CASSAVA INDUSTRY August 2018 Chetchuda Chuasuwan

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1 Nigeria Thailand Indonesia Brazil Vietnam Cambodia India China Lao PDR THAILAND INDUSTRY OUTLOOK CASSAVA INDUSTRY August 218 Chetchuda Chuasuwan forecasts that growth of cassava chip industry will be limited during on the back of demand uncertainty in Chinese market. This is a consequence of the declined imports and the Chinese government s promoting policies to encourage the consumption by Chinese industries of domestically-grown corn. China has the policy to reduce historical high levels of corn stockpiles (expect to take 2-3 years to turn a normal level) and abandon its policy of price support for corn growers. As a result, corn prices on Chinese market fell drastically. In addition, China also plans to grow cassava and establish cassava processing plants in other countries to secure the availability of cassava input for ethanol industry. However, cassava starch industry, especially modified cassava starch is likely to grow further following food, cosmetic, pharmaceutical industries in global market. Overview Cassava is a carbohydrate crop yields and is used as food, animal feed, raw materials in factory and fuel. Currently, it sits in 5 th place in terms of the amount consumed, after wheat, corn, rice, and potatoes (217 figures). Commodities could be replaced each other and cassava prices are lower price than other carbohydrate-rich crops. Therefore, this has tended to increase demand for its consumption in several industries as an animal feed, in industry (for uses such as the manufacture of alcohol, citric acid, clothing, medicine, paper, and glue), and, in the form of ethanol, as a fuel used in alternative energy. Globally, in 217, approximately 278 million tonnes of cassava were produced, with Africa, at 3% of the total, being the single largest producing zone; cultivation is driven by demand for cassava for consumption as a human foodstuff in many African countries. In terms of national producers, the largest is Nigeria, followed by Thailand, Brazil, Indonesia, and Ghana which produce 2%, 11%, 7%, 7% and 6% of world output, respectively. In addition, production from Cambodia and Vietnam increase in the past 3-5 years as Thailand and China have invested in both countries. The largest cassava-consuming nations are Nigeria, China, Indonesia and Brazil, which take 2%, 13%, 9% and 8% of global consumption respectively. Production in Thailand has expanded continuously over the past two decades following demand for cassava processing industry in export markets. In 217, a total of 9 million rai of cassava were under cultivation, yielding approximately 3-31 million tonnes per year 1/. Cassava production is concentrated particularly in Nakhon Ratchasima, Kamphaeng Phet, Chaiyaphum, Kanchanaburi and Ubon Ratchathani. 1/ Cassava can be grown in poorer soils and it can also tolerate drought so may be grown year-round in Thailand but it tends to be planted in March to May for harvesting at the year-end or the start of the following year. Figure 1: Cassava Production and Consumption in Major Producing Countries million tonnes 6 Production Consumption 5 Surplus/deficit Source: Food and Agriculture Organization of the United Nations (FAO) million tonnes 3 Figure 2: World Production of Cassava Source: Food and Agriculture Organization of the United Nations (FAO) million tonnes % YoY (RHS) Production (LHS) Figure 3: Thai Cassava Production Production (LHS) %yoy million rai Area Cultivated (RHS) Source: Office of Agricultural Economics (OAE)

2 Thailand Industry Outlook Cassava Industry To be convenient and reduce transportation of fresh cassava to factories, cassava processing facilities are mostly located near cultivation areas. In addition, Thai manufacturers also import cassava which is planted and produced from primary processing facilities in Cambodia and Laos (in which their production base are situated) to secure the availability of input. Cassava products in Thailand are divided into two characteristics: Dried cassava: There are two type of dried cassava -- cassava pellets and cassava chips. Outputs are estimated at 8-9 million tonnes per year. 85% of domestic cassava output is exported and the remainder used in domestic market. Cassava starch: Primary product is native starch which could be directly consumed in households (cooking, and as raw materials for producing high value-added product or so-called modified starch. In addition, cassava starch is used as an input into downstream industries such as flavorings, lysine, sweeteners (such as glucose, fructose, sorbitol), sago, paper textile, and fibre, plywood, and glue. Cassava starch is expected at 5-6 million tonnes per year 3/, a quarter of which is consumed domestically, leaving three-quarters for export. Figure 4: Thai Exports of Cassava Products (By Volume) 1% Cassava modified starch 8% Cassava native starch 6% Cassava pellets 4% 2% Cassava chips % Source : Ministry of Commerce (MOC) Looking at the value chain for the domestic cassava sector, of total raw material for such sector, 82-85% are domestic input (the proportion of dried cassava and cassava starch production is at 55:45) and the 15-18% is imported from neighboring countries. In 217, Thailand imported fresh cassava of around.4 million tonnes and dried cassava products of 2.9 million tonnes 4/. These input was used as raw materials in downstream industries, especially cassava starch and modified cassava starch. Thailand s cassava product output is mainly dependent on export market. Supply chain production; therefore, is factored by economic conditions and trading partners economies. Figure 5: Thai Cassava Sector Structure Cassava root Growers Cassava root Dried cassava & Cassava root Imported Dried Cassava Industries Cassava Starch Industries Polluted water/ Cassava pulp Cassava Chips Native Starch Ethanol Related Businesses Cassava Pellets Modified Starch Biogas Related Businesses Direct Sales Traders Direct Sales End-user industries (Dried cassava raw material) Animal feed Alcohol Citric acid Domestic 15% Export 85% End-user industries (Starch raw material) Food and drink Paper Textiles Cosmetics Medical Domestic 25% Export 75% Source : Trademap, Ministry of Commerce (MOC), National Food Institute (NFI), compiled by 2/ Producing 1 kg of cassava chips or cassava pellets requires 2.5 kg of fresh cassava 3/ producing 1 kg of cassava starch (or tapioca) takes 4.6 kg of fresh cassava. 4/or equivalent to 7.2 million tonnes of fresh cassava 2

3 Thailand Industry Outlook Cassava Industry Cassava Chip and Pellet World Exporters (Cassava Chips Only) Total 1,84 Mn.USD Thailand 58 % Cambodia 16% Vietnam 15% Figure 6: World Cassava Exporters & Thai Cassava Export Market by Type (217) Thai Cassava Chip Export Markets Thai Cassava Pellet Export Markets Others 59% China 99.99% Netherlands 6% Japan 35% Others.1% No. Top 1 Cassava Chip Exporters 1 Good Luck Trading Co., Ltd. 2 Sawasdi Paiboon Agriculture Limited Partnership 3 Sangfahagriproduct Co., Ltd. 4 Tapioca Inter Corporation Co., Ltd. 5 Yingwattana Tapioca Co., Ltd. 6 P R Inter Trade co., ltd. 7 Int Resources (Thailand) Co., Ltd. 8 Keng Seng Co., Ltd. 9 R.S.V. Tapioca limited 1 Golden Sun Intertrade Co., Ltd. No. Top 6 Thai Cassava Pellet Exporters 1 General Mills Co., Ltd. 2 Wichai Agri-Trade Co., Ltd. 3 Chai Udom Sin Co., Ltd. 4 Quality Pellet Co., Ltd 5 Chaicharoen Exproduce Co., Ltd 6 Thai Europe Feed Co., Ltd 7 Pam International Co., Ltd Native Starch World Exporters Total 1,484 Mn.USD Thailand 68 % Vietnam 2% Cambodia 2% Modified Starch World Exporters Total 3,47 Mn.USD Thailand 2 % Netherland 19% USA 12% Japan 4% Malaysia 8% Taiwan 1% Indonesia 1% Thai Export Markets Others 18% China 5% Thai Export Markets Taiwan 3% USA 6% S. Korea 8% Indonesia 9% China 2% Others 24% Japan 3% No. Top 1 Thai Native Starch Exporters 1 Sanguan Wongse Industries Co., Ltd. 2 Eiamheng Tapioca Starch Industry Co., Ltd. 3 Thai Wah Public Co., Ltd. 4 P.V.D. International Co., Ltd. 5 SCG Trading Co.,Ltd 6 Ubon Agricultural Energy Co.,Ltd 7 T P K Advance Starch Co., Ltd. 8 Roi Et Flour Co., Ltd. 9 Eimburapa Co., Ltd. 1 Top Premium Starch Co., Ltd. No. Top 1 Thai Modified Starch Exporters 1 National Starch And Chemical (Thailand) Co., Ltd. 2 SMS Corporation Co., Ltd. 3 General Starch Limited 4 Sanguan Wongse Starch Co., Ltd. 5 Starpro Starch (Thailand) Co., Ltd. 6 E H M Intertrading Co., Ltd. 7 Asia Modified Starch Co.,Ltd 8 Tapioca Development Co., Ltd. 9 Sino-Thai Starch Co., Ltd. 1 Thai Asahi Co., Ltd. Source : Trademap, Ministry of Commerce (MOC), compiled by Thailand is the world s largest cassava producer and exporter due to the availability of cassava input and advanced technology of cassava processing. In 217, Thai native cassava starch, cassava chips, and modified cassava starch accounted for 68% of 58% and 2% of exports, respectively. Exports of cassava pellets are somewhat less certain since the 25 change in policy by the EU, which saw a reduction in imports of Thai cassava pellets and their replacement with grains grown in the EU zone 5/. This has had significant structural implications for Thai exports. Previously Thai exporters of cassava pellets were reliant on EU markets but exporters have now shifted their attention such that almost all production goes to Asia, in particular to China, which took 75% of all Thai cassava exports, and so is Thailand s number one market. Thai structure and export markets of cassava are detailed as follows: Cassava pellets comprise 1.% of Thai exports of cassava products. In addition, there is considerable year-to-year uncertainty in the market. Cassava chips account for 57% of the country s exports of cassava products, with almost all going to China. These are used in a variety of sectors, including animal feed 6/, alcohol, citric acid and ethanol production. Because of the structure of the export market and its distributed nature, Thai producers lack bargaining power and are also exposed to risk arising from possible policy changes by their trading partners, as happened with trade with EU and reform of the CAP in 25. 5/ Reform of the EU Common Agricultural Policy (CAP) in 25 forced a cut in imports of Thai cassava pellets as EU member states replaced these imports with EU products. Manufacturers of pellets have switched or are switching production to cassava chip for export. 6/ Cassava chips are mixed with soybean meal at 87:13 to keep the same properties of animal feed as corn. 3

4 Jan-9 Jan-1 Jan-11 Thailand Industry Outlook Cassava Industry Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Dec Native cassava starch takes a 28% share of exported Thai cassava products, and 5% of this goes to China. This market is dependent on growth in a number of other downstream industries, including food processing, paper manufacturing, soft drinks, and textiles. Modified cassava starch is a value-added product and as such, profits are higher than for other cassava products. However, only 9% of cassava exports are of modified starch, though the market is seeing solid rates of expansion as downstream demand in industries such as cosmetics and medicines continues to expand. The major export markets for modified cassava starch are Japan, China, Indonesia, and South Korea which represent respectively 3%, 2%, 9% and 8% of the export market by value. Domestic demand for cassava will not only be consumed in households and used as animal feeds, but also used in industrial downstream industries such as fructose and glucose syrup, sago. In addition, some of cassava producers has set up cassava-based ethanol plants. For example, subsidiaries of large manufacturers have expanded ethanol investment e.g. Ubon Bioethanol Co.Ltd., PSC Starch Products PCL., and Sima Interproducts Co.Ltd. (Table 1). Also, some manufacturers have penetrated cassava-based biomass power plants to generate electricity for factories and to sell part of electricity such as Ubon Bioethanol Co.Ltd. Situation In the period , the cassava sector saw strong growth due to double digit growth in export markets (+17.6% per year). The sector growth is boosted by Demand for cassava in China went up significantly, in particular for use as an animal feed, which would expand in line with economic growth. In terms of cassava-based ethanol, the Chinese government encourage to set up cassava-based ethanol production facilities in the Southern region. It is one of the development plan of 1.5-generation (or 1.5 G) biofuels to minimize dependence on oil imports and air pollutant emission. As a result, import demand for cassava chips for ethanol production would increase. The price of cassava was significantly lower than for other starchy vegetables. Cassava also has a relatively high calorific content, giving it an advantage compared to the alternatives and helping to increase demand for cassava as an input into downstream industries. In addition, cassava prices were relatively stable when compared to those of the other world commodities (such as corn, wheat, barley, sorghum); Therefore, this helped to reduce costs for manufacturers in industries which use cassava as raw materials. Chinese agricultural policies also helped to support imports from Thailand between 28 and 214. (i) Official promotion of food security policies after 28 helped to restrict the domestic consumption of corn as an animal feed. Therefore, imports of cassava picked up as a replacement such as alcohol, citric acid, and ethanol; and (ii) Chinese government s support for domestic agricultural prices, helped to push up the prices of Chinese corn products. In addition, it has a policy to assist corn growers by imposing import duties on corn which were set at a USD/tonne USD/tonne Table 1: Thai Ethanol Production & Consumption Cassava Root Source: DEDE Ethanol Factory Figure 6: Global Animal Feed Price Maize (corn) Sorghum Source : World Bank, calculated by Krungsri Figure 7: Global Cereal Starch Price Wheat starch Corn starch Cassva native starch Cassava Modified starch Source : World Bank, Topicathai, calculated by Krungsri Installed Capacity (liters/day) 1 Thai Ethanol Power PCL. 13, 2 Taiping Ethanol Co., Ltd. 15, 3 E85 Co., Ltd. 25, Cassava Chips 1 Rajburi Ethanol Co., Ltd. 15, 2 E.S. Power Co., Ltd. 15, 3 Thai Alcohol PCL. 2, 4 Thai Agro Energy PCL. 35, 5 Sapthip Green Energy Co., Ltd. 2, 6 P.S.C Starch Products PCL. 15, Cassava Root and Chips 1 Ubon Bio Ethanol Co., Ltd. 4, 2 Sima Interproduct Co.,Ltd 15, Total 2,28, Wheat Cassava chips 4

5 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Dec Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Dec Thailand Industry Outlook Cassava Industry high rate of 65%. However, as a consequence of a free trade agreement between ASEAN and China, imports of cassava to China from Thailand attracted % duty, making them a low cost alternative. However, from 215, the Thai cassava sector has experienced a slowdown and this has particularly affected exports. Export volume of Thai cassava grew at only 4.5% YoY in 215 and shrank 3.5% YoY and 1.6% YoY in The Slowdown has been caused by i) a fall in the prices of other starchy or carbohydraterich crops. This lowered the competitiveness of cassava, particularly low-value added products, especially cassava chips and cassava starch); and ii) its government gradually cut back on support for corn producers in order to reduce incentives to increase production and cancelled supports of corn prices in 216. Consequently, corn price on Chinese markets fell from the highest of USD4/tonne in 3Q14 to USD2/tonne. Year Value (USD, m) Table 2: Thai Cassava Exports Cassava Pellet Volume (million tonnes) Cassava Chip Native Starch Modified Starch Total 211 2, , , , , , , % YoY Source: Ministry of Commerce (MOC) In terms of export and producers of cassava, exports shrank 1.6% YoY by volume and 4.8% YoY by value. This was due to declined imports of Thai cassava to China and increasing haggling over price, particularly by Chinese traders, who have increasingly come to Thailand to buy products directly from processing plants; negotiating by them has forced down the price of fresh cassava. This plummeted to THB 1.4/kg, down 7.9% YoY which had knockon effects on the price of exports. Cassava pellets: Total exports came to 35, tonnes or valued at USD5.9 million (up 23.2% YoY and 161.4% YoY). The majority of exports went to Japan in which demand continues to increase. USD/tonne Figure 8: Thai Cassava Prices Cassava starch (LHS) Cassava chips (LHS) Cassava root (RHS) THB/kg Cassava chips: Exports contracted.8% YoY by volume (to 6.4 million tonnes) and 4.3% YoY by value (to USD 1.1 bn). These falls were the result of the Chinese government removing price support for domestic corn and selling off corn stocks at low prices. Therefore, this prompted downstream industries to switch to Chinese corn as a cheap replacement for imported cassava. Native cassava starch: There was a fall in the volume of exports, which fell 4.6% YoY to 3.1 million tonnes but at the same time, the value of exports dropped by 9.% YoY to USD 1. bn. This disparity was caused by increasing competition on price with starches from other starchy cereals. Modified cassava starch: Export volume picked up to 1. million tonnes (6.3% YoY) and valued at USD617.8 million (1.1% YoY) due to strong demand from Japan, China, Indonesia and South Korea. However, prices of modified cassava starch declined due to lower fresh cassava. In addition, falling prices for alternatives to cassava and increasing haggling by trade partners depress prices.. % YoY Cassava starch Cassava chips Cassava root Source: Office of Agricultural Economics (OAE), Tapiocathai Domestic demand for cassava in 217 continued to rise due to an increase in high-value added products such as fructose, glucose, and ethanol 7/. Partly, it is an expansion of business function to increase income of cassava producers after cassava product price has dropped. 7/ Demand for fresh cassava for ethanol industry in 217 is estimated to be around 3 million tonnes. 5

6 F 219F 22F F 219F Thailand Industry Outlook Cassava Industry Outlook In , it is expected that manufacturers of both cassava chips and native cassava starch will experience volatility in production and market situation. Production: In 218, cassava processing industry may face risk which is caused by a decline in domestic cassava (cassava growers reduced plantation areas after cassava price plummeted during the past few years. Fresh cassava in Thailand is estimated to fall 1% to 28 million tonnes). As a result, fresh cassava prices would increase sharply; and this could pressure margin of cassava chip and native cassava starch producers. However, fresh cassava production may improve during , which help lower price of fresh cassava. Market: Demand for Thai modified cassava starch would improve as Thailand has strong potential in competition in global market and global demand for modified cassava starch remains high in line with expansion of food, cosmetics and pharmaceutical industries. In contrast, demand for cassava chips and native cassava starch in global market remains volatile attributed to i) stiffen competition after prices of cereal substitutes fell to almost the same level; ii) China s policy which is unfavorable to Thai cassava industry as incurred. For example, China has the policy to encourage consumption of domestically-grown corn (including selling off historical highs of corn stocks). It is expected to take 2-3 years to diminish stocks to a normal level; China has expand cultivation areas and invested in primary processed cassava plants in other countries such as Cambodia, Tanzania. This will affect exports of primary processed or dried cassava products, especially cassava chip. However, China destocked corn for the first time in April 218, and this found a large number of deteriorated corn stocks. As a result, imports of cassava chip and native cassava starch from Thailand to China may fall slightly. Based on the above mentioned factors, views that exports of Thai cassava in are expected to remain volatile. Export forecasts are detailed below: Figure 14: Global and Chinese Corn Stocks million tonnes % Tapioca chips: Exports are expected to fall by 6-8% YoY to million tonnes in 218 owing to shortage of raw materials and higher prices of fresh cassava which pressure margin. It is expected to rebound at 4-6% YoY in 219 due partly to low base effect in 218 and a rise in fresh cassava output and would pick up only -2% YoY in 22 attributed to fiercer competition from substitutes. Native cassava starch: Exports in this category are also forecast to be stable at million tonnes per year, or grew at -2% per year during This will be caused by falling prices for alternatives to cassava starch. As a result, global competition would be intensified. Modified cassava starch: Growing demand in Japan, the ASEAN zone, and South Korea, especially for use in cosmetics and medicine industries, will help to support in export growth by 1-3% YoY during This will help to maintain healthy profit margins throughout the period World corn stocks % Chinese stock ratio Source : U.S. Department of Agriculture (USDA) million tonnes Chinese corn stocks Figure 15: Thai Cassava Exports Forecast Cassava chips Native starch Value Cassava pellets Modified starch Source : Ministry of Commerce (MOC), forecast by USD, m 4, 3,5 3, 2,5 2, 1,5 1, 5 6

7 Thailand Industry Outlook Cassava Industry On performance side, cassava chip and native cassava starch producers would face increasing levels of price competition; which results in low margin. However, modified cassava starch producers income and margin will be healthier as competition in this business is not severe. In addition, expansion into downstream industries (such as ethanol production and biomass energy generation) and growth in other high-value added business functions will be factors to bolster income and reduce exposure to risks arising from fluctuations in revenue from exports to some extent. In addition, the ability to produce their own energy will help manufacturers reduce their costs. Over the next 5-1 years, dried cassava industry in Thailand faces risks which need to be addressed, particularly cassava chips, low value-added primary products. Cassava chip producers could face tough competition in seeking in fresh cassava as raw materials which is used in high-value added biotechnology industry under the government s support such as ethanol, bioplastic products, and sweeteners. Low value-added producers; therefore, need to consider adjusting their range of products to move themselves further up the value-chain if they wish to be assured of continued growth. In addition, exports of cassava chips which are an over-reliance on Chinese markets may expose operators to uncertainties in their income. Moreover, a developing cassava sector in competitor nations, in particular in Vietnam and Cambodia, may lead to increasing price competition with an attendant downward pressure on prices, which would eat into profitability. 7

8 KRUNGSRI RESEARCH Somprawin Manprasert, Ph.D. Phornphan Phoksuphat Head of Research Division and Chief Economist Head of Macroeconomic and Industry Research Macroeconomic Team Sarun Sunansathaporn Head of Strategic Economics Sujit Chaivichayachat Head of Forecasting and Macroprudential Economics Churailuk Pholsri Senior Economist Soison Lohsuwannakul Senior Economist (Regional Economics) Lookhin Varachotisate Economist Tanaporn Sriklay Economist Industry Team Chetchuda Chuasuwan Head of Agricultural and Manufacturing Sectors Taned Mahattanalai Head of Service and Real Estate Sectors Poonsuk Ninkitsaranont Senior Analyst (Healthcare, Modern Trade, ICT) Piyanuch Sathapongpakdee Senior Analyst (Transportation & Logistics, Industry Risk Ratings) Narin Tunpaiboon Senior Analyst (Power Generation, Biofuel, Chemical & Plastic Products) Puttachard Lunkam Analyst (Tourism Sectors, Real Estate in Upcountry) Niratsai Toomwongsa Analyst (Construction Contractor, Construction Materials) Wanna Yongpisanphob Analyst (Automobile, Electronics & Electrical Appliances, Beverages) Patchara Klinchuanchun Analyst (Real Estate in BMR) Intelligence Team Talublugkhana Thanadhidhasuwanna Senior Analyst (Financial Sectors) Rachot Liengchan Analyst (Oil & Gas, Petrochemicals, Industry Scenario Analysis) Arpakorn Nopparattayaporn Analyst MIS and Reporting Team Suratchanee Somprasong Administrator Thamon Sernsuksakul Administrator Chirdsak Srichaiton MIS Officer Wongsagon Keawuttung MIS Officer For research subscription, contact Disclaimer This document is based on public information believed to be reliable. Nevertheless, would not affirm the accuracy and completeness of this information. The opinions expressed in this document are our own, which are not necessarily the opinions of Bank of Ayudhya. We reserve the right to change opinions or forecast without prior notice. 8