Businesses Want The Baht Held To 35.50 To The Usd

[xbusman]

Sorry, I must be a real thread killer. Come on Ben, whip up a few more of your insights and lets get this rolling again.

[solo siam]

Your arguments are valid, however on some it seems you are making the assumption that the "price" is a fixed figure, and that the only market is the USA.

Some currencies (like the Euro) have moved the opposite way, so that actually maybe Thailands goods are cheaper there than say 18 months ago.

In terms of exports, Thailands main export are food related, I've argued before that food is not just bought on price alone but quality of which Thailand has a rather enviable position against competitors like China, The other thing about food is that it has to be grown so environmental factors limit competition .Also its very difficult to ramp-up farming to meet a new gap in the market due to high prices from the main producing country. For example it's pretty hard to ramp up chicken farming, rice production etc... It's not like switching an electronics factory over to producing a new component that has limited supply, that can be done in days or weeks. Crops often take 6 months to grow, or longer for fruits.

Also in regards to pricing the price of goods isn't fixed by a sum of exchange rates and suppliers costs (lets take the Thai Baht strength as an extra cost here) but rather supply and demand. For foodstuffs, an example is pineapple - The demand is up (due to Russians/E.Europeans) whilst the supply is down in Indonesia (Floods), China (Short crop, prices already up 40% there), South Africa (contaminated crop). This means regardless of the currency exchange rate, a significantly higher price will be paid for Pineapple this year, more than enough to soak up the cost of the Thai Baht's increased strength.

The increase in the strength of the Thai currency will likely lead to an increase the end-user pays (if demand is strong) for foodstuffs rather than the supplier having to continue to supply at a fixed US$ price until he's losing money. Food like oil has failry inelastic demand, If I'm out shopping I won't even notice that pineapples cost 10% more, even if I do what else will I buy to go on My Hawain Pizza? On the flipside If I see that pineapples are discounted 20%, Its unlikely I will buy more.

Edited August 2, 2007 by Ben@H3-Digital

[xbusman]

Ouch, sorry Ben, you really missed the boat on this one.

First, the exact point I made is that the US is mostly irrelevant in this discussion, its the Chinese remimbe that is the key player here no matter where you are selling. The US is a huge buyer, granted, but of far more importance is that the world market determines a price in whatever currency you care to name and when two companies compete for the business, the Chinese currently have an approximate 20% price advantage on currency alone. When you factor in their lower cost for raw materials, no VAT penalty, lower labor rate, better shipping terms, lower corruption index (slightly lower I grant you) they are killing poor Thailand in the marketplace. I dont care if the customer is in Botswana or the Fiji Islands, its all the same basically.

Some currencies like the Euro have moved the opposite way??? Wherever did you pick something like that up? Here is a ten second research project on Yahoo

EU versus Baht

I dont know what you see here but I dont see the EU getting stronger against the baht. But again, irrelevant because those razor sharp German shoe merchants are dropping by China and Thailand to negotiate the purchase, not the sale of goods. Thats what export economies are for.

Regarding food, its a tough commodity, but it is a commodity and by definition is entirely indistinguishable from other product under the same heading. Now a big secret in business is to find some way to distinguish your product so that it brings a premium, examples include Perrier water, Starbucks coffee. The Thai government has made a huge effort to distinguish Thai rice as a premium product. Let me ask you Ben... have you ever dropped by the noodle cart and insisted on Thai Homme Mali rice? I thought not. We will drive all the way down to Sukhumvit to buy overpriced coffee or ask for a special bottle water at dinner but name one Thai food product that is distinguished as a high end commodity... Nope, sorry, foodstuffs are bought according to world prices generally found on commodity exchanges and are the first to feel the impact of currency fluctuations and infrastructure deficiencies.

By the way, its much easier to ramp up or change food production mixes than it is to change industrial products. If we want more rice in six months, we just put more rice seed out today and watch the numbers climb. If you want to make televisions in Thailand, you start the tortuous process of applying for permits, one or two years, then buying land and building, another year or two slips by, then installing all the highly complex equipment used to handle and package the goods, train staff, start importing raw materials. Every step of the way has incredible bureaucracy, bribes, why you cant do it that way, why its better to do it the thai way, why the prime ministers elephants have to be hired to carry the finished product down the unpaved road to get to the trucks, years on years on years. Once you get it going and have to change to ipods, well you just dont throw a switch, nooooooo.... new permits, new elephants to be fed, new training. It can be much better to close down and start all over. I have to disagree with you on this one Ben, agriculture is mostly very simple to change, farmers do it on a regular basis, with a few exceptions like orchards. However, from experience I think that a ten year orchard is probably quicker than the BOI permit process.

Your right about supply and demand for products but the point is the same. Scrap steel is $350 a ton because supply is incredibly tight and demand just huge. Prices have skyrocketed over the past few years. The point is that Thailand and China have to sell at that point, not higher. China is making 18% because of their currency advantage in costs, Thailand is making 1% because the baht is so high. Currency exchange rates have absolutely no effect on commodity pricing unless a country has an exclusive lock on the product. An example would be bauxite used in the production of aluminum. Most of it comes from Russia, almost all of it in fact, and changes in ruble change the pricing. Those are rare, few and far between. Can you name anything that has to be sold in Thai baht??? So in a world market, we sell in the big currencies (Yen, US, EU and GP) and having a stronger baht greatly reduces our profits compared to other countries.

I hate to tell you but the strength in Thai baht on a global market does indeed mean that farmers and manufacturers in Thailand will begin to lose money until they are driven out of business even as prices fluctuate, simply because their competition can offer much lower prices at higher margins on the commodity exchanges. If Thailand could successfully differentiate their product, they might be able to get a premium, but that takes years when you are in the game, its rather late to start now.

Ben I love your posts, its obvious you have not had much experience in international manufacturing and sales. I enjoy your fresh perspective and naive assumptions. I apologize if I come off as a pompous @ss, I never actually would talk that way to someone directly but I can have a little fun on the internet. Feel free to call me names and flame away, I have been rather bored and actually somewhat enjoy the debate. I try to constantly challenge my assumptions and assertions as after all, that is the first step to learning. So feel free to flail away at me.

[Naam]

So feel free to flail away at me.

why would anybody do that? i don't remember having ever seen in this forum an extensive posting like yours containing important points and hitting the nail on the head without assumptions and bla-bla.

my respect Sir!

[xbusman]

Because I am writing like a pompous git, just the type of person I take particular joy in knocking off their ivory tower. This is particularly true when writing about economics or religion, both of which are more matters of faith then of careful analysis and objective truths. I do appreciate the sentiments Dr. Naam, particularly because I respect your posts as thoughtful and balanced.

[solo siam]

If all you say is true, how come Thailands exports have risen by 18% in just the last month whilst the dollar has fared so badly in that same timeframe.

For example the trade surplus has gone from 656 million $ in May and rocketed to 1.09 billion $ for June. Exports of agricultural produce grew 18%, High Technology exports have grown by 20% year on year and automobiles exports have soared 40% in the same timeframe (year on year) all whilst the Thai has strengthened its currency considerably.

Also shipments to the Middle East jumped by 40% over the last month, almost equalling trade with the USA.

It's all very well quoting "whats supposed to happen" from a conventional economic viewpoint learned from a book, but all that you are saying just isn't happening.

In regards to rice, it only grows in certain climates in certain soil, it also requires years/decades of experience - throwing rice on any bit of land and thinking it will grow into a rice paddy and farm itself, is in my opinion naive.

[solo siam]

Interesting to note that also the baht weakened against the dollar in May, and strengthened in June. So by your reckoning the exact opposite should have happened.

http://finance.yahoo.com/currency/convert?...;amt=1&t=3m

Instead the month with the strongest exchange rate so far has seen the most growth in exports.

Your statement xbusman that breakeven point is 35.8 baht and no export company can make money at a stronger rate, how does that fit into all this? Are all these exporters losing vast amounts of money from the massive growth in exporting that Thailand is going through? I think not.

Edited August 2, 2007 by Ben@H3-Digital

[Naam]

Because I am writing like a pompous git

you and me could form a club

[bangkoksingapore]

dont forget that a higher baht hurts the real estate market. i dont know how many americans buy in thailand, but if it hits 30, you can be sure the number will be much smaller than at 36.

[xbusman]

If all you say is true, how come Thailands exports have risen by 18% in just the last month whilst the dollar has fared so badly in that same timeframe.

For example the trade surplus has gone from 656 million $ in May and rocketed to 1.09 billion $ for June. Exports of agricultural produce grew 18%, High Technology exports have grown by 20% year on year and automobiles exports have soared 40% in the same timeframe (year on year) all whilst the Thai has strengthened its currency considerably.

Also shipments to the Middle East jumped by 40% over the last month, almost equalling trade with the USA.

It's all very well quoting "whats supposed to happen" from a conventional economic viewpoint learned from a book, but all that you are saying just isn't happening.

In regards to rice, it only grows in certain climates in certain soil, it also requires years/decades of experience - throwing rice on any bit of land and thinking it will grow into a rice paddy and farm itself, is in my opinion naive.

Ben, I am really disappointed with your math skills. I have written repeatedly about the facetiousness of reporting Thai exports in dollar terms. If Thailands sole trading partner was the US it might make some weird sort of sense, even if most of their trade was in dollar denominations it might make sense, but to report thai exports in dollars is simply ridiculous. Thailands economy is in baht. To see trends and measure performance, we have to remove all extraneous impacts specifically currency impacts that are mostly irrelevant to the economy. So Ben, if we have an 18% increase in our currency, and sell the exact same amount of goods and services, 0% growth, we realize a 18% increase in dollar sales. So once we factor out the currency appreciation year to year, you will note that exports are growing somewhere around 0% and imports are growing somewhere around 24% in real baht terms.

Having worked in the automotive industry and spoken to a few folks associated with Honda Thailand, the reason for the increase in car exports would not be apparent to someone unfamiliar with the business. When you run an automotive assembly facility, you plan out production for years to come. You build the facility to handle a certain capacity, and gear all your vendors to that. Ramping up or down is a real problem and always a negative impact to costs, it takes a long time to implement because contracts are let out for long periods of time. So the factory has to produce a certain amount of autos for a year or so regardless of demand. Its why they have huge holding lots in Detroit and a dealer network to soak up inventory in bad times and even out the production cycle. Here in Thailand, when car sales drop 14% and the dealer network is loaded to the gills with slow moving inventory, there is only one option... export. I personally think car sales are even slower than is being reported as banks are making loans ever more difficult. Add your 18% currency appreciation when measured in dollars and I think the 40% increase in exports is easily explained. I do know the car companies here are quickly ramping down production in a major way, they will be back in balance by year end if things dont change much.

Shipments to the Middle East, come on Ben, even you can figure that out when oil is $70 a barrel. Give me a break on that one.

I dont remember ever saying whats supposed to happen or mentioning any particular school of though regarding economic theory. Perhaps you might refresh me on that. If you find anyone who does know what is going to happen, be sure they are telling lies. Unfortunately, I cannot tell the future, I strive only to define the present and even that is marginally correct at best. I listen to Bloomberg every day and see talking heads describe the exact same event in diametrically opposed perspectives. In my way of thinking I assume they are both wrong. My economics can be found on income statements and balance sheets which would make me a terrible central banker. I dont envy the terrible choices faced by Khunying Tarisa every day, but at least I am familiar with them.

Interesting to note that also the baht weakened against the dollar in May, and strengthened in June. So by your reckoning the exact opposite should have happened.

http://finance.yahoo.com/currency/convert?...;amt=1&t=3m

Instead the month with the strongest exchange rate so far has seen the most growth in exports.

Your statement xbusman that breakeven point is 35.8 baht and no export company can make money at a stronger rate, how does that fit into all this? Are all these exporters losing vast amounts of money from the massive growth in exporting that Thailand is going through? I think not.

Ben, its all but impossible to say a change in this will cause a change in that. A weak baht in May does not mean an increase in imports or exports, a tsunami in Sri Lanka or a shortage of bottle water in the Sahara. Things dont work that way. Exports and imports take months, years to sell, make, deliver and get paid for. Its a long term process. Its the trends you want to watch over a period of months, years, decades. Businesses make long term plans, work to goals, and have to keep a long term perspective to protect short term results. Its called strategic thinking Ben, I will explain that to you in some other diatribe.

Be careful with quotes Ben, I think you might be slightly dyslexic in your reading. I dont remember saying that breakeven is at 35.8 and no export company can make money over this. Lots of them can make great money all the way down to 15 baht to the dollar. I give as example King Power. A complete monopoly that specializes in export only business with minimal overhead and partially inelastic demand.

Lets try it again Ben in case you get confused. Generally speaking, Thailand is competitive across the board at a rate around 35 to 36 baht to the dollar. At that rate, we can win our fair share and make a reasonable return on investment. There are lots and lots of exceptions Ben, we discussed autos and high end stuff. If you take ten seconds to think about it, you will quickly understand why high tech is more resilient to currency fluctuations. On the other hand, that brings us to the recent rash of closures by major producers in the rag industry. The big guys can hold out the longest but they are beginning to throw in the towels. That worries me, they watch the same data and have decided not to wait it out. Closing and moving factories is hugely discomforting and costly, these decisions by Thai Silp and Union send some very strong signals.

Yes Ben, for a time we suck it up and honor contracts even when they are at a loss. That might be confusing to you but a good businessman knows that things will eventually turn around. Cant make money every day, just have to make money most of them.

Stay tuned, lots of interesting times ahead for Thailand. We are only seeing the tip of the iceberg so far. Dont underestimate the resilience of people and businesses to adapt to even the most adverse conditions. If the baht stays at 33.5 and possibly lower, things will adjust to that number by the end of the year. We might not like the results in an economy based 60% on exports but economies change.

Enjoy your posts Ben, keep at it.

[xbusman]

Because I am writing like a pompous git

you and me could form a club

Dr Naam, I regret to inform you that my second hard and fast rule of life is the following:

NEVER EVER JOIN ANY ORGANIZATION THAT WOULD LET SOMEONE LIKE ME JOIN

However, I bet I would enjoy it immensely and greatly regret the missed opportunity.

[solo siam]

You are proving my points instead of your own.

If the currency increase is directly responsible for the export growth in Thailand, surely that just proves my point regarding end-users paying more for their product without a significant decrease in demand due to the higher price, if the producer is collecting the same amount of baht for their products as before (which the above implies) then all of your other points are moot.

Your statement regarding the export growth in $ terms implies that demand for Thai exports has not reduced (or grown), at a price rise of 18% - exporters are receiving identical baht for their product, the buyers are paying 18% more for the Thai product without reduction in demand.

I'm not naive, stupid nor dyslexic, by suggesting these things you are in fact belittling your own view, attacking the character of someone with opposite views in such a way intimates at weaknesses in your own argument, not mine.

Edited August 3, 2007 by Ben@H3-Digital

[xbusman]

Atta Boy Ben, we got the juices flowing now.

In measuring export growth, currency is irrelevant and should be eliminated from the equation. Therefore, get ready for this, IN BAHT TERMS, exports are growing somewhere betweeh 0 and 5%, you can do the math and report back, I am too busy today. Quick and dirty, it looks like exports are shrinking with the exception of automotive that are being forced to dump their current surplus production. Hopefully either consumers will start buying cars again or they will adjust their production at year end. Right now, I think they are betting on ramping down production for at least the next two years.

If I were to guess, a 0 growth in exports means that manufacturers are filling out contracts in process without additional orders or new business. When I say additional orders, I mean orders above the evergreen yearly requirements. We will start to see the impact of Unions and Silps show up in the numbers by year end, remember, they are only the bell weathers.

And please Ben, if you want to participate in forums you should be careful about misquoting people. I never called you stupid, if I even insuated the same I offer a heartfelt apology, that would be rude and boorish. Intentional misquoting I put down to dyslexia, I would not be so crass as to assume mens rea. In fact, I find your insights show you have a real interest in how things work and why, its just very obvious that you are quite young in perceptions and I also find that refreshing. Old stale ideas should be constantly challenged by the young, in that lies learning and growth for all who care to listen with open mind, most especially myself.

[xbusman]

You are proving my points instead of your own.

If the currency increase is directly responsible for the export growth in Thailand, surely that just proves my point regarding end-users paying more for their product without a significant decrease in demand due to the higher price, if the producer is collecting the same amount of baht for their products as before (which the above implies) then all of your other points are moot.

Your statement regarding the export growth in $ terms implies that demand for Thai exports has not reduced (or grown), at a price rise of 18% - exporters are receiving identical baht for their product, the buyers are paying 18% more for the Thai product without reduction in demand.

I'm not naive, stupid nor dyslexic, by suggesting these things you are in fact belittling your own view, attacking the character of someone with opposite views in such a way intimates at weaknesses in your own argument, not mine.

I went back and reread your post carefully because I was slightly confused by it.

Let me try to explain it to you this way.

I make a four color book in thailand, it costs me 22 baht. I signed a one year contract with a US customer to sell this book at $.66 each, qty 10,000 a month. I got the contract last year when the baht was 38 to the dollar. At that time, I was $.07 over the Chinese but I sold Thailand on reliability, quality, and combining with other products for the same company for freight savings.

I ship this customer 10,000 books every month. They cost me 220,000 baht every month. Every month Thai customs recorder 220,000 baht of goods exported. When I started last year, 220,000 baht was equal to about $5800. The shipment that left my warehouse today was still 220,000 baht but in US dollar terms was about $6567, an increase of about 13% in US dollar terms but not a single additional baht or book left thailand, therefore 0% growth in exports or GDP. The only differance is that I am now shipping books at break even because the change in currency came out of my profits. Got it so far?

Now, remember the chinese? They were 2 baht cheaper in 2006. Currently they are still selling at $.59 each, my thai vendor wants to up the price to 23 baht because of inflation, that works out roughly to $.69. When I sit down with my customer who has been paying $.66 for the past year and has new quotes from China for $.59, what do you think is going to happen when I slide $.73 across the table. Think exports will increase, decrease or stay the same?

So demand is slightly inflexible, for a while. Your right, we should see exports remain stable at 0% growth or slightly higher while businesses take time to change, adapt, or go out of business.

[solo siam]

Atta Boy Ben, we got the juices flowing now.

In measuring export growth, currency is irrelevant and should be eliminated from the equation. Therefore, get ready for this, IN BAHT TERMS, exports are growing somewhere betweeh 0 and 5%, you can do the math and report back, I am too busy today.

The currency exchange actually works in favour of the supplier at growth of 0% in your example, it doesn't matter that he has 0% growth in sales because other costs fall, so he is still realising more profit. Any product thats imported is now cheaper by x% (crude oil, raw materials, fuels, supplies, computers, machinery), his costs in Thai Baht have fallen whilst sales in Thai Baht have stayed identical - end result still equals more profit, added to which the lowering of Thai interest rates have reduced his costs by even more.

In terms of your example it doesn't really work for Thailands exports, which are primarily; Rubber, Food, Fishery, Automobiles etc... I will give you the textiles, I don't see any added value from making clothes in Thailand rather than Bangladesh for example.

How does someone step-in and take over the supply of Rubber (have to grow the trees), Automobiles (set up the infrastructure, factories) etc....

[xbusman]

All other costs fall??? I have yet to have one supplier anywhere and anytime call me up and lower prices. In fact, inflation generally keeps us on an ever upward spiral regardless of currency fluctuations. Ben, I hate to tell you but we live in a baht world. When I sell a product that costs me 36 baht for $1 US and get 38 baht for it, I make two baht. When it still costs me 36 baht and I sell it for $1 US and get paid 33.5 baht it is not rocket science to see that currency is losing me money. Granted, if a majority of my product consisted of imported materials I might actually realize a baht or two in savings if I was the importer and nothing else increased, but I would still be losing money, just not as much.

Lots of countries sell rubber, food, fish and automobiles. I dont really know any industry that Thailand has a lock on that will withstand the currency appreciation affecting their competitiveness and thereby profits. In fact, watch as commodity products and labor intensive low skill get hit first. Farmers are not dumping mangosteens on the highway because they are making too much money on them.....

Ben, for the last time, you have to maintain a lock on a product to withstand currency fluctuations when your currency appreciates. Airbus is a great example and yet I hear them complaining constantly to the press, thankfully they are heavily subsidized or they would be looking for the exits. Know what their solution is??? Airbus is going to outsource to China. Get it?

When I get more time, I will describe to you the Japanese models of manufacturing as used in the auto industry. They are simply genius and because of their total focus on the customer they can demand a brand premium for their product. Just what Thailand should have been learning and applying in the last decade. In fact, they will ramp down Thailand to more manufacturing in China, its happening as we speak.

In any event, if you figure out a way to make money in exports as your costs appreciate through the roof, I recommend you stop by BOI and do this country a favor before its too late for more manufacturers who are saving money on their imported raw materials.

[solo siam]

In one of your previous posts you stated "So Ben, if we have an 18% increase in our currency, and sell the exact same amount of goods and services, 0% growth, we realize a 18% increase in dollar sales"

That would mean that prices have risen (in $ terms) by 18% with no impact on demand (no decline in sales (0% Growth)), hence the Thai products are maintaining their Baht price (an 18% increase in US$ price).

In your latest example therefore the producer is still getting 38 baht for his product (and selling the same amount of products), but realising 2 baht savings on imported materials, His product now costs him 34 baht to produce. He is now making 4 baht per widget, he's doubled his profit.

Edited August 3, 2007 by Ben@H3-Digital

[solo siam]

All other costs fall??? I have yet to have one supplier anywhere and anytime call me up and lower prices.

If the Baht is 18% stronger against the dollar and other currencies, it means that imports are 18% cheaper in Baht terms, your supplier probably won't expect to call you to inform you of this.

Edited August 3, 2007 by Ben@H3-Digital

[onethailand]

In one of your previous posts you stated "So Ben, if we have an 18% increase in our currency, and sell the exact same amount of goods and services, 0% growth, we realize a 18% increase in dollar sales"

That would mean that prices have risen (in $ terms) by 18% with no impact on demand (no decline in sales (0% Growth)), hence the Thai products are maintaining their Baht price (an 18% increase in US$ price).

In your latest example therefore the producer is still getting 38 baht for his product (and selling the same amount of products), but realising 2 baht savings on imported materials, His product now costs him 34 baht to produce. He is now making 4 baht per widget, he's doubled his profit.

Who do you think imports Thai products quoted in Thai Baht? Most, if not all prices, quoted for export are US$.

If last year you had a contract to sell 1 million mangoes per month at US$1 each and the baht was 38 to the dollar, your income would be roughly equivalent to 38 million baht. If your cost was 36 baht per mango, your approximate profit would be 2 baht per mango, or 2 million baht per month.

Today, you still have to provide 1 million mangoes per month at US$1. Unfortunately, your cost per mango is still 36 per mango because local costs don't change - and you're receiving about 33.5 baht per mango. Your loss is 2 baht per mango, or 2.5 million baht per month.

I would be highly amazed if any Thai exporter of a reasonable size could get away with quoting costs in Baht.

What xbusman gave was a basic comparison example, not a statement of fact. If a company can manage to sell the same amount of goods and services - highly debatable given the examples of lower costs elsewhere in this thread - then, and only then, would they realize an increased profit.

The sad truth of the matter is, they are not able to sell the same amount of good and services because now foreign importers can get the same amount of product in another country for LESS than a Thai exporter can quote. The only way a Thai company would be able to maintain its level of sales is if a ) they have a product of significantly higher quality, or b ) if they have a monopoly on the product, or c ) the product can only be sourced from Thailand.

The only other way that example could actually happen is if a foreign company contracts to buy $x amount of product, rather than x pieces of product - and again I highly doubt there will be many companies that would contract to buy or sell on this basis.

Do keep in mind that agricultural products are not going to benefit from a rising baht ever, since they generally don't need to import anything to produce their product, with the exception of production equipment. They won't suffer either if their product is produced for domestic use - but they will definitely suffer if they produce for export.

There are few, if any, products in any industry in Thailand that will meet any of these points.

Meanwhile, in tourism, no hotel is going to lower its prices because the dollar is worth less - and most hotels, with the exception of large chains or other 5-star hotels, quote in baht. The tourist is suddenly paying more for the room than he would have last year, even if there was no change in the baht price. So perhaps he takes his dollar elsewhere, possibly to a location closer to home.

The large chains and 5-star hotels who quote in USD, not willing to suffer the losses on the rising baht, will simply raise their prices. These big hotels often won't even quote agencies a contract rate, referring them instead to an online reservations system to obtain the "best available rate" for the booking period.

Edited August 3, 2007 by onethailand

[solo siam]

You are looking at it from a fixed price point of view, my point specifically states that pricing is NOT in Thai baht... but in US$ and that the Thai products have taken an increase in price, without a decrease in demand as evidenced by the growth in Thai exports over the time period when the baht has strengthened.

Put it this way, have you never seen fruit or vegetable change price at the supermarket in your home country?

Edited August 3, 2007 by Ben@H3-Digital

[onethailand]

You are looking at it from a fixed price point of view, my point specifically states that pricing is NOT in Thai baht... but in US$ and that the Thai products have taken an increase in price, without a decrease in demand as evidenced by the growth in Thai exports over the time period when the baht has strengthened.

Put it this way, have you never seen fruit or vegetable change price at the supermarket in your home country?

Like Acme, Safeway, Sainsburys, etc. places orders with Mr. Thai Farmer on a monthly basis? Seasonal basis, months in advance of the season, maybe. I can't see Mr Acme calling Mr Thai Farmer and saying "Somchai, send me another container of mangoes like the lot you sent last month".

Prices change when contracts reach a state of fulfillment, whether by date or quantity. They don't fluctuate based on the value of THB vs USD. Thus a contract, even made in USD, will still need to be fulfilled at the contract price.

BTW, by "evidence of growth", do you mean in quantity of product, or in dollar terms? Just because there may have been an increased number in terms of USD does not mean in the slightest that the industry has shipped more product or "grown".

[solo siam]

Completely missed the point, not worth posting anymore really - Perhaps I don't care enough to or can't articulate my point of view properly.

My point about the Thai export growth is that it has grown in $ terms by x%, over Y months. The comeback was that this exact growth level was down to the x% increase in currency strength, my retort was that if this was the case then the market was paying a higher price (by x%) for Thai products with no loss of demand. Hence the Thai Baht price paid to the supplier had not changed, so Thai producers were realising the same Thai baht return on their products whilst enjoying the savings gained from the x% decrease in their import costs.

[onethailand]

Completely missed the point, not worth posting anymore really - Perhaps I don't care enough to or can't articulate my point of view properly.

My point about the Thai export growth is that it has grown in $ terms by x%, over Y months. The comeback was that this exact growth level was down to the x% increase in currency strength, my retort was that if this was the case then the market was paying a higher price (by x%) for Thai products with no loss of demand. Hence the Thai Baht price paid to the supplier had not changed, so Thai producers were realising the same Thai baht return on their products whilst enjoying the savings gained from the x% decrease in their import costs.

What Thai baht price being paid to supplier? You seem to be missing the fact that few, if any at all, suppliers denominate export contracts in baht, AND import is mostly irrelevant.

Did it occur to you that the comparison was for the same period of time last year - and thus new contracts would have been issued since the time the baht was around 36? The baht is now around 33, slipping about 8% in 7 months - if it holds at this level how likely do you think it is that they will report export growth?

Let's say that company A exported 10 million mangos last year at $1 each. Total USD revenue $10 million = Total baht revenue approximately 360 million assuming 36 baht was the average rate for the year (it wasn't, it was higher).

This year, company A exported 9.5 million mangos at $1.10 each. Total USD revenue $10.45 million = Total baht revenue approximately 355.3 million. And that assumes that the baht was at 34, which is looking a bit optimistic as the year goes on.

Is that what you call export growth? Forget the fact that the mangos cost the same locally last year as they do this year. The export company took in MORE USD and made LESS money in baht and sold less product.

That's as simple as it gets.

All we are saying is that you cannot measure growth in foreign currency. You want to measure in baht? Fine. You want to measure in amount of product exported? Fine. Both of those are fixed as far as Thailand is concerned. The USD is NOT. Thus you cannot use USD to reliably measure export growth. The numbers being reported also happened to come out when the dollar is under heavy pressure - think there may be a reason for that?

Use a local measure for determining export growth. And there is little if any savings on imports because few products for export are highly dependent on imported material.

Now I'm bowing out. xbusman will enjoy the back and forth much more than I probably do.

[pattyboy]

I must admit that I've only skimmed through this thread but though this might be interesting. It's the first time I've seen the baht fall below 30 to the $US on XE.com

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[xbusman]

Ben, I think we are stuck on the fallacy of the 18% increase in exports measured in dollar terms.

My point with this is that we are thai companies working in Thai bahts.

Forgetting inflation, if I make and export 1000 widgets at 1 baht last year I exported 1000 baht worth of widgets. When converted to US dollars at 38 per, I made $26.31.

This year I make and export 1000 widgets at 1 baht each for exactly the same quantity and price, when converted to US dollars I made $30.30, an increase of about 15% in dollar terms.

Note on the above, I did not make any additional baht, not a single additional widget left the factory, the illustration I used created 0% growth in GDP but a 15% increase in exports measured in some irrelevant currency called the dollar.

Now dont get lost on who bought it, what my imports were, what inflation did, how many elephants it took, or anything else. Stay with the big picture for a moment because in the big picture, none of those factors matter. The simple fact is that when my exports stay constant if I measure them in my currency (baht) they remain flat, but if I pick any weakening currency (say zimbabwe dollars) I can measure a monstrous gain on currency. That would be really relevant, if I lived in Zimbabwe.

So are you there yet? Can you agree that in Thai baht terms (which are the single and only relevant terms) that exports are either not growing or perhaps beginning to shrink?

Okay, on to your point which is entirely valid and I understand your confusion.

If we continue to sell the exact amount of goods, you are assuming that the customer is paying the 15% increase because I am still booking 1 baht of sales for each widget. That is a true statement within limits. The primary problem with this is that the US may be a large trading partner but by no means is it the only or even primary trading partner. It just happens to have the weakest currency at the moment but in relative terms we could have picked the Zimbabwe dollar to measure exports and reported a 10,000 percent gain over last year. Does that mean that customers are paying 10,000 percent more for thai goods? No, it means we dont have many Zimbabweans at trade shows buying products, that all. Same with the US dollar, it just means US buyers are looking elsewhere.

Buyers have moved away from the dollar, hedged purchases, and in the end they make thai producers cover the exchange losses from a variety of currencies in order to remain competitive. Thats what all the crying is about from exporters. The buyer is still taking 1000 widgets every month worth 1000 baht but they are not being paid any more in terms of dollars then they were a year ago. That money comes out of the income statement of exporters under the heading "currency losses".

So even though we are still making 1000 widgets for 1 baht each, our export volume goes up 18% because of measuring the volume in a arbitrarily selected currency that has no relevancy to our economy. (Overstated that a bit).

So who and what is paying that 15% increase in price caused by currency. I think the answer currently is that manufacturers and exporters are paying it. They are forgoing their profit and continuing to sell in dollar and EU terms that they won a year ago. So they are still selling 1000 widgets for 1 baht but breaking even at best, losing money at worst, because they are no longer earning 1 baht.

Here, let me clear up a point on how measuring exports work. In the case of my books, when I buy 220,000 baht worth of books and ship them out, the government (through VAT and customs) records an export of 220,000 baht worth of goods. They dont care if I sell in Yen or drachmas, its recorded as 220,000 baht worth of goods. They dont care if I make money on them or lose money, its still 220,000 baht worth of books. In this case my customer pays in US dollars, his contract is fixed and they pay me the same amount of dollars they did last year. I get to eat the 15% cost of currency depreciation. So in the end, customers generally do not pay currency differences, manufacturers and exporters do in order to remain competitive.

So now, can you see how exports can remain completely flat with 0 growth while causing significant losses to manufacturers and exporters due to currency fluctuations? Those losses are ultimately the reason for the 0 growth rate in exports, old rule in business is that when you are losing money on each widget you cannot make it up in volume.

So Ben, the customer is not paying more for the same goods, we are making less. Because of that, exports in volume and value in baht terms is either 0 or shrinking. We would have to know a lot more detailed numbers on what the big internationals are doing before we could answer that question and unfortunately the BOT are not releasing those numbers for some reason.

I think we are in disagreement on the inelasticity of pricing. I glean from your posting that you feel thai producers are able to raise prices to cover currency fluctuations and should continue to make a profit. I believe that is possible with some products but they have to be on the higher end of the technology scale and have limited competition. As we move towards commodities the pricing becomes harder and harder to manage, those products have to be managed on a cost basis to hold profit margins. I dont believe that Thailand is on the high end of the scale. I do believe that France is on the high end of the scale and much better equipped to handle the high Euro than Thailand is able to handle the high baht. Products from Chanel to Airbus are able to dictate pricing because of their quality, stature and exclusivity. Even then, I hear the accountants at Airbus weeping in their pillows every night regarding the exchange rate of the EU-dollar. With only two manufacturers in the world (sorry Brazil and Canada) they realize a 1 billion EU loss with every penny of the exchange rate change. (thats from memory, might not be exact but I am too lazy today to look it up, its about that ugly anyway---ED).

For poor Thailand, we are going to find out exactly how elastic the pricing on shoes, mangosteens and wooden frogs actually is. I am guessing that there is almost no product that Thailand can demand a premium for over China or Vietnam or even Mexico. There is our puzzler of the day, can you name one? They tried pretty hard with Thai rice but I have yet to overhear anyone in a restaurant insisting on only Thai rice. Think thats facetious? The Japanese are extremely particular about only eating Japanese rice and their national rice product sells for much more than the commodity market.

You are correct however, once an assembly facility is set up here, its pricing is somewhat inelastic. In actuality costs raise due to currency and the method of booking costs for international corporations is about 14 hours worth of course work at a good university. Suffice to say that it is only relevant if you utilize the exact same assumptions over an extended period of time. They are feeling the pinch however, even if it is only at the bottom of the P&L. Its only a matter of time before their strategic thinkers do something new and stupid.

Ben, come up with a good way to get a 20% premium for Thai brand products and you can quit working for life. I think if you could get a 3% premium you could make a better living than you are making now. In the meantime, like all the other stupid manufacturers and exporters, I am continuing to suck up the currency losses and hoping for better times tomorrow. In the meanwhile I am moving products as fast as possible to China and India (maybe that helps explain their terrifying growth rate if others are doing the same?). I love Thailand but I cant find a good reason to lose money on my products to stay here.

[xbusman]

Surging baht drives Thai exporters to the wall

Despite hedging, some of Thailand's biggest exporters are up against it.

"It's tough," said Thiraphong Chansiri, president of Asian tuna giant Thai Union Frozen Products (TUF).

TUF, the company behind the U.S. "Chicken of the Sea" tuna brand, recorded a first-quarter sales increase of 3 percent in dollar terms but a 7 percent decline when changed into baht.

Most economists believe export growth will fall back this year to about 12 percent from 17 percent last year.

At first glance, that appears to suggest the sector is not faring too badly.

However, when measured in baht, the picture is nothing like as rosy. For instance, exports rose 18 percent in dollar terms in June this year from 2006, but only just over 5 percent in baht.

BoT data also shows the lion's share of export growth is accounted for by the high-technology sector, suggesting that bleak times lie ahead for firms at the other end of the scale.

Article in Washington Post, perhaps they capture the problem more succinctly than I do.

for full article go here ----> Surging Baht drives Thai Exporters to the wall

Nicely said, you can up the price a little, cut back salaries a little, but in the end, you have to either have a high end product or move the business.

[Carmine6]

Completely missed the point, not worth posting anymore really - Perhaps I don't care enough to or can't articulate my point of view properly.

My point about the Thai export growth is that it has grown in $ terms by x%, over Y months. The comeback was that this exact growth level was down to the x% increase in currency strength, my retort was that if this was the case then the market was paying a higher price (by x%) for Thai products with no loss of demand. Hence the Thai Baht price paid to the supplier had not changed, so Thai producers were realising the same Thai baht return on their products whilst enjoying the savings gained from the x% decrease in their import costs.

For agricultural and fish products, prices in baht have declined this year. Not by an outrageous amount for most things, but in the case of shrimp, it's been about 10%. Sugar is down about 16% from last year. Fish is also lower. The attached graphs are categories that cover 64% of agriculture and fishery exports for 2006 and 2007. Some of these have a sharp downturn in the last couple months and it'll be interesting to see prices the next few months.

Data is per the Bank of Thailand, table 47 Bank of Thailand

No data on units for other categories of exports so can't be sure.

Sugar_and_Rice.pdf

Shrimp_and_Cuttlefish.pdf

Fish.pdf

Canned_Fish.pdf

[xbusman]

From the August 10 Bangkok Post

AGRICULTURE SUGAR PRICE SLUMP

Sugar fund seeks 20 billion baht as debts mount

YUTHANA PRAIWAN

The state-managed sugar fund may seek another 20 billion baht in loans from the Bank for Agriculture and Agricultural Co-operatives to support planters and millers who face financial losses from a sugar price slump and lower income from exports due to the strong baht. Kamthorn Kitichotisub, a farmers' representative, said planters and millers experienced huge losses in the 2006-07 harvest season as world sugar prices dropped sharply and export revenue dipped 14% due to the stronger baht.

Planters and millers earlier expected the crop to fetch 800 baht per tonne for the 2006-07 harvest season. But the baht appreciated against the dollar to 33 from 40 in the previous season, leading export-based revenue to decline proportionately. At present, more than 65% of sugar production is slated for export.

At the same time, raw sugar prices in the world market are expected to drop to $0.10 a pound from $0.12. That means the crop price is likely to fall to 650 baht per tonne, which would not cover production costs.

An additional loan would boost the fund's debt to 35 billion baht because it has not yet cleared debts of 15 billion baht incurred over the past decade.

Mr Kamthorn said that instead, the government should provide soft loans carrying 1-2% interest to the fund, similar to those of other industries, so the fund doesn't need to seek loans from the BAAC, which offers a 6% interest rate.

So lets get this straight, since 1997 they have lost 15 billion baht until last year. Thats about 1.5 billion baht a year, not a bad subsidy, sounds like they know the market and how to play the game. Then last year, they lost 20 BILLION BAHT???? ON CURRENCY???? Thats a lot of money, even the Thai government might miss 20 BILLION baht if it got taken out of their hotel room in Pattaya after a hard night. Let me guess, they had no idea the baht was going to appreciate and did not hedge.

I think its time for Krik to get up in front of the sugar farmers and talk about investing in technology and reducing costs through lean management concepts.

TWENTY BILLION BAHT IN ONE YEAR. I thought I was having trouble.

I got a new product that needs manufactured and my customer is more time sensative than price sensitive. I thought, just for kicks I might source this one in Thailand. I have not spoken to my chromers in almost a year, I moved all that work when the baht hit 37 to the dollar. I use three high tech shops in Central Thailand who are technically advanced, not your end of the block grind and shine operations. None of them work for Toyota or Honda (those are mostly Japanese funded shops and closed to outside business).

Not a single one of them was in operation. They all closed at about 35 to the dollar. Interesting enough, all three owners are Thai/Chinese and have found new jobs. Each chrome shop owner has become a broker to businesses in China and are involved in moving manufacturing out of Thailand and into China. They are trying to keep their skilled employees on part time to weather the storm and hope to open their chrome shops again one day.

Now chroming is something you watch carefully to measure the health of your manufacturing. All three shops were mothballed and we are not talking small shops.

The internal economic pressures must be getting enormous.

20 BILLION BAHT, IN SUGAR.

I wonder if Thailand has enough money to grow sugar another year at 33.4 baht/dollar. They may have to sell Phuket to Malaysia or something. And to think they lost 20 billion when the average was around 35 or so. Excuse me for ranting but the loss of 20 billion baht on our sugar crop this year has just kinda ruined my day.

[xbusman]

20 BILLION BAHT IN ONE YEAR

I am sitting here thinking of this number. This is about 1/7 of the cost of Suvarnabhumi. If I am not mistaken, this is more than the BTS cost. Thats 20 months of trades surplus if we use the results from June, if we use May results that 4 years of trade surplus.

Ben, here is your chance.

A weak currency promotes complacency, companies are competetive through the exchange rate alone - Obviously this can't happen forever, as part of a developing nations economy grows I think it's exporters must learn to be more competetive. In the short term this will lead no doubt to job loss and short term frustration, however in the long term as the most well organised and competetive companies rise to the top they actually become truly globally competetive, making for a more efficient economy.

Thats 20 billion baht of short term frustration for just one industry. Mayhaps you might know some ways to organize them to help keep the losses under 50 billion for the next growing season and push Thai sugar growers into becoming truly globally competitive. If we continue losing 20 billion baht a year growing sugar, I think you are right, Thailand could become a much much more efficient economy.

If the global economy is irrelevant to most people, I'm guessing you mean down to grass-roots farmers etc... then surely a strong baht is a good thing, less expensive oil/energy, same amount of rice harvested, local rice price in baht unchanged.

Pray that our sugar farmers dont have more of a good thing, I think it could bankrupt us.

The increase in the strength of the Thai currency will likely lead to an increase the end-user pays (if demand is strong) for foodstuffs rather than the supplier having to continue to supply at a fixed US$ price until he's losing money. Food like oil has failry inelastic demand, If I'm out shopping I won't even notice that pineapples cost 10% more, even if I do what else will I buy to go on My Hawain Pizza? On the flipside If I see that pineapples are discounted 20%, Its unlikely I will buy more.

Well, I think we should plant more sugar next year and wait for the big increase in price on the world market. Even if price does not go up, we can make it up on volume.

I am sorry Ben, 20 billion baht loss for thailand in one year on one crop just sort of shocked me. I am being a real turd again but the magnitude of the building storm is more than even I imagined. I would have never been able to guess that Thailand could lose 20 billion baht on a single crop in a single year. Most of all, I am surprised that huge alarm bells were not going off all over the country in the middle of the loss. Changing crops, building storage to pull sugar off the market, burning young fields, closing farms, sending home workers, something, anything, I mean after all its 20 BILLION BAHT. But no, a small byline in the paper where the Ministry of silly walks has to put aside 20 billion for losses. If they dont talk about this problem, at this magnitude, can you imagine the problems they are facing. I have said before, I dont envy the terrible choices being faced by this interim government while being controlled by the NLA.

Edited August 10, 2007 by xbusman

[VegasVic]

20 BILLION BAHT IN ONE YEAR

I am sitting here thinking of this number. This is about 1/7 of the cost of Suvarnabhumi. If I am not mistaken, this is more than the BTS cost. Thats 20 months of trades surplus if we use the results from June, if we use May results that 4 years of trade surplus.

Ben, here is your chance.

A weak currency promotes complacency, companies are competetive through the exchange rate alone - Obviously this can't happen forever, as part of a developing nations economy grows I think it's exporters must learn to be more competetive. In the short term this will lead no doubt to job loss and short term frustration, however in the long term as the most well organised and competetive companies rise to the top they actually become truly globally competetive, making for a more efficient economy.

Thats 20 billion baht of short term frustration for just one industry. Mayhaps you might know some ways to organize them to help keep the losses under 50 billion for the next growing season and push Thai sugar growers into becoming truly globally competitive. If we continue losing 20 billion baht a year growing sugar, I think you are right, Thailand could become a much much more efficient economy.

If the global economy is irrelevant to most people, I'm guessing you mean down to grass-roots farmers etc... then surely a strong baht is a good thing, less expensive oil/energy, same amount of rice harvested, local rice price in baht unchanged.

Pray that our sugar farmers dont have more of a good thing, I think it could bankrupt us.

The increase in the strength of the Thai currency will likely lead to an increase the end-user pays (if demand is strong) for foodstuffs rather than the supplier having to continue to supply at a fixed US$ price until he's losing money. Food like oil has failry inelastic demand, If I'm out shopping I won't even notice that pineapples cost 10% more, even if I do what else will I buy to go on My Hawain Pizza? On the flipside If I see that pineapples are discounted 20%, Its unlikely I will buy more.

Well, I think we should plant more sugar next year and wait for the big increase in price on the world market. Even if price does not go up, we can make it up on volume.

I am sorry Ben, 20 billion baht loss for thailand in one year on one crop just sort of shocked me. I am being a real turd again but the magnitude of the building storm is more than even I imagined. I would have never been able to guess that Thailand could lose 20 billion baht on a single crop in a single year. Most of all, I am surprised that huge alarm bells were not going off all over the country in the middle of the loss. Changing crops, building storage to pull sugar off the market, burning young fields, closing farms, sending home workers, something, anything, I mean after all its 20 BILLION BAHT. But no, a small byline in the paper where the Ministry of silly walks has to put aside 20 billion for losses. If they dont talk about this problem, at this magnitude, can you imagine the problems they are facing. I have said before, I dont envy the terrible choices being faced by this interim government while being controlled by the NLA.

Ben reminds me of some of those folks that owned Enron stock, and as the share price continued to decline and the articles showing the magnitude of Enrons problems became public they just blindly held on to their shares not willing to take the loss and move on, of course in the end as we all know they lost everything. I posted here 5 months ago that the devestation the strong baht would have on the Thai economy (in particular the export sector) would not come home to roost until Octber when we see the figures for Q3, it looks like I was a few months off. The situation will continue to worsen until the baht can make a substantial and sustained move in the other direction (weakening), if the baht does not weaken to any substantial degree over the coming months, then not only could part of the Thai export sector be harmed permanently but the coming tourist season could be the worst (in $ terms) in many years. Furthermore, if free and fair elections are not held this year then foriegn investment in the Kingdom could take a considerable tumble.