THE price of natural rubber is down. This is not the first time. It has happened before, and it will again.
On Dec 24, the price of tyre-grade Standard Malaysian Rubber (SMR) 20 stood at 505.5 sen against 748.5 sen registered on the same date last year, while latex-in-bulk settled at 368 sen a kg from 554.5 sen a kg a year ago.
History bears testimony to the fact that rubber prices have always gone through cycles of ups and downs. When high demand chases low supply, prices will be bullish. Likewise, when oversupply caters to shrinking demand, the opposite is true. Prices turn bearish.
When prices are up, rubber growers go shopping. But when rubber prices hit historic lows, rubber growers cry. Downstream rubber users, on the other hand, seldom lose.
When rubber prices does go well down, as is the case now, rubber growers, especially smallholders, bear the brunt of the pain. This is because rubber smallholders depend on the rubber tree for their income. They are always at the mercy of world rubber prices.
The last time rubber prices hit the highs was when demand from China exploded. Now, the Chinese economy has slowed down. Demand for tyres is down. So is the demand for natural rubber. Tyres are still the biggest users of natural rubber. The other giant economy, India, is also not seeing as vigorous a growth. Another big natural rubber market, the European Union, is also not so robust. Throw in the current low price of petroleum, and the concoction spells doom for natural rubber prices.
The ones most affected are the rubber smallholders. Plantations are not so badly impacted. They have rubber and oil palm. They also have downstream investments. Some have palm oil downstream companies, such as refineries and oleochemicals. Others have investments in rubber products, especially gloves.
Very few smallholders have both rubber and oil palm. At least, if they have both, there may be times when good palm oil prices can compensate for poor rubber prices. But this time around, both rubber and palm oil face bearish times.
Palm oil prices are also down from a year ago. It is time rubber smallholders rethink their future strategy.
Now, rubber smallholders supply two types of products to the downstream manufacturing business.
One is the rubber latex itself, which goes into making tyres, engineering rubber products, including for the car industry, rubber seals and fenders for mining and other sectors and, last but not least, the various types of gloves.
The other raw material that comes from rubber smallholders is rubberwood. Most of the furniture we export is made from rubberwood.
Though rubber smallholders supply both raw materials, they do not have a stake in the downstream businesses of rubber products and rubberwood furniture.
This is unfortunate because the returns from the many downstream businesses are many times higher than the earnings from just selling raw rubber and unprocessed rubberwood. The downstream business is controlled by investors who do not produce the raw materials.
It is an irony that the farmers who supply the raw materials for the manufacturing sector remain poor, whereas the people who invest in the machinery to process the raw materials into consumer products are many times richer.
It is time this situation is changed. If we look at the situation in developed economies, there is a way to bring better returns to the producers of such materials.
The answer lies in the formation of a powerful cooperative business. In the United States, soya bean farmers have long adopted the strategy.
There, cooperatives operate successful investments in soya bean crushing, edible oil refineries, and also logistics and transport. The returns from such cooperatives are then shared with the farmers.
During times of high soya bean prices, the cooperatives benefit. The farmers share the benefits. Whereas during times of low soya bean prices, the cooperatives also benefit. Again farmers enjoy a share of the profits from the downstream businesses.
Rubber smallholders should emulate the cooperative business model of soya bean growers in the US.
They should come together nationwide to form cooperatives and venture downstream. Initial help from the government would be useful. Once the cooperatives achieve business stability, worrying over low rubber prices will be a thing of the past.
