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Politics

Thailand to issue $1bn bonds to help cut rubber supply

Funds will compensate farmers and support prices, says agriculture minister

Thailand is the world's biggest rubber producing country and the agriculture ministry is trying to make the industry more sustainable (Getty Images)

BANGKOK -- The Thai government plans to issue bonds to raise roughly 30 billion baht ($963 million) to fund projects aimed at cutting an oversupply of rubber and to prop up the price of the commodity.

The Ministry of Agriculture plans to cut annual supply by as much as 1 million tons to 3.3 million tons before year-end, the minister of the department Grisada Boonrach told the Nikkei Asian Review.

"We aim to raise around 30 billion baht from the bond to be used as compensation to farmers to encourage them to reduce supply and to be used as initial capital for the Rubber Authority of Thailand to operate its business," said Grisada.

The ministry is planning to inject part of the funds raised from the bond issuance into the rubber authority. This will boost the ability of government institutions to lend to farmers.

The rubber authority oversees the industry and this involves regulating plantations, teaching farmers techniques to increase yield and intervention in the market if necessary. The agriculture ministry is in discussions with the finance department over the process of bond issuance and the two are expected to reach a conclusion soon, Grisada said.

To cut oversupply and to support rubber prices, the government previously compensated farmers who were encouraged to cut down rubber trees in an area of around 64,000 hectares.

But that failed to prop up rubber prices. The agriculture ministry sees the need for more comprehensive measures that would make rubber plantation more sustainable. Thailand is the world's biggest rubber producing country.

The price of unsmoked rubber sheets, which farmers sell to rubber factories, had fallen to 48 baht per kilogram, from a record high of 180 baht per kilogram in 2011. The target now is to push prices up to 80 baht.

High prices then prompted farmers, not only in Thailand but also in Cambodia, India and Vietnam, to grow more rubber trees. Such expansion resulted in massive oversupply that has pressured prices until today.

In the past few years, falling prices had ignited sporadic protests among farmers. But the current junta has set a clear policy of not compensating farmers directly in order to avoid expectations for financial assistance whenever prices fall. The junta's stance is that easy give-aways could prevent farmers from improving their operations such as by cutting costs.

"We aim to figure out the business model for [the rubber authority] by late March or early April and we would see how we can generate profits to be used as ... compensation to farmers to encourage them to cut rubber supply," said Grisada.

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