Asian rubber farmers switch crops as prices dive

Tuesday, 17 June 2014 00:50 -     - {{hitsCtrl.values.hits}}

  •  Rubber market in fourth consecutive year of glut
  • Drop in output unlikely to happen overnight
  • Farmers switch crops, find other jobs, reduce tapping
SINGAPORE/KUALA LUMPUR (Reuters): A slump in natural rubber prices to multi-year lows is spurring Southeast Asian farmers to turn to other crops and tappers to look for other jobs, potentially chipping away at a chronic supply overhang. Any crop shift won’t lead to a rapid drop in output, say analysts, but along with threats of an El Nino weather pattern could start to halt production growth as tumbling prices take a toll on the region’s five million-plus rubber farmers. Output growth in top producer Thailand could halve this year, while in neighbouring Vietnam, which recently overtook Malaysia as the world’s third-largest producer, farmers have cut down trees and reduced tapping. Asia accounts for about 90% of the world’s natural rubber output. The tyre-making industry makes up about 60% of global rubber consumption, and the commodity is also used to make gloves and condoms. “Supplies are increasing at a time when demand is relatively sluggish,” said analyst Abah Ofon at Standard Chartered in Singapore, who said output would need to fall to have some impact on prices. “A 3-5% reduction in global supply will be tangible enough for the market to take note,” he added. Rubber prices have sunk more than 25% this year and hit 4-1/2 year lows on persistent worries about slower economic growth in main consumer China and oversupply. Global supply is forecast to exceed demand by 241,000 tons in 2014 for a fourth year of glut, according to the International Rubber Study Group, which rules out any near-term rebound in prices. However, traders said the low prices meant some farmers would switch to quicker growing palm oil trees, while rubber yields would falls as trees were neglected and farmers could not afford to replace old stock. “The bull may return in 2017 when the market feels the impact of the low prices as farmers cut back on fertiliser and trees suffer,” said a dealer in Singapore, who trades Indonesian rubber. “There will be no new planting and farmers will switch crops for better returns.” Farmers hurtingFrustrated by the sagging price, farmers in Malaysia and second-largest producer Indonesia have begun switching to palm oil or finding jobs in factories and mines, say dealers and industry groups. “I have given up on rubber. A lot of other farmers have started planting other crops like oil palm,” said 62-year old Roslai Hasan, who owns six acres in Malaysia’s Selangor state. It takes six years for rubber trees to mature and produce latex, while palm trees begin to bear fruit within three years. “You are now approaching levels where you are having an impact on production,” said Michael Coleman, managing director of RCMA Asset Management, who helps manage the $140 million Merchant Commodity Fund in Singapore. “Clearly at $1,700 FOB (a ton), which is $1,500 at the farm gate, that’s beginning to affect people in areas where they’ve got good employment opportunities elsewhere, and that’s Malaysia.” A lack of action by the International Rubber Consortium (IRCo), which groups Thailand, Indonesia and Malaysia, has also angered farmers and exporters, but the group appears hamstrung by a lack of funds and political will. For many farmers in Indonesia, low rubber prices are becoming unsustainable. “Now, one kilo of latex gives you 4,000 rupiah ($0.34). The price of rice keeps rising, and it costs 10,000 rupiah to buy one kilo,” said Hambali Nasution, a 40-year old rubber farmer on Indonesia’s main growing island of Sumatra. “We have to find other jobs to survive, such as working in palm oil plantations. I have three children.”