Problem with NR prices

The Rubber Economist Ltd

Problems with NR prices

While waiting for output from smaller producers to become significant, there is a need to encourage the major producing countries to replant more NR. However, even with government efforts to help farmers to plant and replant rubber, there is no guarantee that there will be enough tappers or incentives for tapping. The difficulty is because that not only NR prices have declined in real terms and against manufacturing products, NR price instability has made it very difficult to increase investment.

Rubber prices have been declining in real terms, despite the high nominal price level achieved in recent years and a better performance than most other commodities (see figure below). Often, NR prices decline to a level that renders the NR sector unprofitable as a viable income generating activity, especially for smallholders. As a result, NR producers, particularly smallholders, have switched to other more profitable alternatives, like palm oil. Like other commodities, the decline in NR prices, at least in the past, was partly a result of a structural surplus influenced by both demand and supply. On the demand side, in addition to slow economic growth in industrial countries, the demand for commodities, particularly raw materials, is affected by the long-run tendency for the consumption of commodities per unit of GDP to decrease. On the supply side, there is a tendency to increase production irrespective of market conditions and there have been increases in productivity in many producing countries.

US RSS1 price deflated by 1990 price index, 1960–2007

There is also a problem with price and export instability of NR, which can influence the economic performance of the exporting countries in many ways. The countries’ ability to import capital and equipment goods essential to their development program is greatly influenced by export earnings. Investment may be affected because of higher levels of uncertainty, resulting in higher interest rates. Furthermore, export instability may result in balance-of-payments pressures which may limit import capacity and therefore reduce investment. The growth rate may be affected by a reduction in the productivity of investment. To protect against instability, there may be more investment in inventories than in more directly productive things. Government revenue through taxation of exports is subject to fluctuation which can slow down government projects such as infrastructure that are integral to the total development program. Increases in income consequent upon upward changes in export earnings may exacerbate inflationary tendencies by raising demand for both domestically produced and imported consumer goods. Reduction in income may have opposite effects. As a consequence, individual producers and workers may suffer considerable hardship from instability.

For NR, it is quite likely that the problem may have originated from a reduction in trade through organized markets and an increase in direct trade between producers and consumers. This in turn has resulted in inefficiency in physical price determination. In the past, government purchases through a marketing board or purchasing agent were quite popular. However, there has been a trend to abolish this type of marketing channel and the effect is that producers are facing less stable prices and need good reliable prices for physical trade deals. In fact, recent events may have caused NR prices to become more volatile than ever before. The Asian economic and financial crises not only caused the sudden decline in demand for rubber, but also increased the amount Asian rubber farmers received in local currencies. The unprecedented levels of exchange rate variability as a result of the crisis caused sharp fluctuations in rubber prices. Furthermore, the introduction of on-line trading means news is readily accessible and prices tend to fluctuate sharply in response to this news. The collapse of the International Natural Rubber Agreement (INRA), which engaged in management of price risk at the international level, may also have contributed to the increase in price volatility This is where the role of Risk management in the rubber industry comes into play.

Home (New)