Grain and processing industries affected by Asian economic woes
February 01, 1998
by Teresa Acklin
What began in mid-1997 as a currency problem seemingly isolated to one Asian country has turned into a full blown economic crisis for the entire region in 1998.
Over the past six months, Indonesia's rupiah, the Malaysian ringgit, South Korea's won and Thailand's baht continually have lost value against the U.S. dollar, plunging the countries' credit markets into chaos and their economies into recession. In recent weeks, the currency declines have escalated, particularly in the rupiah, as concerns mounted about the ability of reforms to achieve financial stability.
The situation's most damaging economic effects of course have occurred within the beleaguered countries themselves. But because of global linkages, the repercussions have extended around the world and encompassed many economic sectors.
For grain exporters, the most immediate concern has been trade, as collapsing currencies have made it increasingly difficult for flour and feed millers to procure imported grain. The region's coarse grain imports in 1998 are likely to be reduced from recent years, according to grain analysts, as consumers cut back on “luxury” foods, such as meats. At the same time, consumption of food grains such as rice and wheat should increase, resulting in fairly stable global trade in those grains.
The crisis already has affected trade patterns to some degree. Observers noted that Asian grain users increasingly have turned to Eastern European sources, including Ukraine, Hungary and Romania, instead of the more traditional Australian and North American sources. Cheaper prices and favorable exchange rates for the European grain more than offset any reductions in quality.
The individual countries in Asia have been affected to varying degrees. The currency problems perhaps have been most severe in Indonesia, where the rupiah dropped by some 500% between August 1997 and late January. That crash in buying power is equivalent to the per-tonne export wheat price moving from U.S.$155 to U.S.$837; maize that cost U.S.$115 per tonne in mid-1997 equated to U.S.$621 in January.
According to one Indonesian feed miller, the crisis has created “the worst conditions” for the feed industry. Many poultry producers have collapsed, as soaring feed prices have outpaced by far producers' ability to raise poultry prices.
To help maintain demand, feed mills offered to deliver feed on credit with no interest charge, but those measures were “useless because the price of feed was still high,” the miller said. As of January, many Indonesian feed mills had reduced production or closed completely, he said, and unemployment in the feed and meat industries was on the increase.
In early January, Indonesia defaulted on a 92,000-tonne maize shipment from the United States and China. Some analysts have indicated Indonesia's 1997-98 maize imports could drop by 36% from the previous season, while feed manufacturing could fall by 30%.
The crisis also has resulted in a dramatic change in Indonesia's wheat and flour marketing system. As a result of reform agreements between Indonesia and the International Monetary Fund, Indonesian wheat flour millers since Jan. 1 have been responsible for purchasing wheat directly from overseas suppliers.
Beginning Feb. 1, additional I.M.F.-backed reforms were scheduled to take effect, with the Bureau of Logistics, BULOG, relinquishing its monopoly over all products except rice, the primary food staple. The consumer flour subsidy also was scheduled for elimination on that date.
In South Korea, grain imports were disrupted for a time, as banks were reluctant to open letters of credit to finance purchases. The U.S., Australia and Canada each implemented credit guarantees, which enabled trade to resume. But observers noted the unstable financial conditions have caused wariness, even with the guarantees, and the livestock and feed industries are struggling.
In Malaysia, the ringgit dropped about 50% between July and January, causing problems for flour millers there. According to a Jan. 7 report in The Malaysia Star, a Feb. 1 increase in the government-set flour price was not enough to cover millers' operating costs because it was based on the November exchange rate of 3.4 ringgits per U.S. dollar, rather than the early January rate of 4.4 ringgits.
The millers indicated that the 4.4-ringgit exchange rate represented a loss of U.S.$0.06 per kilogram of flour produced and that another flour price increase would be needed if the ringgit did not strengthen. As of Jan. 23, the ringgit had continued to weaken and was at 4.55 to the dollar.
In Thailand, domestic meat consumption plunged by as much as 30% between July and January, and feed millers were struggling to manufacture feed profitably. With the eroding baht, import maize prices in January were at least 7 baht per kg; with prices at the mill running 5.5 to 5.6 baht, maize imports and even buying decisions were put on indefinite hold.
In the Philippines, flour millers asked suppliers to defer scheduled February wheat shipments until March based on weak flour demand and currency volatility. Industry estimates show wheat imports in the Philippines for 1998 could drop to 1.6 million tonnes after totaling 1.7 million tonnes in 1997. In addition to delayed imports, the Philippines also cut its import tariff on maize in an effort to offset the currency weakness.