Asean region critical to tackling food security, but countries must deal with multiple risks

RISING food inflation and food security threats have cast a spotlight on food producers in South-east Asia, creating opportunities for companies in the region. But climate change also poses a risk to production, which is flagging in some parts of the world.

The Russia-Ukraine conflict has contributed to rising food prices, as the 2 countries jointly account for a large portion of the world’s wheat, barley and sunflower oil supplies.

South-east Asia, meanwhile, is home to several key producers of agri commodities such as palm oil, rice and dried beans. Its favourable climate and fertile soil make it a major crop grower, and there have been suggestions that the region could take on a role as a major food supplier.

Gregory Seow, Maybank Singapore’s head of global banking, said South-east Asia is “unlikely to be the food bowl for the world at present”, even though the region exports substantial food supplies to other countries. 

He noted a “yield stagnation” in countries such as Indonesia, Myanmar, Thailand and Vietnam. “Urbanisation progress has resulted in lesser agricultural land to grow and harvest crops,” he said, adding that this in turn affects export food production. 

Seow also noted that South-east Asia is a major consuming region for staple foods such as rice and cereals, and the region’s increase in population will also lead to a greater demand for the import of such staples.

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Indeed, the region is also a key importer of some agri commodities for which domestic demand continues to surpass domestic production.

Indonesia and the Philippines, for instance, import rice, although they also grow it. Countries in South-east Asia also import wheat, for wheat flour and animal feed production, because the region’s tropical climate does not support wheat growing.

A spokesperson from Commodities Intelligence Centre (CIC) – a global trading platform for physical commodities – said climate change is another challenge for the industry. A lack of rainfall could impact agri commodities such as rice, the spokesperson said.

Meanwhile, a growing emphasis on sustainability investing has reduced capital flow into commodities producers as investors worry about the climate risks associated with agriculture.

Government intervention, in the form of financial support or punitive regulations, can also impact the outlook for agri commodity suppliers.

A sugar tax in Thailand, for instance, is expected to reduce sugar consumption over time.

CIC, meanwhile, noted that Indonesia’s palm oil industry is “dominated by a small number of big companies”.

“These companies have large concessions in excess of the limit imposed by the government, allowing them to wield outsized power to dictate prices, policies and supplies,” said the company’s spokesperson. 

Against this backdrop of challenges, CIC sees opportunities for investors in agri-tech and in the changing consumer habits that are pushing companies to produce food of better quality. How these opportunities present themselves will depend on circumstances unique to each market.

Here is a breakdown of what South­-east Asia’s major crop producers do:

Indonesia: South-east Asia’s agri commodities powerhouse

The country is one of the largest producers of crude palm oil (CPO) and, along with Malaysia, accounts for much of the world’s CPO supply. 

CIC said the majority of Indonesia’s palm oil output is exported to countries including China, India, Pakistan, Malaysia and the Netherlands.

“Global palm oil production is dominated by Indonesia and Malaysia,” said CIC. “These 2 countries, together, account for around 85-90 per cent of total global palm oil production.”

Indonesia is also a key producer of cocoa beans, rice, sugar cane, corn and dried beans. 

According to Statista, Indonesia produced approximately 170,000 metric tonnes of cocoa beans in 2020/21. It is expected to produce 180,000 metric tonnes in 2021/22. 

An Apr 1 report from the US Department of Agriculture said agricultural self-sufficiency is a “stated goal of the Indonesian government” and this is also “often used to justify trade barriers and restrictions”.

The report said the strength of Indonesia in the food space lies in its large consumer base and growing incomes. The country’s weakness, however, is its “inadequate infrastructure” – including ports and cold storage facilities outside the main island of Java.

Malaysia: Palm oil giant, rising ESG focus

Malaysia is one of the world’s top producers of crude palm oil, alongside Indonesia. The country’s bourse is home to palm oil giants such as Boustead Plantations, FGV Holdings and Sime Darby, and the commodity is one of the pillars of Malaysia’s economy. 

Oil palms need a steady amount of rain and sunshine to grow, and high temperatures or heavy rainfall can adversely affect yields. Market watchers keep a close eye on Malaysia’s palm oil inventory levels that are reported on a monthly basis to gauge the industry’s demand and supply dynamics.

Malaysia is also one of the region’s key players for cocoa, and the country is one of the largest cocoa bean processing and grinding centres. According to data from Statista, the country ground 338,000 metric tonnes of cocoa beans in 2020/21, up from 318,000 metric tonnes in 2019/20. 

Despite global demand uncertainty, analysts believe commodity exporters such as Indonesia and Malaysia could benefit, as positive terms of trade will give them the liquidity to fund domestic demand through more comfortable loan-to-deposit ratios and stronger fiscal resources. 

Vietnam: A coffee hub

Vietnam is South-east Asia’s largest producer of coffee, and the second-largest globally after Brazil. 

According to the country’s agency of foreign trade under the Ministry of Industry and Trade, Vietnam’s coffee exports in the first 2 months of 2022 were estimated at 293,000 tonnes and valued at US$674 million, up 3.4 percent in volume and 35.6 percent in value compared with the same period last year.

Market analysts have noted that Vietnam exports are declining faster than expected, despite declining shipping rates. They trimmed Vietnam’s 2021/22 crop estimate marginally to a total of 30.1 million bags and lowered expectations for the next year to 29.4 million bags. 

The analysts said the price of coffee has risen significantly this year on the back of factors like higher container freight rates and higher prices for energy needed for roasting coffee beans. They are expecting further margin pressures for coffee roasters globally in H2.

Thailand: South-east Asia’s sugar bowl

Thailand is a top exporter of sugar globally, and sugarcane is one of the country’s top agriculture crops. Sugarcane accounts for roughly 80 per cent of sugar produced globally. 

CIC said sugar consumption is expected to rise to 2.5 million metric tonnes in 2023 alongside the broad-based economic recovery. Countries in South-east Asia also mainly rely on Thailand as their source of sugar, said its spokesperson. 

The “strong global demand” for the agri commodity is expected to push up Thailand’s sugar production and exports to 10.5 million metric tonnes in 2023. 

Although Thailand was set to start the third phase of its sugar tax on Oct 1, 2021, this was pushed back to Oct 1 this year to ease the burden on business operators and consumers over the course of the Covid-19 pandemic. 

Sugar prices typically rise when either extreme – a drought or a prolonged flood – strikes producing countries. A prolonged drought will worsen the production and productivity of sugarcane crop. While sugarcane crop can largely withstand floods, production will be hit when floods continue for a longer period of time, particularly if the crop is in early stages of growth.