The Dilemma of Over Supply of Rice

The Dilemma of Over Supply

of Rice

What is actually happening in Thailand now? The unrest has been building up steam especially during the last few days. Will the elegant and charming Prime Minister Yingluck Shinawatra survives this crisis this time? What actually causes this unrest?

One of the main causes I personally believed is due to the over supply of rice production that exceeded world demand during the last few years. We all know the law of demand and supply. Too much goods chasing too fewer buyers and the price will drop. Too many buyers chasing too few goods and the price will go up.

Currently based on what I had read, rice production supply during the last few years exceeded world demand. Even despite lower 2012 production [According to The Food and Agriculture Organisation (FAO)], rice supply continued to outstrip world demand. I have no idea for 2013.

Thailand which produces abundant of rice is expected to suffer a sharp decline in exports and Argentina with Brazil, China, Myanmar and Uruguay and Vietnam also shipping less rice.

Global rice inventories at the close of the 2012/13 marketing years were revised upwards by 200.000 tons to 164.5 million tons (milled basis). This would imply a 9 million tons increase from the previous year and mark the eighth consecutive season of stock accumulation. Thailand needs to release its abundant stocks before the October harvest which could impact prices.

Back to Yingluck, during the last election which she won, She had set up a "controversial" rice subsidy scheme with the farmers. She had pledged to buy rice from the farmers at a fixed rate, in return for their votes. The farmers delivered the votes massively for Yingluck. At that time, world rice price was still stable. As long as world rice price stays stable (above the fixed rate bought from the farmers), the Yingluck government would still be in a winning position. However when world rice price fell (below the fixed rate bought from the farmers), it spells big trouble for the Yingluck government. The government is suffering from huge losses as rice bought from the farmers are selling in the world market at below the fixed rate bought from them. How long can this losses continues?

Thus, the opposition has every reasons to demand a change of government. A new government would surely renege on the promise pledged to the farmers by the Yingluck government. The farmers would not like it. Hence, we see two sides to this unrest. But the farmers are too turning up in demonstration against the Yingluck government due to the non payment of rice delivery during the last few months.

How this issue will pan itself out is only time will tell. But in Malaysia, there is a current rice issue going on. But don't worry, you won't be able to see any demonstration on the streets regarding this rice issue. I am talking about the rice monopoly company in Malaysia and that is Bernas. 

Bernas (Padiberas Nasional Bhd)

The current attempt by tycoon Tan Sri Syed Mokhtar Albukhary to take Bernas private is being spurned by minorities who are not happy with the offer price of RM3.70.

The minorities felt that the offer price of RM3.70 is not a fair value and the company should be worth more than that

I am puzzled by the way Bernas is being "calculated" for its fair value by different various different groups. According to MSWG, Bernas should be worth between RM4.18 to RM6.13 per share based on the variable sets of calculations (sorry, I really don't know the technical way of calculating and valuing a stock with all those figures, I am just an ordinary layman who even needs a calculator to add in some simple numbers).

But obviously that is not what the independent adviser Kenanga Investment Bank Bhd (KIBB) sees.  Minorities are being advised by KIBB to take up the offer as the offer is seen as a fair and reasonable.

What about the offerors? Tan Sri Syed Mokhtar Albukhary and his group must have their reasons for attempting to take Bernas privately. Although this is his second attempt, again this time the minorities seen to be holding pretty well-up for a bigger offer.

Incidentally, Bernas has not been paying any dividend since 2012, perhaps due to the ongoing privatisation attempts. Also, the privatisation attempt is currently being the issue when rice production supply during the last few years has exceeded world demand.

How will Bernas performs in the future in the face of oversupply of rice?

Stock B

A few years ago, there was this stock (I shall call it Stock B) that has attracted my attention with its rather generous dividends payouts. It was trading at a steady range of RM2.20 plus levels. (Actually Stock B has risen from a RM1 plus levels prior to this).

Confident that there had to be a minor correction for Stock B, I reminded my remiser to call me be should Stock B be traded at less than RM2.20 in the future.

A few days later while I was shopping at Tesco with my spouse one afternoon around 4pm when my remiser called and told me that Stock B is now trading at RM2.17. Well, then I told her to buy 3,000 shares of Stock B at that RM2.17 price. Done!

My shopping bill on that day was about RM80.00. But it "became" almost RM230.00! Why? Because Stock B closed at RM2.12 on that day! See, the paper loss was RM150 alone for Stock B! If only I had waited to tell my remiser to buy at near the closing time. I could have bought at a lower price.

Nevertheless, as I kept Stock B for the next 20 months and went on to receive more than RM1,000 plus dividends. Then it started to report less and less profits in its quarterly results. (It dawned to me that there was an over supply of rice production vs world demand due to the favourable climate according to a report. As such, Stock B which had huge stockpiles bought at dearer price earlier would be affected).

I made up my mind by selling off Stock B at RM3.46 for my 3,000 shares. (A profit of RM3,754.48 plus the RM1K plus dividends means a total profit of RM4,754.48 for a holding period of 20 months or a 72% return).

Believe it or not, months later, Stock B was the subject of a privatisation exercise.

Stock B is actually ...... Bernas!

Life is 10% what you make it,

and 90% how you take it."

There was a Mr Tan who posted this after reading my blog : Integrax's Future Potential Kingmaker. A search on the internet revealed that actually this is a inspiration quote by Irving Berlin (1888-1989) who was an American composer and lyricist.

What is the actual meaning of it? I might be wrong, but my very personal perception of the meaning is that one doesn't have to know all or do everything, but just have the 10% knowledge or participation enough and then must be an opportunist to take the 90% reward from it.

For example is Mr Tan trying to say that Kassim knows a little bit of something (just about 10%) that one day Integrax will be the subject of a privatisation exercise? Hence, based on that little knowledge makes an early bet by investing in Integrax? And one day (maybe months or a few years later) that Kassim's investment will reap possible 100% or more should there be a privatisation exercise for Integrax?

Please correct me if I am wrong, Mr Tan. Or perhaps there are some other readers who may have their own perceptions of it. Be generous enough to share it with me and for the benefit of others. It will not cost you anything, perhaps only a little bit of your valuable times.

But I can guarantee that when you share (your honest ideas and views) sincerely with others, there is nothing more wonderful than that good feeling you will experience at the end of the day and that is the good joys of sharing with each other!