Rubber tree plantation investments
New investment strategies in “white gold”
Thailand’s rubber industry seemed to be in bad shape. But now it might be the perfect point in time for a profitable investment in the white gold of rubber farmland. Technology 4.0, smart farming, and the use of blockchain technology for every single tree could give the market a consistent upward movement. The tokenization of rubber trees could be the bright future of farming.
The pandemic and its long-term effects have boosted global demand for rubber. “The latex price in June is THB 44.52 per kg, an increase of THB 4.34, or 10.89 percent, compared to the same period last year, and 6.46 percent from the previous month,” reports the Rubber Authority of Thailand (quoted from The Nation, June 23, 2020). Medical rubber gloves are on high demand for at least 3 to 5 years. #CoronaAlliance
In the golden past, the latex rubber price escalated continuously, which prompted Thai rubber farmers to grow rubber trees even on unsuitable land. Even traditional rice fields have been converted into rubber plantations. These projects depend on a high market price and make the farmer prone to a temporary price drop, because Thailand, for example, traded substantial amounts of reserved latex rubber.
The long-term outlook for the rubber price seems still to be promising. There will be definitely sooner or later a globally growing demand for this particular commodity. However, due to oversupply, the latex rubber price dropped dramatically in the world market. As a spontaneous reaction, Thai farmers have been chopping down rubber trees for the last several months and eliminated many Rai of rubber fields.
#Thailand‘s largest IPO during the coronavirus outbreak (so far) will be from rubber glove maker, Sri Trang Gloves, which aims to raise $480 million. CEO Jarinya Jirojkul wants to make 100 billion gloves a year by 2032 https://t.co/0WuWZBOGxL pic.twitter.com/bWk8Gk8Pen
— Chayut (@ChayutSet) June 22, 2020
From a local farmer’s perspective, it is quite reasonable to grow one crop when he finds it profitable and then chop the plants down when prices drop to levels that cannot sustain profits. However, this does not take into consideration the long life-cycle of a rubber investment. Therefore, from an international investor’s point of view, it makes perfect sense to make use of the shake-out of market adjustment in the rubber industry.
A natural resource with an unloved past but a promising future
Natural rubber, also called India rubber or caoutchouc is harvested mainly in the form of latex from rubber trees (Hevea brasiliensis, RRIT251, RRIM600) as a renewable natural source. As a general rule, rubber trees are tapped about once every two days, each time yielding about 50 g of latex. Rubber trees are no native inhabitants in Thailand. The first rubber tree in Thailand has been planted by a Thai-Chinese investor in 1899. That tree, respectively the great, great-grandson of the original, is located in the town of Kan Tang, in the province of Trang, roughly 30 km west of the provincial capital of Trang city.
As of today, Thailand is head to head with Indonesia the world’s largest producer and exporter of natural rubber, accounting for about one-third of global supply. The country’s rubber production has more than doubled from 1.6 million to 3.8 million metric tons in the past two decades, about 90% of which is for export. The world’s third-biggest player is Malaysia. Natural rubber is mainly used for tires, surgeons’ gloves, condoms, balloons, and other relatively high-value products. Therefore the rubber price highly depends on the world economic situation and petroleum price.
Rubber trees are cultivated in monoculture commercial plantations. Rubber plantations are actively managed for the commercial production of latex on a large scale. Rubber plantations are typically privately owned. Due to various success factors, a long-term growth cycle and a changing legal and business environment it has to be qualified as high risk and high reward investment in both valuable and volatile commodity.
In Thailand, rubber brings in more money from exports than rice. The export value of natural rubber between 2010 and 2013 averaged US$ 9.3 billion a year, compared with Thai rice at an average export value of US$ 5.3 billion a year, as statistics show. But more Thais are employed in the rice industry. An estimated 1.2 million Thai households have someone who works on a rubber plantation, which is only about one-third of rice-farmer households, according to government data.
Smart clearance of legal hurdles – learning from the mistakes of others
Any investment has to be carefully prepared for because Thailand is a highly regulated legislation and the land encroachments of the past will not be tolerated in the future. Each farm acquisition needs comprehensive due diligence, and no investor should lay his trust alone on a proper registration at the local land office.
A complex legal framework and changing governmental policies for Thailand’s forest add additional complexity to the project. Apart from the primary forest legislation sources as the Forestry Act of 1941, the Forest Protection Act of 1992, the National Park Act of 1961, the National Forest Reserve Act of 1964, and the Conservation and Protection of Wildlife Act of 1992, relevant forest authorities and their plans and policies are the Royal Forest Department (RFD) of Ministry of Natural Resources and Environment (MNRE), the National Forest Committee, the National Economic and Social Development Plan and the Policy and Prospective Plan for Enhancement and Conservation of National Environmental Quality (1997-2016).
Restrictions: However, it should be noted that foreign investments in Thailand rubber farming face certain additional legal and factual hurdles. These are, above all: the foreign investment restrictions under the Foreign Business Act, restrictions on foreign land acquisition under the Land Code, high dependence on local people and local knowledge, non-transparent calculation of profitability and financial forecast, the lack of physical presence on-site favors manipulations and theft of latex and trees, and limited financing facilities for foreign investments.
All in all, a rubber farm investment has even in these times for the good advised investor attractive benefits to offer. The legal hurdles are tough, but experience shows that they are not at all insuperable.
Professional scope of services – where the rubber meets the success road
PUGNATORIUS Ltd. is a Bangkok-based specialist provider of bespoke transactional legal and tax advice in the corporate and property legal and taxation industry sectors. The law firm has broad experiences and unique know-how in the legal structuring and financial modeling of rubber farm investments in Thailand by foreign investors. This covers all Thai legal and tax issues and includes these tasks:
- Comprehensive investment due diligence, the design of the legal structure including project company, joint venture agreement, land and tree purchase, harvest and latex delivery contract.
- Analysis of the forestry legislation and policy and negotiations with the Royal Forest Department and other governmental agencies
- Land acquisition process from the design of foreign ownership acquisition structures through comprehensive due diligence, the preparation and negotiation of the purchase agreement and supporting documents till the signing, closing, payment, transfer of legal ownership and registration.
- Corporate structuring from the basic design, the company formation, registration. This includes licensing, permissions, employment issues, and visa and work permit if required.
- Contracts like the harvest agreement, potential leases, rubber supply agreements, the implementation of an agreement to skim the founder benefits from the overall project structure and similar tasks.
- Thai tax structuring and international tax planning for the whole group of companies.
Given the current economic and political situation, the perfect time for a rubber investment in Thailand is now – whether it is a greenfield project, a rubber farm acquisition or a rubber investment funds.
PUGNATORIUS Ltd. advises foreign investors on how to successfully acquire and restructure rubber plantation farms in Thailand in compliance with local legislation and with a solid protection mechanism. It provides direct access to markets and industries, business connections and major industry players, government agencies and key decision-makers.
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