Gloomy forecast for Cambodia's rice sector
An industry analyst has issued a dire forecast for Cambodia’s rice sector, claiming the long-grain “white gold” that has been credited with lifting millions of Cambodia’s farmers out of abject poverty, and which seems a natural fit for the Kingdom’s agrarian workforce, is on a downward trajectory.
Jim Plamondon, a former technical evangelist for Microsoft who is developing new marketing strategies for Cambodian rice varieties, says the Kingdom’s rice industry – the lifeblood of its agricultural economy – is headed for a brutal and imminent consolidation.
Those in the industry who think sliding rice prices will recover, or reducing overhead costs will make Cambodia competitive against its heavyweight neighbours, are in for a rude awakening.
According to Plamondon, the surge in world rice prices a decade ago that prompted many of Cambodia’s rice exporters to join the industry was an aberration. The predominant trend for rice prices – as it has been for the last 400 years – is down.
“When the price of rice started rising in 2006, and then spiked in 2008, that was great news for Cambodia’s subsistence rice farmers,” he says. “Then rice stayed high in 2011, partly because everybody was hoarding rice to make sure this [global supply shortage] wouldn’t recur, but ever since then it has been coming down.”
The majority of Cambodia’s rice exporters cut their teeth during these peak-rice years, investing in mills and distribution networks while reaping stellar profits on export shipments.
“[Peak prices] were normal to them, but they were not normal to the world, which has seen rice prices [as a percentage of wages] steadily declining for centuries,” explains Plamondon.
Rice was one of a raft of commodities caught in a global supply shortage in the mid-2000s as producers raced to scale up production to meet the voracious demand of China and other emerging economies. But now there is a global glut of supply and the world’s rice exporters are facing hard times, as profits continue to shrink, leaving only the hardiest contenders in the race.
In April 2008, Thailand was quoting a metric tonne of 5-per cent broken milled rice for US delivery at $1,020 per tonne. Today, it ships for about $417 per tonne, having rebounded from a nadir of $354 per tonne last December.
Ominously, Cambodia’s rice exports fell six per cent during the first half of the year, while rice exports from Vietnam dropped by 32 per cent despite cost-competitive pricing. Exports from emerging rice powerhouse Myanmar plummeted 63 per cent year-on-year during its latest dry season harvest.
The UN Food and Agriculture Organisation (FAO) has forecast the total worldwide trade of rice at 43.9 million tonnes this year, indicating a second successive year of contraction due to oversupply.
“Much of the projected fall would reflect import reductions in the Far East, where key buyers such as Bangladesh, China (Mainland), the Philippines and Sri Lanka may lower their purchases amid ample availabilities on store and/or increased border protection,” the agency said in its July 2016 Rice Market Monitor.
Yet even with the world awash in cheap rice, many exporting countries are planning to increase production. Myanmar is looking to triple rice exports in the coming three years, while Cambodia is still pining for its elusive one-million-tonnes a year export goal – about double what the country shipped last year.
Plamondon describes this strategy of ramping up the production of commodity as its prices continue to fall as a “race to the bottom.”
“This is not about Cambodia’s rice industry – there is a worldwide glut of supply, so there must be a retraction,” he says.
“I do not believe Cambodia’s rice industry is on the verge of collapse, but it is on the brink of a consolidation, and that means a lot of farmers and millers are going to go broke.”
There are signs it is already happening.
According to Moul Sarith, secretary-general of the Cambodian Rice Federation (CRF), low margins and increased competition from neighbouring countries have forced at least five small- and medium-d Cambodian rice millers out of business in the last year.
“They could not overcome the challenges and had to shut down,” he said, adding: “If no action is taken to support the sector, more millers will go bankrupt in the next six months.”
In total, up to 50 per cent of the nation’s rice millers could be out of business by the end of the year, he added.
Yet Sarith remains confident there is a way out, explaining that millers have capacity but lack capital to purchase enough rice paddy to operate efficiently.
“Even with rice export prices lower than they were last year, exports are still profitable, though those profits are smaller,” he said, adding that the government has pledged up facilitate up to $30 million in emergency loans for millers and exporters to help shore up the industry.
Capital will not solve the problems plaguing Cambodia’s rice sector, insists Plamondon, but it could determine who survives.
“There’s going to be a significant retrenchment – only those with access to capital and plans for growth [will survive],” he said.
“New mills are more efficient than old ones, so many older, smaller mills will be out-competed. But even new mills will be squeezed out by [bigger and more efficient operations in] Vietnam and Thailand, especially if they’re burdened by debt.”
According to Kann Kunthy, CEO of Battambang Rice Investment Co Ltd (BRICo), a consolidation is already taking shape. By his calculation, nearly half of all millers have either shuttered operations or been bought out by bigger operations.
Those that remain are increasingly turning to business “alliances” to increase their economies of scale.
“Most of our rice millers will have to consolidate in order to survive,” he said. “Facing a long-term downswing, millers are forging alliances to process paddy as a survival strategy.”
As examples, he cited new “cooperation” agreements between Asia Gold Rice and Crystal Mill Rice, and between Apsara Rice and Soma Group.
BRICo, which has invested $15 million since 2014 into its milling operations and has a hefty capacity of 24,000 tonnes per year, has managed to keep its head above water, Kunthy insists.
But while the company’s exports continue to grow, he admitted “even we are feeling the impact, just like the rest of the rice sector.”