood at 6.4m ha in 2011, up only slightly from 6.3m ha in 2006. During this time, the value of agricultural production per hectare had risen from $1209 to $1310, according to FAOSTAT, a growth rate of 1.62%. Value per hectare in Vietnam, by comparison, had gone from $2064 to $2272 over the same period, an increase of 1.94%. Indeed, low productivity in agriculture was remarked upon in the IMF’s Article IV consultation with Thailand in September 2013. Over the previous decade, the ratio of value added per worker had averaged seven to nine times higher in manufacturing than in agriculture, the IMF stated, which is a concern when some 40% of the workforce still works in agriculture.

Raising these standards is therefore one of the main aims of the country’s agricultural policy. The main mechanism for doing this historically has tended to be government intervention, which has largely occurred in two broad forms: via investment in the rural, agricultural infrastructure, including in irrigation and transportation schemes, and intervention in the marketplace via a system of price supports for key commodities. Both types of intervention have had their strengths and weaknesses.

Infrastructure Spend

The main government body overseeing the sector is the MOAC. One of the lead agencies under this is the Office of Agricultural Economics (OAE), which monitors, analyses and helps develop agricultural policy.

Currently the OAE is monitoring the implementation of the Thailand Agricultural Development Plan (ADP) 2012-16, which has three main parts, or strategies: improving farmers’ quality of life; boosting production capacity in crops, livestock and fisheries; and improving agricultural resource management. In the first strategy, relations with another important sector body, the National Farmers’ Council, which represents farmers nationwide, are key.

Operating within the current ADP period, the MOAC’s Food Security Strategy Framework 2013-16 also comes into play, aimed at enhancing quality, promoting sustainable practices and the consumption of good-quality products, while also producing adequate supplies to meet the country’s food needs.

Since 1979, the OAE has also been overseeing a crop-zoning policy, with the past decade seeing this implemented in coffee, cotton, jute, sugarcane, pineapple, cassava, garlic, shallots, onions, chicken, asparagus, pepper and oil palm. This zoning policy continues to develop too, with the years ahead likely to see it intensify further.

Two major government investment plans currently under way are also likely to have a major effect on the agriculture sector. First, there is the Logistics Infrastructure Development and Investment Plan for Thailand 2013-20 (more widely known as Thailand 2020), with this aiming at overall economic growth rates of 4-5%, to be secured by unplugging a range of current supply-side bottlenecks.

This will include a major investment in transport infrastructure, from airports to roads, which will likely help ease some of the logistics problems currently faced by farmers, while speeding up the transit of goods to and from international markets.

The second, and more direct, assistance project is a range of water-management investments being undertaken in response to the devastating flooding that occurred in 2011. This project will include flood-prevention barriers and better reservoir management, as well as improved provision of flood-ways and flood diversion channels.

In addition, more efficient rural roads are also a part of the plan, as is the restoration of the forest ecosystem in areas where deforestation has been a major cause of inundation. The project should also see a knock-on effect in better irrigation, due to more efficient water management.

This particular programme, however, has been beset by financing difficulties. An emergency decree authorising the government to borrow around BT350bn ($11.45bn) to pay for the project has run into legal difficulties, with the IMF reporting that only 7% of the allocated financing had been used up to September 2013.

For some years too, the Thai government has operated a system of price supports for key agricultural commodities, a policy that has gone through several changes, while remaining highly controversial and politically sensitive (see analysis).

Continuing Growth

One of the most remarkable aspects of the Thai agricultural sector is that it has continued to thrive despite this political controversy and uncertainty, recording steady growth for decades. FAOSTAT figures show that total agricultural production by value increased 2.29% between 2007 and 2012, with food production up 2.21% over the same period. This was less than the 2.85% increase in agricultural production and the 2.9% rise in food production for 2002-07, and the 3.21% and 3.23%, respectively, figures for 1997-2002, yet is still a healthy rate, given the decline in available land.

Indeed, most of the growth is in productivity, with better farming methods, as well as higher-yielding seeds. FAOSTAT shows crop production value per hectare even increasing between the 2002 and 2007 and 2007 and 2012 periods, from 1.49% to 1.62%.

Urbanisation has also benefitted the sector. As the population dwindles, some farms have become larger, buying up emptying neighbouring property and adding economies of scale, including a declining cost of mechanisation, as machinery becomes more effective on larger plots. In recent years too, there has been a move towards contracting out specialist agricultural services, with third-party units hired to undertake harvesting, pesticide and herbicide activities, and rice broadcasting.

Farmers have also become increasingly professional in their relationship with businesses in the downstream segment, being encouraged by successive governments to sign supply contracts with urban-based retailers. This process has also seen Bangkok supermarket standards passed back down the line to production, boosting quality across the board.

In addition, specialisation in production has occurred, with some farmers targeting, for example, the organic market. Organic vegetables can fetch retail prices of three to four times regular products, more than compensating for their lower yields.

High-Quality Crops

There are also certain underlying reasons why Thailand produces crops at a lower rate than some competitors. Low levels of irrigation lie behind much of this, but decisions to produce high-quality crops – such as jasmine rice – also lead to lower outputs.

The results of this continuous growth have also been seen in increasing food security and declines in rural poverty and under-nutrition. In 1994, according to FAOSTAT, kcal per capita per day stood at 2264 in Thailand, on average, with this rising to 2967 by 2009 (the most recent statistics). The prevalence of under-nutrition fell from 20% in the 1999-2001 period to just 7% in the 2010-12 period.

Boosting Incentives 

Investment in agricultural R&D has been further enhancing yields. Leading this effort for a number of years has been the MOAC, but a range of other agencies are also involved, such as the Ministry of University Affairs, the Ministry of Science, Technology and Energy, and various units under the Office of the Prime Minister, including the Thailand Research Fund and the National Economic and Social Development Board.

Agri-business companies themselves have also spearheaded investments in R&D in the country, while at the same time encouraging the use of more scientific farming methods. The Ministry of Industry’s Board of Investment (BOI) also provides incentives for research, including a 200% deduction on expenditures for R&D services provided by approved R&D companies incorporated in Thailand.

Indeed, agriculture and agro-industry is one of the seven key sectors identified as “priority” by the government for promotion by the BOI, Thailand’s main foreign investment promotion agency.

The BOI divides the entire country into a number of zones, with different incentives available in each type for different industries, with the overall objective of channelling investments into areas where they are most needed.

Priority industries, however, receive maximum incentives wherever they are located. These incentives generally include tax breaks, ease of permissions, state guarantees and protections.

Under Thai law, in agriculture and agro-industry, Thai nationals must hold a minimum of 51% of the registered capital in any project, however. In manufacturing, there are no such equity restrictions on foreign capital, thus exempting food processing and the manufacturing of agricultural products. This may be one factor behind the relatively low level of FDI in pure agriculture, while food processing has seen major inflows. Bank of Thailand figures quoted in a 2012 FAO report suggested the ratio of agricultural foreign direct investment to GDP was only around 0.009% between 1970 and 2009, while food processing’s share was 0.079%. The main 21st-century investors in agriculture were Hong Kong and Japan.

Since then, BOI statistics have shown a gradual increase in the number of projects in agricultural products granted approval for BOI incentives. In 2009, 60 projects, worth a total of BT16.17bn ($528.8m), were approved; in 2010, 72 projects worth BT17.53bn ($573.2m); and in 2012, 69 projects worth BT24.2bn ($791.3m). In the first half of 2013, 39 projects worth BT13.18bn ($431m) were approved, up on the first half of 2012’s total of 29 and BT12.99bn ($424.8m). Thus Thailand continues to attract foreign interest in its agricultural sector.

Outlook

Despite the prevalence of government intervention in the market, Thai farmers are no strangers to free competition, a factor that will likely stand them in good stead with the commencement of the ASEAN Economic Community in 2015. This will likely see greater competition in many areas, including fisheries, where ASEAN countries often produce similar commodities. The fundamentals of agriculture in Thailand, however, are robust enough for many to benefit from such competition, with many competitive advantages for the sector to draw on.

Where the risk remains is likely in the political framework around agriculture, and in particular in rice and rubber. Efforts to assist development of poorer farmers via price subsidies may well have to be reworked in the period ahead, with many criticising schemes that benefit wealthy farmers too. A more targeted approach may thus lie down the road.

Despite these challenges, however, Thailand remains a major global agricultural player. There is much still to be done in developing the infrastructure, mechanisation and diversity of this international food bowl, too, which should create major opportunities for investors in the years to come.

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The Report: Thailand 2014

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