iEECCOONNOOMMIICCSS OOFF RRUUBBBBEERRWWOOOODD FFOORR

SSMMAALLLLHHOOLLDDIINNGG OOWWNNEERRSS IINN TTRRAADDIITTIIOONNAALL

RRUUBBBBEERR PPRROODDUUCCTTIIOONN AARREEAASS IINN

TTHHEE SSOOUUTTHH OOFF TTHHAAIILLAANNDD

Thesis submitted for a M.Sc. degree in Forest Economics

University of HelsinkiDept. of Forest EconomicsJune 2007, Helsinki

Adrin Antonio Monge Monge

iHELSINGIN YLIOPISTO HELSINGFORS UNIVERSITET UNIVERSITY OF HELSINKITiedekunta/Osasto Fakultet/Sektion Faculty

Faculty of Agriculture and Forestry

Laitos Institution Department

Department of Forest EconomicsTekij Frfattare Author

Monge Monge Adrin AntonioTyn nimi Arbetets titel Title

Economics of Rubberwood for Smallholding owners in Traditional Rubber Production Areas in theSouth of Thailand.Oppiaine Lromne Subject

Forest EconomicsTyn laji Arbetets art Level

M.Sc. Thesis

Aika Datum Month and year

June 2007

Sivumr Sidoantal Number of pages

55Tiivistelm Referat Abstract

From all rubber production systems, rubber monoculture is the most disadvantaged due to itssensibility to changes in latex price, higher labour requirements and the smaller farm size.Nonetheless, rubber monoculture is attractive during times of high latex and timber prices,particularly in traditional rubber production areas where price distortions are small.

In this study, an optimal rotation for rubber plantations is calculated taking into account the revenuegenerated from the selling of latex as well as the stumpage price. The net present value (NPV)combined with the Faustmann approach of infinite rotations is used to estimate the optimal rotationfor rubber plantations inside traditional production areas. Expected stumpage prices, obtained from alinear model, are combined with normal cash flows from a rubber plantation in order to estimate therotation length that maximises the net present value for smallholdings.

The value of timber reduces optimal rotation from 26 to 21 years. Planted area, basal area nor latexprice have a strong effect on the optimal rotation for smallholdings, harvesting age stays close to 21years with small changes on NPV. The large revenue generated by timber seems to be the reason forthe stable optimal rotation. The elasticities of the stumpage prices model indicate that basal area istwice as important as total planted area at the moment of estimating timber value. This is particularlyimportant for smallholdings that would find it difficult to increase planted area, but could increasebasal area by using an improved latex-timber clone.

The effect of using improved latex-timber clones on NPV per rai seems to be stronger than the effectof increasing planted area with rubber. The new clones will be an easy way to improvesmallholding's welfare and more has to be done to promote its used. A 2% change of interest ratewould shorten or extend optimal rotation by one year. The value of timber measured as a fraction ofNPV is the highest when latex prices are low and interest rates high.

The replanting aid paid by the Office of Rubber Replanting Aid Fund (ORRAF) was also evaluatedand indeed. It was found that it has a positive affect on NPV and reduces optimal rotation in somecases. However, its relative importance decreases as latex and timber prices increase.

Avainsanat Nyckelord Keywords

rubberwood, latex, economics, southern Thailand, optimal rotation, stumpage price.Silytyspaikka Frvaringsstlle Where deposited

Viikki Science LibraryMuita tietoja vriga uppgifter Further information

ii

Acknowledgements

This M.Sc. thesis was prepared as part of the project Improving the productivity ofrubber smallholdings through rubber agroforestry systems in Indonesia andThailand. This project is financed by the Common Fund for Commodities (CFC)and coordinated by the World Agroforestry Centre (ICRAF) in cooperation with theIndonesian Rubber Research Institute, Kasetsart University (KU) and Prince ofSongkla University (PSU) in Thailand as well as the University of Helsinki (UH).

I would like to thank the professors at the Viikki Tropical Research Institute (VITRI)and the Department of Forest Economics for combining the time and knowledge inorder to collaborate with my work. My supervisors Professor Jari Kuuluvainen andProfessor Olavi Luukkanen deserve particular acknowledgement for their commentsand commitment to my thesis as well as the trust they put on me.

In Thailand I would like to recognise the excellent work of the staff at theInternational Student Centre (ISC) and the Faculty of Forestry at the KasetsatUniversity. My gratitude to Dr. Sompetch Mungkorndin for giving me my firstimpressions of the rubber sector in Thailand; it was admirable to see how the Facultyof Forestry keeps strong links with its senior members and allow them to continuesharing the valuable information they have accumulated along the years.

At the Prince of Songkla University, I would like to express my sincere gratitude toProfessors Buncha Somboonsuke and Pramoth Kheowvongsri for all the informationand cooperation with my work. I also have to mention the members of the CFCproject Pikun Saiyapan: Uraiwan Laongsri, Patinya Srakawi, Somchai Jantaraphithakand Pichet Petwong, they did not only help me with the collection of information, butthey also made my stay in the south unforgettable. My acknowledgement also go tothe governmental agencies the Royal Forest Department (RFD), the Rubber ResearchInstitute of Thailand (RRIT), the Center Rubber Market (CRM) and the Office ofAgricultural Economics (OAE) for all the time and information several members oftheir staff kindly shared with me. My special gratitude to Dr. Rachane Sonkanok andDr. Pranad Pipitkul at the OAE for the interviews and sharing of information.

Finally, I would like to express not only my gratitude but also my admiration to Dr.Damrong Pipatwattanakul (KU) and Dr. Vesa Kaarakka (UH) for their continuoussupport and their ability to deal with the logistics of my thesis. They made my workin Thailand and in Helsinki much easier. I consider them indispensable to myaccomplishments and the successful relation between the Kasetsart University andthe University of Helsinki.

Helsinki, 5th June, 2007

Adrin A. Monge Monge.

This project is been financed by the Common Fund for Commodities, anintergovernmental financial institution established within the frameworkof the United Nations, headquarters in Amsterdam, the Netherlands.

iii

TABLE OF CONTENTS

ABBREVIATIONS AND ACRONYMS ............................................................. IV

1. INTRODUCTION...............................................................................................51.1 BACKGROUND ..................................................................................................51.2 OBJECTIVES OF THE STUDY................................................................................6

2. LATEX AND RUBBERWOOD PRODUCTION AND TRADE INTHAILAND.............................................................................................................6

2.1 SHORT HISTORY ABOUT HEVEA BRASILIENSIS (WILLD.) MUELL. -ARG ...............62.2 THAILAND'S RUBBER SECTOR.............................................................................9

2.2.1 Rubber production .....................................................................................92.2.2 Characteristics of the Thai rubber market ................................................13

2.3 THAILAND'S RUBBERWOOD SECTOR .................................................................152.3.1 Rubberwood production...........................................................................152.3.2 Characteristics of the Thai rubberwood market........................................18

3. PREVIOUS RESEARCH. ................................................................................213.1 SMALLHOLDINGS ............................................................................................213.2 RUBBER CLONES .............................................................................................23

4. THEORETICAL FRAMEWORK ...................................................................264.1 BASIC FAUSTMANN MODEL .............................................................................264.2 FAUSTMANN MODEL WITH NON-TIMBER PRODUCTS ..........................................27

5. MATERIAL AND METHODS. .......................................................................28

6. RESULTS AND DISCUSSION ........................................................................326.1 OPTIMAL ROTATION ........................................................................................32

6.1.1 Stumpage price model..............................................................................326.1.2 The net present value (NPV) ....................................................................35

6.2 SENSITIVITY ANALYSIS....................................................................................366.2.1 Effect of planting area..............................................................................366.2.2 Effect of latex prices.................................................................................376.2.3 Effect of basal area. .................................................................................386.2.4 Effect of the discount rate.........................................................................39

6.3 THE ORRAF EFFECT.......................................................................................416.4 LIMITATIONS OF THE RESEARCH. .....................................................................44

7. CONCLUSIONS ...............................................................................................45

8. REFERENCES..................................................................................................48

9. APPENDIXES...................................................................................................54APPENDIX 1. LATEX PRODUCTION AND COSTS FOR YEARS 2000 AND 2006..............54APPENDIX 2. ESTIMATION OF OPTIMAL ROTATION FOR A 15 RAI PLANTATION .........55

iv

ABBREVIATIONS AND ACRONYMS

BAAC Bank for Agriculture and Agricultural Cooperatives

CFC Common Fund for Commodities

CRM Center Rubber Market

DOAE Department of Agricultural Extension

EU European Union

FAO Food and Agriculture Organization of the United Nations

FRIM Forest Research Institute Of Malaysia

ICRAF World Agroforestry Centre

IMF International Monetary Fund

IRRDB International Rubber Research & Development Board

IRSG International Rubber Study Group

ITTO International Tropical Timber Organization

KU Kasetsart University

LDD Land Development Department of Thailand

MDF Medium Density Fibreboard

NPV Net Present Value

OAE Office of Agricultural Economics

OED Operations Evaluation Department

OPEC Organisation of the Petrolum Exporting Countries

ORRAF The Office of the Rubber Replanting Aid Fund

PSU Prince of Songkla University

REO Rubber Estate Organisation

RFD Royal Forest Department of Thailand

RRC Rubber Research Centre

RRIT Rubber Research Institute of Thailand

US United States of America

UH University of Helsinki

51. INTRODUCTION

1.1 Background

Rubber is one of the successful histories about a foreign tree been introduced to a

new continent. In less than fifty years after its introduction in South-east Asia, the

latex from rubber trees became an important economic source not only for local

governments but for a large number of small producers who discovered in rubber an

important source of continuous cash flows.

Nowadays, rubber is still vital for the welfare of millions of small farmers around the

region and it can be found as part of different production systems. These production

systems can be rather complex in terms of diversity (biological and economical) with

jungle rubber on one extreme, or much simpler in the form of pure rubber stands.

Since 2004, under the coordination of the World Agroforestry Centre (ICRAF) and

the financial support of the Common Fund for Commodities (CFC), the Indonesian

Rubber Research Institute, Kasetsart University (KU) and Prince of Songkla

University (PSU) in Thailand as well as the University of Helsinki (UH) have been

working together in the project Improving the productivity of rubber smallholdings

through rubber agroforestry systems in Indonesia and Thailand.

The University of Helsinki through the Viikki Tropical Research Institute (VITRI),

has dedicated particular effort to evaluate different aspects related to the increasing

importance of rubberwood for smallholdings particularly in Thailand. This thesis is

the latest product of the coordinated work between Kasetsart University, Prince of

Songkla University and the University of Helsinki (UH).

61.2 Objectives of the study

This thesis deals with the economic effect of timber value on rubber monoculture

smallholdings, particularly in the traditional rubber production regions in Southern

and Eastern Thailand. In these regions, the closeness of rubber markets and sawmills

reduce price distortions faced by small rubber producers.

The main objective of this research is to calculate optimal the rotation for rubber

plantations, taking into account the value of timber. To do so the net present value

(NPV) of all cash flows is going to be maximised not for one rotation but for an

infinite number of rotations, assuming that inside traditional production areas rubber

plantations are not going to be eliminated.

To help to achieve this objective, a simple model to predict stumpage prices for

rubber plantations in the traditional rubber production areas is developed.

Additionally, some factors affecting stumpage prices are evaluated in order to

determine their effect on the optimal rotation length and the profitability of the

rubber plantations.

2. LATEX AND RUBBERWOOD PRODUCTION AND

TRADE IN THAILAND

2.1 Short history about Hevea brasiliensis (Willd.) Muell. -Arg

It is important to note that Hevea brasiliensis (Willd) is not the only rubber tree

available, but it is the most important in terms of industrial production. Polhamus

(1962 cited in Hill 1963) indicates that a variety of species of Castilla sp, Ficus sp as

well as many species of Apocynaceae's family have been used around the world for

centuries to obtain raw materials similar to what is today commonly known as

rubber.

7Resor (1977) and Dove (2002) mention that rubber products were already used in

many pre-Columbian cultures in Latin America. The main uses included protective

clothes, game balls and syringes, in some cases it was even used for religious rituals.

For a couple of centuries, after the arrival of the Europeans in America, rubber was

considered a particularity and not an extended use was found for it, crude footwear

and other waterproof material were the main products (Schultes 1977; IRRDB 2000).

It was in 1839 when Charles Goodyear and the development of vulcanisation

introduced rubber to the industrial era (Resor 1977, Schultes 1977). The invention of

the car only multiplied the good news for rubber producers, Hevea brasiliensis

(Willd.) became the main source of raw rubber and Brazil the main exporter. For

many years, rubber industry brought millions of dollars to rubber lords and brutality

to native Amazonian people. Small towns like Manaus and Pra rapidly transformed

itself into rich cities whilst the native population decreased rapidly under slavery

(Akers 1914, Resor 1977, Schultes 1984).

In 1876, Henry Wickham (a thief for some or a remarkable British official for

others), smuggled or shipped, 70 000 seeds of Hevea brasiliensis (Willd.) to

England. Between 2 700 and 2 800 seeds germinated and were sent to Ceylon

(present day Sri Lanka) and to the Singapore's Botanic Garden. After several failures

and continuous research, mostly in the Singapore's Botanic Garden and under the

direction of Henry Ridley, rubber plantations started to appear in different countries

around the region (Resor 1977, Schultes 1977, 1984, 1993; Kong 2002; IRRDB

2000).

Posterior research during the early 1900's brought innovations in the management

and harvest of rubber trees; production capacity increased rapidly and the area

planted also grew constantly. At the same time, Brazil's ability to supply the

international market was in decline; particularly because of the difficulty of

increasing supply from natural forest, partially because of the extermination of the

Amazonian natives used for finding and taping trees. (Akers 1914, Resor 1977,

Schultes 1984). From been the only supplier Brazil's share of the market dropped to

50% in 1910 to less than 8% in 1921 (Resor 1977)

8During the Second World War, the Southeast Asia region was the main supplier of

rubber. With the expansion of Japan to the south and increasing rubber prices, big

consumers of rubber like the USA, United Kingdom and France, started to worry

about possible distortions of supply and they invested in developing the available

alternatives: from new tree species and locations to synthetic products. Extensive

work on the latter alternative yielded a product that, economists predicted, would

replace natural rubber. By 1964, synthetic rubber supplied 75 percent of the total

global market (Resor 1977, IRRDB 2000).

However, the situation changed drastically with the OPEC oil embargo of 1973,

which doubled the price of synthetic rubber. Another concern, the gas mileage

brought an unexpected threat to the synthetic rubber market: the radial tyre. The

radial tyre replaced the simple bias tyres (about 90 percent of the market) and within

a few years virtually all cars were rolling on radials. Synthetic rubber did not have

the strength for radial tyres only natural rubber could provide the required sturdiness

(Mongabay 1996). Today between 30 and 90 percent of every auto tyre, from small

cars to big trunks, and between 90 and 100 percent of all aircraft tyres are made with

natural rubber (IRSG 2005). Of this rubber, more than 85 percent is imported from

Southeast Asia, with Thailand, Indonesia, and Malaysia as the main producers (Kong

2002).

Hevea brasiliensis grows best at temperatures between 20 and 28C, well distributed

annual rainfall between 1,800-2,000 mm and will perform well on most adequately

drained soils. The tree is susceptible to strong winds and will grow well up to 600

meters above sea level (even 1000 meters near the Equator). Based on temperature

and rainfall requirements, the optimal growing area for Hevea brasiliensis is between

10 latitude on either side of the Equator, although it can be found further north, as in

China and Mexico, as well as further south as in Sao Paulo, Brasil (IRRDB, 2000).

92.2 Thailand's rubber sector

2.2.1 Rubber production

When listening to expressions like jungle rubber and natural rubber many people

get the impression that rubber production in South-east Asia is an ancient and

endogenous activity. In fact rubber was introduced in the region at the turn of the last

century when many farmers started to plant it in their small pieces of land. The forest

fallow was replaced by jungle rubber, a mixture of planted rubber, forest trees and

fruit trees close to a secondary forest in terms of biodiversity and structure (Gouyon,

1999).

Rubber (also known as para-rubber) was introduced to Thailand around 1900 by

Praya Ratchadanupradit Mahison Phakdi Na Ranong, who first brought seeds from

Perak State (Malaysia) into the Muang Trang district in the Trang province, south of

the country near the Malaysian border (LDD 2006). Adequate climatic conditions

and land availability favoured the expansion of rubber plantations along the southern

peninsula (Pendleton 1962). Later cultivation was extended to some of the eastern

provinces. (RFD 2000).

Somboonsuke (2002), presents some chronological characterisations of different,

rubber based, production systems in Thailand from its origins to the 1990's. Before

1960 rubber was normally produced on conventional farms also known as rubber

forestry or rubber community forest systems, where skills and technology were

family or region specific and most of the labour force came from the household. An

indigenous rubber strain was dominant until 1934 when high yield varieties such as

Tjir and PB86 were introduced. Usually, the quality of rubber was low and

smallholders sold their products at a local market.

In 1960, the establishment of the Office of Rubber Replanting Aid Fund (ORRAF),

brought rubber production into the green revolution. The main goal of ORRAF was

to introduce and implement new and standard technology into rubber farms. The use

of improved rubber strains such as RRIM 600/623, PB 5/51 and Tjir1, chemicals like

10

fertilisers and herbicides, more efficient tapping techniques and the search of

additional sources of income for smallholdings, are some of the most important

achievements of this institution. The Rubber Research Centre of Hat Yai (RRC) was

opened in 1965 to coordinate and develop research at both national and international

levels.

During the 1970's the technical extension activities of ORRAF increased and new

socio-economic extension programs by the Department of Agricultural Extension

(DOAE) were also introduced. Farmers were advised to diversify production and to

apply agribusiness management techniques. Producers were also asked to organise

themselves into local rubber farmers groups, in order to improve the quality of their

products, reduce production costs and to increase their bargaining power at the local

markets. The introduction of agricultural crops under the rubber trees and mixed

plantations with fruit trees became very common. Favourable international prices

promoted the expansion of rubber plantations even away from traditional cultivation

areas.

The rubber sector developed rapidly during the 1980's. The rubber farmers groups

became more product specific (e.g. rubber sheet making group, rubber latex group)

and with better access to technology. In order to complement the improvements in

production, the government made significant investments in public infrastructure like

roads, communication channels and water supply. All these improvements also

accelerated the migration of people away from the rural areas and generated shortage

of local labour and consequently pushing the diversification of rubber farms into less

labour demanding forms of rubber farming.

The 1990's was a difficult decade for rubber producers with fluctuating international

prices for latex and the deepening of the labour shortage. Improvements in the

quality and type of latex produced in Thailand as well as some governmental

interventions were the answers to deal with an increasingly difficult international

market. The economic crisis in 1997 drastically changed the rubber sector in

Thailand; rubber plantations outside traditional areas disappeared or changed into

very diverse farming systems, even rubber farms inside traditional rubber production

spots moved further into the diversification of production. The replanting program of

11

ORRAF came almost to a hold and the common agreement was to reduce latex

production by limiting the area planted with rubber. Figure 1 displays rubber prices

for the main latex products in Thailand during the last eight years.

Today the area of rubber plantations has increased again. In 2002 prices started to

increase and recently have stabilised between the 60 and 70 bahts per kilogram,

which is more than twice as the price in 2002. Smallholdings which earlier had

mixed rubber plantations have increasingly established rubber monoculture in recent

years, and around traditional rubber production areas new plantations have appeared

even on unfavourable sites like rice fields. (Somboonsuke 2006, Kheowvongsri

2006). In 2004, the Thai government announced plans to expand rubber plantations

into non-traditional areas (particularly in the North and Northeast of the country),

with a target of one million rai (about 160 000 hectares). The extension of rubber

cultivation area is expected to be around two million hectares by the year 2010

(IRSG 2005).

20

30

40

50

60

70

80

90

100

110

1999 2000 2001 2002 2003 2004 2005 2006Year

Bah

ts /

kg.

RSS3STR 5L

STR 20

Latex 1st

Figure 1. Real prices of Ribbed Smoked Sheet grade 3 (RSS3), Standard Thai Rubber5L (STR 5L), Standard Thai Rubber 20 (STR 20) and Natural Rubber latex (Latex1st) in Thailand from 1999 to October 2006.

12

The main reason behind the revaluation of natural rubber is the escalation of the

international crude oil prices since 2002 as the building up of the Iraq invasion and

throughout the Iraq conflict. Considering the current international scene and the

global concerns about climate change, international oil prices could stay high in the

foreseeable future keeping international and local natural rubber prices high as well.

China's economic growth and its increasing demand of raw materials also have an

effect on international prices of natural rubber (Van Beilen 2006).

Nowadays, Thailand is the biggest rubber producer with an output of more than 3

million tons of raw rubber per year (RFD 2005). Production is expected to continue

increasing in the next 13 years despite a projected modest decrease in the planted

area. Most of the rubber is exported as raw material to big consumers like China,

Japan, Malaysia and the EU; only about 10% of total production is consumed in

Thailand (IRSG 2005).

The main sector demanding natural rubber in Thailand is the tyre industry. Top

producers like Bridgeston, Gooyear and Michelin have had production capacity in

Thailand since the 1980's. Others products like balloons, gloves, rubber bands and

moulded goods have been produced in Thailand since the 1950's. Recently the Thai

government announced plans to increase the share of domestic consumption of

natural rubber from 10% of total production to 30% within a few years. Already

companies like Bridgestone, Sumitomo Rubber Industries and Yokohama are

increasing production capacity, and the industry of medical equipment made from

rubber has also grown in recent years (IRSG 2005).

According to the projections of the International Rubber Study Group (2005)

production and consumption of natural rubber in Thailand for the next 10 years looks

profitable, especially if international oil prices stay as high as expected.

13

2.2.2 Characteristics of the Thai rubber market

In most of Southeast Asia, rubber production is based on a combination of state

owned plantations, large private plantations and smallholdings, with Thailand as the

major exception. Contrary to other countries in the region, estate agriculture was

discouraged in Thailand at the beginning of the 20th century. Rubber growing became

an important activity for smallholding. High latex prices during the second part of the

1920's only increased the popularity of rubber as a cash crop for small owners and

the planted area increased significantly (Courtenay 1979). Official figures from the

RFD (2000), indicate that 93% of all rubber plantations are classified into the

category of smallholdings with a planted area smaller than 50 rai (6.25 rai = 1

hectare); more than a million rubber plantations fall into this category with an

average size of 13 rai.

In Thailand, rubber producers have a fair access to information like rubber official

prices, governmental policies, cost of inputs, new technologies, stumpage prices, etc.

Gilbert et al. (2001) indicates that monetary markets are also fairly accessible, the

Bank for Agriculture and Agricultural Cooperatives (BAAC) and to some extent

ORRAF are the main connection between small rubber producers and monetary

markets; the BAAC is considered a well functioning institution with relatively low

administrative costs.

The access to physical rubber markets depends on different conditions, from which

the distance from central rubber market and the organisational level of rubber

producers are the two most important ones. The combination of these two factors

determined the number of intermediaries needed to reach central markets.

Somboonsuke (2002) mentions up to five different intermediate dealers in some

circumstances; the use of these intermediaries only aggravates the price distortions

faced by rubber producers. In theory, the difference between farm gate latex prices

and official latex prices should not be larger than five or six bahts per kilogram.

Nonetheless, this is difficult to control especially when rubber prices are high;

differences above ten bahts per kilogram have been reported in recent years

(Boonchote 2006).

14

There are four governmental agencies supporting rubber production and

development, all of them under the Ministry of Agriculture and Cooperatives

(Somboonsuke 2002).

1. The Rubber Research Institute of Thailand (RRIT) is responsible of research

and development of new technologies as well as for the training of farmers and

officials from other agencies.

2. The Office of Rubber Replanting Aid Fund (ORRAF) is in charge of

governmental planting policies (replanting and new plantations); ORRAF is

also responsible of some particular training activities.

3. The Rubber Estate Organisation (REO): deals with the supply of planting

material including agricultural tools, fuel and other related material.

4. The Department of Agricultural Extension (DOAE): is mainly responsible for

the transference of technology from other agencies to rubber producers, as well

as to function as an adviser to farmers.

Additionally, the Center Rubber Market (CRM), working under the RRIT, tries to

systematically regulate the national rubber market by facilitating the exchange of

sensible information within the market, by providing marketing and warehousing

services. Some private organisations of natural rubber consumers also provide

additional support and information to particular regions or groups of producers. In

the main rubber production and marketing areas of the south and east of the country,

market characteristics resemble an almost perfect market with good flows of

information, fair access to capital markets, low indirect cost and a functioning price

mechanism. The longer the distance from these market centres, the more market

imperfections can be found.

15

2.3 Thailand's rubberwood sector

2.3.1 Rubberwood production

According to Hong (1996), research to determine the potential use of rubberwood,

including timber, fibreboards and wood pulp as well as other products, was initiated

in the Forest Research Institute of Malaysia (FRIM) in 1953. Even though these

attempts showed the potential of rubberwood, the wood processing industry at that

time was not receptive. Problems related to the durability and the quality of

rubberwood as well as the plentiful and low cost supply of logs from natural forest,

made rubberwood unattractive.

The decreasing area of natural forests available for logging as well as the increase in

harvesting cost (e.g. labour and transportation) have enabled rubber plantations to

emerge as a leading source of timber, especially for the manufacture of furniture

(Hong 1996).

A commonly agreed rotation for rubber trees is between 25-30 years, after latex

production decreases (Kadir 1998). Previously the felled trees were used as firewood

or burnt on the place. The major users of rubberwood were firewood consuming

industries like drying and smoking of sheet-rubber, tobacco curing, brick making, the

charcoal industry and others. It was in the late 1970's that intensive commercial

utilisation of rubberwood started in Malaysia (Hong 1996, Kong 2002). However,

Malaysia was not the first country to use rubber as a source of timber; this credit

belongs to India or Sri Lanka, which have been utilising rubberwood much earlier.

Malaysia could claim to be the first to successfully export rubberwood in the late

1970's (Kong 2002).

The turning point for the rubberwood industry in Thailand came in 1989 with the

logging ban for all natural forest. The main objective was to reduce environmental

degradation, partially generated by the extension of rubber plantations into areas

previously covered by natural forest (Collins et al 1991). After wood imports

drastically increased, as a consequence of the logging ban, local industries as well as

16

governmental officials started to search possible alternatives for the increasingly

expensive supply of raw materials for the wood industry. Thailand's imports of wood

increased from about 1.1 million cubic meters in 1988 to about 2.5 millions in 1989

and about 3.3 millions in 1990; the peak on wood imports was reached in 1994 with

about 4.1 million cubic meters. Since 1995 wood imports have decreased and in

recent years the annual volume of wood imported have stabilised around the two

million cubic metres (RFD 2005).

The almost 11 million rai (1.176 million ha) of rubber plantations in 1990 became an

attractive source of raw material for the Thai wood industry. Today, the more than 13

million rai (2.08 million ha) of rubber plantations (RFD 2005) roughly supply around

5 millions cubic meters of saw logs per year (RFD 2000). This optimistic

approximation of rubberwood supply is still below the projected demand of more

than 6.6 million cubic meters for 2007 (RFD 2000). However, with the projected

increase of one million rai of rubber plantations, the government expects to expand

the replanting area from 280 000 rai to 420 000 rai and thus increase rubberwood

supply (RFD 2005). Additional technology updates of the industry will close the gap

between supply and demand.

Currently, not all rubber plantations are considered commercial; due to

inaccessibility problems only between 75% (RFD 2000) and 90% (Promachotikool &

Doungpet 1996 cited in Balsiger et al. 2000) of all rubber plantations are

commercially viable. With increasing stumpage prices, more plantations in difficult

areas will become more profitable. In Thailand, the RRIT recommends spacing of

3x7 or 2.5x8 meters between trees in the plantation (RFD 2000). Mature trees on

rubber plantations are commonly 20-30 meters tall with a relatively slim trunk of up

to 30 cm diameter at breast height, an average branch-free bole of three meters and

upwards-extending branches (Balsiger et al. 2000).

Estimations on potential rubberwood volume from plantations vary significantly

between authors and between regions. Volume estimates for the clone RRIM600, by

far the most planted clone in Thailand, are presented in Table 1. The differences

between estimations are due to differences in methodology, such as mortality rate,

volume functions and sample size. However, it is important to recognise the lack of

17

official and standardised volume tables for rubberwood. As part of the project

Improvement of Rubberwood Utilisation and Marketing in Thailand, a pilot

assessment of rubberwood resource was financed by ITTO in 2002. Unfortunately,

the effort was abandoned and only preliminary results from the Rayong province are

available.

Table 1. Estimation of total and commercial volume of the clone RRIM600 forrubber plantations between 24 and 26 years old in Thailand.

Source Total volume Commercial volume

m3/rai m3/ha m3/rai m3/ha

RFD (2000, 2005) 24.8 - 60 155.3 - 379.4 16.6 - 19.8 103.75 - 123.75

INDUFOR (2006) 29.04 181.56 17.5 109.52

Chantuma et al. (2005) 40.96 - 48 256-300

According to official figures, about one third of the wood volume is used for

furniture parts and one third is used as firewood; the rest is used to make crates and

in construction. This projection assumes timber volumes of 45 m3 per rai (281.25 m3)

and it is presented in Figure 2. In places where industry is available, rubberwood is

also used by particle board mills and plywood industries (RFD, 2005).

Recovery rates of sawing wood are low, with an average recovery rate of 33.5% with

minimum values of 29% and maximum values of 40% (RFD, 2000); Clment-

Demange (2004) reports conversion rates of 70% in the Rayong province whilst

Kaikulainen (2007), presents improved recovery percentages closer to 40%.

35 %

35 %

18 %

12 % Wood for furniture and parts

Wood for fuel and charcoal burning

Wood for commodity crates

Wood for pilings, constructionpillars

Figure 2. Proportional use of wood from a rubber plantation in Thailand according toRFD (2005), expected timber volume is 45 m3 per rai.

18

2.3.2 Characteristics of the Thai rubberwood market

The Department of Industrial Factories of the Ministry of Industry, reported in 2004

a total of 815 rubberwood related plants, of which 462 were sawmills, 96 were

drying plants, 27 furniture parts manufacturing factories and 56 furniture

manufacturing factories as well as many other small enterprises. Additionally in

2005, five particle board companies and 25 plywood industries were reported using

rubberwood as raw material. (RFD 2005). Most of the primary rubberwood industries

are located in the south and east of Thailand, in provinces such as Surat Thani,

Nakhon Si Thammarat, Trang, Songkhla and Yala (south), as well as Rayong

province in the east. A significant part of the furniture industry is located in and

around the Bangkok area (RFD, 2000). These industrial areas basically overlap with

the traditional rubber planted areas and are presented in Figure 3.

Rubberwood industry in Thailand employs several hundred thousands of people and

generates an output value of 70 000 million bahts (more then 1.6 billion euros).

Around 80% of all products and furniture made of rubberwood are for export, with

Japan, the USA and the EU as the main consumers. Surpluses of processed

rubberwood are exported to other countries in the region like China, Hong Kong

(China), Vietnam, Malaysia and others (RFD 2005).

Direct contact between rubberwood producers and rubberwood users is very limited.

Just in the south, the most important source of raw material, 70 percent of standing

timber is bought from wood dealers and the rest directly from plantation owners

(Bassili 2000). The stumpage price that the wood dealer offer for the plantation is

based on different factors e.g. distance from saw mill and the main road, season of

the year (rainy or dry), size of the trees as well as the extend of the plantation, quality

of tapping and clone. In practice, inside the traditional rubber production areas, these

factors seem to have little significance for stumpage price estimation. Distance from

sawmill is below 75 kilometres, secondary and local roads are in good conditions,

plantation size does not vary significantly and the other factors are relatively

constant. Bassili (2000), mentioned that the problematic rainy season is only three

months long in the south.

19

Figure 3. Main rubberwood industrial regions in Thailand1.

1 Source: http://www.maps-thailand.com/

20

Harvesting and transportation costs are covered by the wood dealer, who usually

owns the equipment required for these activities. Normally chain saws are used to

fell the trees, de-branching and cutting of logs. Tractors or small bulldozers are used

to extract the roots or move materials if necessary; in some cases, tractors or

bulldozers are used to uproot the whole tree (RFD 2000). The wood dealer will take

all the marketable wood and leave behind only small branches and some pieces of

wood that could not fit in the last car. Transportation is done by using modified pick-

up trucks, but bigger trucks are gaining popularity among wood dealers

Sawmills keep very little if any information about neither the origin of timber nor the

transportation distance. Commonly sawmills will buy all the logs delivered during

the day and work overtime to process the total supply of the day, just to avoid fungal

problems (Bassili, 2000). In most cases sawmills offer a price per kilogram for the

timber, but in some places and for particular dimensions they have a price per cubic

meter (RFD 2000).

Rubberwood logs are normally cut between one and 1.5 meters long, with diameters

above 15 cm. Logs with less of 15 cm of diameter but with lengths near to 1.8 meters

are sent to medium density fibreboard (MDF) mills. Smaller logs of at least 5 cm of

diameter and with a minimum length of 0.9 meters can be sold to particle board

mills. Shorter logs with large diameters are sometimes destined for plywood

production (Bassili, 2000). How the wood is going to be distributed between

different uses is the choice of the sawmill. Part of the wood and residuals will be also

allocated to heat the sawmill's own drying facilities.

There are two important governmental agencies in the rubberwood sector, the

Department of Industrial Promotion and its Furniture Industries Division as well as

the Department of Export Promotion and its Product Development Centre. The

private sector is organised into two main groups: the Thai Parawood Association, and

the Thai Furniture Industries Association (Bassili, 2000). Of the government

agencies, the Department of Industrial Promotion is more active, providing training

for machine operators and courses for technicians and managers on different topics.

The Thai Parawood Association includes all related industrial levels from sawmills to

furniture exporters in the south of Thailand. The Thai Furniture Industries

21

Association is involved with exports promotion by providing information to both

foreign buyers and potential exporters (Bassili, 2000).

Despite the increasing importance of timber in the economy of smallholdings, rubber

plantations have been exclusively managed to maximise latex production. Decisions

like spacing and rotation length are made without considering potential

improvements on timber volume or stumpage prices. Timber is still seen as a by-

product of latex and its effect on silvicultural decisions is continuously ignored.

Recently, significant advance has been made in the development of new rubber

clones, which combine both, high latex yields and improved timber volumes.

However, it is unclear when these new clones will start to be widely used.

Nonetheless, potential changes in the way rubber plantations are managed are only

occasionally discussed.

3. PREVIOUS RESEARCH.

3.1 Smallholdings

A considerable amount of research has been made about rubber and rubber

smallholdings, especially in Thailand and Indonesia. Most of the technical research

concentrates on improved tapping techniques and the development of new rubber

strains that are able to adapt to particular locations or produce higher yields of latex.

Research about the small rubber producers has dealt with issues like poverty

alleviation, improvement of market conditions and diversification of production as

well as information networks.

The amount of information is significant, but it is not properly distributed.

Governmental agencies and public universities carry out most of the research, which

is published in the national language. Large part of this research is never translated or

summarised and gets lost between the many layers of bureaucracy; this situation also

promotes overlapping and in some cases results in replication of research, especially

from international institutions and projects.

22

Dr. Buncha Somboonsuke is one of the most cited experts on the socio-economic

aspects related to rubber smallholdings in Thailand. The latest research of Dr.

Somboonsuke concentrates in the effect of the 1997 Asian economic crisis on rubber

smallholdings, particularly in the south of the country.

In 2001, Somboonsuke presented a small historical review of the rubber sector in

Thailand until before the economic crisis. He also redefined a classification of

different rubber farming systems, based on the variety of products produced by the

smallholding, its socio-economic structure and its agroeco-zone. The classification

starts with rubber monoculture farms and ends with rubber-integrated farming with at

least three agricultural products or two agricultural products and one non-agricultural

product (animal or fish). There is also an empirical argumentation that in case of

sufficient supply of natural and financial resources, smallholdings will move away

from monoculture into more complex production systems.

Prommee & Somboonsuke (2001) compared some socio-economic characteristics

between the different farming systems previously defined by Somboonsuke (2001).

They showed that rubber monoculture has more disadvantage characteristics than

other systems. The heads of the monoculture smallholdings are generally the oldest,

they have a relatively low level of education and the lowest rate of participation in

farm groups. They also have the smallest farm size, the highest farm labour needs,

the poorest access to information as well as the lowest standards of equipment and

machinery.

Somboonsuke et al. (2002a) calculated economic indicators for the same farming

systems; measurements of financial capacity (self financing and debt service) and

farm productivity were carried out as well as an economic comparison between

systems, treating them like individual projects. The analysis indicated that all rubber

systems were profitable with rubber monoculture and rubber-pineapple systems

showing the worst results. They also indicated that the more diverse the system, the

more profitable it becomes.

23

Finally, Somboonsuke et al. (2002b), analysed the main constraints faced by rubber

smallholdings. In general, low latex price and quality, insufficient capital for

investment, difficult access to information and problems with pests and diseases were

mentioned as the main constraints by rubber producers. Shortage of family labour

was mentioned as a constraint, but not as important; however labour supply was an

increasing problem as younger people moved into cities in the search of better

opportunities (OED 1994). The document also indicates that biological and economic

constraints are more serious than physical and social ones. Less diverse systems are

also more vulnerable than complex ones.

3.2 Rubber clones

Since the beginning of the rubberwood boom, research on new rubber strains has

expanded to develop new clones that combine high latex yields with large timber

volume and special clones to be used only for timber production. However, Clment-

Damange (2004) mentions that the idea of rubber trees only for timber plantation is

not particularly popular among researchers. A reduction of latex production or even a

delay of the tapping activities, to increase timber volume, seems to have a negative

affect on the economic returns for the smallholdings. Figures 4 and 5 show some

comparisons between clones evaluated by the RFD and RRIT.

Figure 4. Comparison between the latex clones (RRIT226, BMP24 and RRIM600)and the latex-timber clones (PB235, PB255 and PB260) in term of latex production.2

2 Source: RRIT (2003)

150

200

250

300

350

400

450

500

7 8 9 10 11 12 13 14 15 16

Age of the tree

Kg/

rai

RRIT 226BPM 24RRIM 600

150

200

250

300

350

400

450

500

7 8 9 10 11 12 13 14 15 16

Age of the tree

Kg/

rai

PB 235PB 255PB 260

24

The RRIT has developed a classification for new latex-timber and timber clones and

it is actively working in the development of improved strains. Information about

these new clones and some preliminary results can be found in many of the RRIT's

publication as well as from other institutions (RFD 2000, 2005). These documents

aim at informing about the results of the institution but lack technical references

about the development of the new strains, in some cases these documents even

contradict each other. It seems to be little difference between latex clones and latex-

timber clones in terms of latex production. When speaking about timber volumes,

there is a clear difference between the reference clone (RRIM600) and all the other

clones. This indicates potential increases in timber supply in the future if the new

clones are fully utilised.

0

0,1

0,2

0,3

0,4

0,5

PB 235 PB 255 PB 260 AVROS2037

BPM 1 RRIM 600

Clone

cubi

c m

eter

s

6 years15 years20 years

Figure 5. Comparison between the latex-timber clones (PB235, PB255 and PB260)and the timber clones (AVROS2037 and BMP1) at tree different ages in terms ofcommercial timber volume per tree; clone RRIM 600 is the reference clone.3

Other countries are also in the final steps of the development of latex-timber strains.

In Vietnam (Thuy Hoa T. el al. 2005), breeding trials from 1985 were cut at the age

of 19 and the volume production was evaluated in order to select hybrids that

combine both high latex production and good timber volumes. A regression equation

for commercial volume (including branches with at least 6 cm of diameter) was also

estimated. The best clones showed volumes of up to one cubic meter per tree; the

3 Source: RRIT (2003)

25

clone RRIM600 (the most popular in Thailand), was also included in the trial and

reported the second lowest timber production out of 25 clones with 0.419 m3/tree.

Also from Vietnam, Lam L.V. et al (2005) reported preliminary results from rubber

trials including new germplasm obtained during an expedition, organised by the

International Rubber Research and Development Board (IRRDB) in 1981, to the

Brazilian Amazonian. The expedition's main objective was to expand the genetic

base of Hevea in Asia. This document presents a brand new collection of genotypes

including some with low latex production and excellent timber growth.

Bin Mohd. Aris (2005) argues that plantations for timber production only could be

felled after 15 years. The potential volume after 15 years was not estimated, but a

commercial volume of more than 100 m3/ha is reported from a 10 years old trial. The

effect of different plantation densities is also analysed in this document; including

higher densities that traditionally have been considered for timber plantations.

It is also important to consider the effect of tapping on growth rate of the trees. Silpi

et al. (2006), shows that there is a negative correlation between latex yield and

annual girth increment. After one season of tapping, the radial growth rate of tapped

trees was about half of that of untapped trees. Nonetheless, it is still unclear how

much timber could be obtained from an untapped rubber plantation when managed to

maximise timber value.

All of the previous research neither evaluates the economic potential of timber

plantations nor compares it with latex-timber plantations. Comparative research

between tapped and untapped rubber trees, including the economic effect, for timber

production is also limited, but extremely needed.

26

4. THEORETICAL FRAMEWORK

4.1 Basic Faustmann model

In 1849, Faustmann illustrated how to calculate the value of bare forestland using

two different approaches, one of them uses a discounted cash flow analysis for which

all incomes and expenditures are reduced to their present value equivalents. The

value of bare forestland is just the difference between discounted incomes and

discounted expenditures. In accordance with the Faustmann approach, landowners

will maximise the economic benefit from the forest if they maximise the present

value of net incomes. Between other things, Faustmann assumes that stumpage price,

harvest volume as well as regeneration costs remain the same for an infinite number

of rotations. A simplified form of the original Faustmann model can be written as

follows (Hyytiinen et al. 2001).

( )

( ) s

s

i

im

kiki

r

rcRVL

-=

-

=

+-

+

-

=

11

10 1 (1)

Were:

VL : value of bare land.

Ri : harvesting revenues.

cik : silvicultural and establishment costs.

(1+r)-i : discount factor to the beginning of the rotation.

r : interest rate.

1-(1+r)-s = infinite time horizon.

Two conditions need to be satisfied in order to solve the maximisation problem for

optimal rotation time. The first order derivative have to be equalised to zero whilst

the second order derivative must be less than zero. For forestry this conditions have

been proved correct by many authors, one of them is Chang (1983). The Faustmann

rotation model had been widely used to determine optimal rotation for even-age

forests, also including non-timber benefits; however its used, combining annual

revenue flow and final timber harvesting income, is still uncommon.

27

4.2 Faustmann model with non-timber products

Hartman (1976) expands the Faustmann model to include the economic value of non-

timber products. This additional revenue from the forest stand can extent the optimal

harvesting moment even to a point when the timber is losing value and in some cases

when the non-timber values are high enough, the optimal time for harvesting the

trees may never come. The Faustmann model as well as the Hartman variation can be

easily rewrited in the form of net present value (NPV) by including the discount

factor that repeats all cash flows for an infinite number of times as follows.

1

1 )1(11*

)1()(

)1(

-

=

+

-

-

++

+-

= TT

tTt

tt

rCp

rTpf

rCBNPV (2)

Where:

Bt : annual revenue obtained from the selling of latex.

Ct : annual cost related to the production of latex.

pf (T) : the stumpage price as a function of the harvesting moment T.

T: age of the plantation at the moment of harvest.

Cp : the plantation cost.

r: rate of return.

The multiplying factor on the right is used to repeat all cash flows for an infinite

number of times. The result does not only approximate the NPV for one rotation, but

for consecutive rotations until infinity, assuming land is not going to be used for

other activities. Note that rubber plantations are not normally thinned.

There is much research on optimal rotation and timber supply in terms of forest

owners' behaviour has been done, part of this research deals with the effect of timber

price and owner's amenities value on short and long term timber supply. Amenity

value depends on the owner's own perception of the forest, it is additional to the

timber prices and increases along with the increasing age of the forest stand

(Hartman 1976, Kuuluvainen et al. 1996).

28

By using comparative statistics Clark (1976) and Johansson & Lfgren (1985) show

that a permanent increase in stumpage price have a negative effect on the optimal

rotation or moment of harvest. Under high timber prices, forest owners will harvest

trees at a younger age and replant, as commercial maturity of the trees occurs earlier;

thus, high prices will increase timber supply in the short term. Decreasing timber

prices would have the opposite effect and owners will wait longer before felling the

trees and by doing so timber supply will decreases in the short term (Chang 1983,

Koskela & Ollikainen 2001)

Using the same methodology Clark (1976) and Johansson & Lfgren (1985) indicate

that lower interest rates will extend the optimal rotation length whilst high interest

rate will make the rotation shorter as low rates allow forest owners to have a lower

opportunity cost. The marginal increase of growing timber stock will equal the

opportunity cost of harvesting at an older age under low interest rate, the opposite

will happen with high interest rates.

From the forestry point of view, the income from latex can be seen as an amenity,

which total value increases over time but at a decreasing rate; the main difference

here is that after a particular age the revenue from latex starts to decrease. The effect

of amenities on optimal rotation and timber supply has been analysed by Hartman

(1976) and Strang (1983). They argue that an increase in the value of the amenities

will extend optimal rotation as owners wait longer before felling the trees in order to

capitalise the additional value of the trees. This situation will also reduce the supply

of wood in the short term (Kuuluvainen et al. 1996).

5. MATERIAL AND METHODS.

From the beginning of the research, it was assumed that most of the information

needed in order to achieve the objectives was already available in Thailand. In order

to establish contact with local expertise and collect the necessary information, a three

months trip was organised as part of the cooperation program between the Kasetsart

University in Bangkok and the University of Helsinki.

29

The information required was:

Annual rubber productivity at different ages.

Prices of latex paid to smallholders.

Economic governmental incentives to rubber producers.

Rubber trees growth rate.

Stumpage price of Rubberwood.

General information about the social and economic situation of small rubber

producers.

Governmental agencies like the RRIT and the RFD were visited in Bangkok, as well

as the Office of Agriculture Economics (OAE). Informal interviews were carried out

with members of these agencies and with some members of the Faculty of Forestry at

the Kasetsart University. An additional trip was organised to the Songkhla province

in the south of Thailand, the most important region in terms of latex and rubberwood

production.

In the south, the offices of the Rubber Research Centre and the Central Rubber

Market were also visited and staff from these agencies was interviewed. Researchers

at the Prince of Songkla University (PSU) were also contacted and interviewed. With

the collaboration of the PSU, which is also part of the Common Fund of

Commodities (CFC) project, three field trips were organised in order to visit rubber

plantations and sawmills. Information about annual costs and revenue from rubber

plantation was relatively easy to find. However, most of the databases lacked

information about the methodology used. In most cases, cost and benefits were

presented as a constant average value per year, which does not give information on

annual changes in latex production.

Two databases were selected for this thesis, the first one from the OAE (Rachane

2000 and Rach-Chachoop 2000) was used to run most of the calculations, and the

second by Somboonsuke (2002) that was used as support information. Two of the

persons in charge of the gathering of these databases were also interviewed in order

to clarify some aspects of the methodologies used. Both databases were corrected for

30

inflation based on the official annual inflation rates published by the International

Monetary Fund in its website (IMF 2006).

The information for the OAE's database was collected during 1999 and early 2000.

Around 255 smallholdings were interviewed along the country, especially in the

southern and eastern part; information about latex production as well as latex related

costs was collected. The database also contains information about stumpage prices

for a few areas also in the southern and eastern part of the country.

The database by Somboonsuke (2002) was collected during the same period but it

concentrates on mixed rubber production systems. From 3 820 smallholdings

evaluated 807 were considered rubber monoculture. Again information about latex

production as well as latex related costs was collected. In this case, the information

was collected in only three districts in the Songkhla province.

Prices for all latex concentrations and latex products were obtain from the

governmental website (RRIT 2006). This website includes a monthly publication of

the RRIT that informs about prices as well as other aspects of the Thai rubber sector,

but most of the information is only available in Thai language. In this thesis, latex

prices were corrected for inflation and can be compared with today prices. For the

calculations, an average price of 60 bahts/kg was used. This is an average of the

Ribbed Smoked Sheet (RSS) price during the last three years. RSS is the most

common product sold in the rubber market of Hat Yai as well as in other parts of

Thailand.

The only information unavailable was the stumpage price of rubberwood. To collect

this information, a field trip was organised with the cooperation of Dr. Pramoth

Kheowvongsri's team (PSU/CFC), and including two wood dealers. With the help of

a local ORRAF official, a set of 10 plantations were selected and then visited in

companion of the wood dealers. These dealers were then questioned about the

potential bid price per rai for each individual plantation.

31

One of the observations, a 19 years old plantation was eliminated from the

calculations. The clone planted in this plantation was the PB235. The site conditions

were the worst observed (almost in state of abandonment), the trees were in poor

condition (even with stem damage produced by tapping), and with obvious high

mortality. Nine plantations were finally used and two wood dealers were consulted

about the potential wood price per rai for each individual plantation. The size and the

age of the plantations varied from 8 to 40 rai (1.28 to 6.4 hectares) and from 12 to 25

years, respectively.

With the information about timber prices, a regression model was prepared in order

to predict stumpage prices for rubber plantations at different ages. Because of the

particular conditions of the region, e.g. large concentration of rubber plantations, well

organised latex market, good infrastructure and the presence of many sawmills, it is

assumed that stumpage prices are only affected by the price of latex, the expected

revenue of the wood dealer as well as the demand and supply of timber.

Optimal rotation length was calculated using the net present value concept combined

with the Faustmann-Hartman approach of infinite rotations, including latex and

timber values, as in equation (2). Optimal rotation for latex production only was also

calculated. A minimum accepted return rate of 5% on investment is expected from

latex and timber. Information about costs and revenues from latex were included in

the NPV calculation as given in the original database. Additional models to predict

costs and revenues based on latex production were not considered as it was assumed

that the effect on the results was not significant. The software programs PcGive and

Limdep were used for most of the statistical calculations. The normal worksheet of

Excel was used for algebraical calculations.

Finally, with a sensitivity analysis, the effect of different variables on NPV and

optimal rotation is going to be evaluated. The variables included for the analysis are:

planted are, latex price, basal area and discount rate. Additionally, the effect of the

replanting aid program by ORRAF will be also evaluated.

32

6. RESULTS AND DISCUSSION

6.1 Optimal rotation

6.1.1 Stumpage price model

In this particular case, two separate steps were required in order to estimate the

optimal rotation for plantations inside the traditional rubber production areas. To

begin with, a model to predict potential stumpage prices, as a function of the growth

of the rubberwood stand, was developed; then the NPV was calculated and applied to

estimate the optimal rotation for rubber smallholdings. The information collected on

the field generated 18 observations with stumpage price as the dependent variable

whilst age of stand, plantation size and basal area as the independent variables (Table

2).

Table 2. Age, planted area, basal area and stumpage prices (bahts/rai) for nine rubberplantations in Songkhla province, Southern Thailand

Age Owner Planted area Basal area Basal area Wood dealers(years) (rai) ( m2/rai) (m2/ha) Taan Pomlak Vaeng Noosong

12 Sirayo S. 17 2,72 12,42 18 000 15 00012 Yenta P. 7 1,12 13,34 22 000 25 00015 Niyom C. 8 1,28 16,13 45 000 40 00015 Prayot C. 18 2,88 19,48 47 000 47 00018 Tam M. 8 1,28 22,60 55 000 52 00019 Suchat C. 17 2,72 23,47 60 000 60 00021 Klub C. 8 1,28 28,39 57 000 57 00025 Wichad L. 40 6,40 26,58 80 000 75 00025 Vaeng N. 10 1,60 26,90 60 000 60 000

The proposed model is a linear regression that generates linear results based on a

linearly increasing age, basal area and planting area. In reality, however, basal area

behaves in a different way. To correct this inconsistency, a quadratic equation to

predict basal area based on age was also estimated (Figure 6).

33

y = -0,0144x2 + 0,7157x - 4,5197R2 = 0,9483

0

0,5

1

1,5

2

2,5

3

3,5

4

4,5

5

10 12 14 16 18 20 22 24 26

Age

Bas

al a

rea

per r

ai

Figure 6. Regression equation for basal area to be used with the model to predicttimber prices for rubber plantations in Songkhla province, Southern Thailand.

As expected, the dependent variable Price (stumpage price) as well as the

independent variables Age (age of the plantation) and BA (basal area), are highly

correlated (around 90% correlation). The independent variable Area (planted are in

rai) shows a correlation value of 48% with the dependent variable and values below

40% with the other independent variables.

The plantation age is the only non significant variable in the model; nevertheless, it

was included as the time reference variable for the model (Table 3). In this case,

basal area is a function of time, site conditions and intensity of tapping, with the

latter factor having a strong effect on growth (Silpi et al. 2006). The inclusion of age

in the model would reinforce the effect of tapping on basal area.

Table 3. Statistics of the stumpage model for rubber plantations in Songkhlaprovince, Southern Thailand.

Coefficient Std.Error t-value t-prob Part.R2 Mean of x ElasticityConstant -15369.3 6395.0 -2.40 0.031 0.2921

Age 584.408 1053.0 0.55 0.588 0.0215 18.000 0.084Area 444.981 191.4 2.33 0.036 0.2786 14.778 0.061BA 13931.50 824.9 2.70 0.017 0.3428 2.280

Sigma 6800.76 RSS 647505516R2 0.888712 F(3,14) = 37.27 [0.000]**

log-likelihood -182.125 DW 1.37no. of observations 18 no. of parameters 4

Mean (Price) 48611.1 Std.Dev 6800.764

1.397

34

The adjusted R2 of the model is high at 0.86. The whole model is significant at 5%

significant level; the independent variables Area and BA are also significant. The

Durbin-Watson's test indicates a significant correlation of the residuals, probably due

to high correlation between some of the variables. The partial autocorrelations for the

independent variables indicate that basal area is twice more important than plantation

size when estimating stumpage prices.

The proposition that the effect of basal area over price is larger than the effect of

plantation size is particularly important for smallholders who normally will find it

difficult to expand the area planted with rubber. Previous research indicates

(Chandrasekhar 2005, Lam et al. 2005, RFD 2005, Thuy Hoa T. el al. 2005) that the

clone RRIM600 generally produces far less timber (meaning -ceteris paribus- lower

basal area) than many of the new latex-timber clones. Improved latex-timber clones

could have a significant effect on farm gate prices for timber. In the sensitivity

analysis below, the effect of increasing basal area on stumpage price and optimal

rotation will be discussed.

The average plantation size of the plantation was the remaining value included in the

model. Table 4 displays the expected stumpage prices from 12 to 25 years old

plantations.

Table 4. Expected stumpage prices for a 15 rai (2.4ha) rubber plantation and agebetween 12 and 25 years in Songkhla province, Southern Thailand.

AgeBasal area

(m2/rai)Basal area

(m2/ha)Expected stumpage price

(bahts/rai)Expected stumpage price

(bahts/ha)12 2.00 12.47 26 113.02 163 206.3813 2.35 14.69 31 652.86 197 830.3814 2.68 16.74 36 791.47 229 946.6915 2.98 18.60 41 528.86 259 555.3816 3.25 20.28 45 865.01 286 656.3117 3.49 21.79 49 799.95 311 249.6918 3.7 23.11 53 333.65 333 335.3119 3.88 24.25 56 466.13 352 913.3120 4.03 25.21 59 197.38 369 983.6321 4.16 26.00 61 527.40 384 546.2522 4.26 26.60 63 456.20 396 601.2523 4.32 27.02 64 983.77 406 148.5624 4.36 27.27 66 110.11 413 188.1925 4.37 27.33 66 835.23 417 720.19

35

6.1.2 The net present value (NPV)

When the previous information is combined with the annual cost and benefit values

of running a rubber plantation, the NPV for different rotation lengths can be

calculated. It is assumed that the plantations around the main rubber markets will

always be replanted with rubber. In this case the NPV can be calculated for an

infinite number of rotations.

Table 5 presents the results of the NPV for a single rotation and for infinite rotations

for plantations between 12 and 25 years old, the long term NPV is used to determine

optimal rotation. The values presented are the discounted and accumulated cost and

benefit for each year using the 5% return on investment. The expected stumpage

price is also express as present value. All values are presented as bahts per rai.

Additional information about production costs and benefits can be found in the

appendix. For a 15 rai plantation (2.4ha), the optimal rotation age is 21 years with a

NPV of 79 194.95 bahts/rai (494 968.44 bahts/ha). The NPV of timber (at 5% rate of

return) accounts for 27.9 % of the total NPV, which is higher than the 20% calculated

by Clment-Demange (2004).

Table 5. Estimation of optimal rotation for a 15 rai rubber plantation in Songkhlaprovince, Southern Thailand based on the long term NPV; the accumulated costs andbenefits from a rubber plantation as well as stumpage prices are discounted at 5%return rate, all values are in bahts/rai.

Year Latex production Stumpage price NPV Long termCosts Benefits if harvested NPV

12 32 224.52 49 937.02 14 540.71 32 253.20 72 779.6213 35 550.28 59 739.59 16 786.19 40 975.49 87 241.5414 38 455.03 68 575.35 18 582.19 48 702.51 98 402.4115 41 049.30 76 195.81 19 976.09 55 122.60 106 212.7416 43 464.89 83 238.18 21 011.29 60 784.58 112 171.7517 45 714.20 89 783.94 21 727.55 65 797.29 116 723.2618 47 757.93 95 652.50 22 161.23 70 055.80 119 860.1819 49 800.65 101 074.45 22 345.56 73 619.36 121 832.7020 51 599.05 106 073.81 22 310.87 76 785.64 123 229.5621 53 151.22 110 261.38 22 084.79 79 194.95 123 537.9522 54 499.58 113 768.76 21 692.49 80 961.67 123 013.9823 55 699.60 116 706.71 21 156.85 82 163.96 121 827.5024 56 806.41 119 457.51 20 498.62 83 149.72 120 518.7125 57 865. 40 122 033.38 19 736. 63 83 940 61 119 064.76

36

With the current information, it would be difficult to estimate optimal rotation length

for plantations located outside the traditional rubber production areas. However, it is

reasonable to assume that with increasing transportation costs, optimal rotation could

shift around the 24 years if timber is still a priced product. The increase in

transportation cost could have stronger effects on stumpage price than on latex price

as the latex market is more extend and better organised than the rubberwood market

thus rotation would be longer than 21 but shorter than 26 years.

The estimation of an optimal rotation for timber production is not possible with the

available data. Current rubber plantations are neither designed nor managed for

timber production rendering it difficult to predict expected volumes and potential

stumpage prices when silvicultural activities are changed.

6.2 Sensitivity analysis

6.2.1 Effect of planting area

Because smallholdings, of less than 50 rai in area, are the subjects of this research,

the changes in plantation area concentrated in this particular group; nonetheless,

results for plantation of 100 rai are also presented. Table 6 shows the effect of

different plantation areas.

Table 6. Effect of planted area on optimal rotation and NPV for rubber plantations inSongkhla province, Southern Thailand.

Planted area(rai)

Planted area(ha)

Optimal rotation(years)

NPV(bahts/rai)

Long term NPV(bahts/rai)

5 0.80 21 77 597.72 121 046.4115 1.60 21 79 194.95 123 537.9530 2.40 21 81 590.79 127 275.2850 4.80 20 82 655.44 132 649.73

100 16.00 18 85 772.20 146 749.76

It seems clear that for smallholdings any increase in the area planted with rubber

would significantly affect neither the optimal rotation nor the NPV of the activity. In

the best case, if the small owner has the required financial resources to increase the

37

planted area from 5 rai to at least 30 rai, the increase on NPV will be about 5% or

less than 4 000 bahts/rai.

The results suggest that optimal rotation is reduced by one year with an increase of

the plantation area is increased in at least 20 rai, as better timber prices are payed for

larger plantations whilst latex related cost stay constant. This could indicate that

wood dealers are obtaining higher benefit-cost rates from large plantations by

increasing the productivity of labour and machinery during the harvesting and

transportation activities of which they are responsible.

This information has little value for financially constrained smallholdings but it could

be relevant for the owner of mid and large plantations, who could reduce optimal

rotation by considerable increasing the area planted with rubber. Nevertheless,

information reported by the RFD (2000) indicates that, based on the characteristics of

the RRIM600 clone and under current management conditions, sawmills are only

willing to accept trees that are older than 19 years.

6.2.2 Effect of latex prices

As latex accounts for 73% of the total NPV, changes in the price of latex are

expected to have a strong effect on profitability. Increasing latex prices tend to

increase optimal rotation for rubber plantations (Table 7). However, a considerable

change in latex prices from 40 to 75 bahts per kilogram only increases the optimal

rotation from 20 to 21 years. Apparently, in this case, timber value works as buffer

for the optimal rotation; the fact that a significant proportion of income occurs at

once maintains optimal rotation stable even if NPV changes significantly. Normally,

latex prices have a strong effect on optimal rotation for plantations producing only

latex.

It is important to observe the fraction of NPV that corresponds to the timber value.

With lower latex prices, this percentage grows close to 40%. This may indicate that

when latex prices fall below 40 bahts per kilogram, rubber plantations for timber

production become more attractive from an economic point of view.

38

Table 7. Effect of latex price on optimal rotation, NPV and the importance of timberas percentage of NPV for 15 rai rubber plantations in Songkhla province, SouthernThailand

Price(bahts/kg)

Optimal rotation(years)

NPV(bahts/rai)

Discounted stumpage priceif harvested (bahts/rai)

Timber as %of NPV

40 20 41 427.70 22 310.87 53.8545 20 50 267.18 22 310.87 44.3850 21 60 818.05 22 084.79 36.3155 21 70 006.50 22 084.79 31.5560 21 79 194.95 22 084.79 27.8965 21 88 383.38 22 084.79 24.9970 21 97 571.84 22 084.79 22.6375 21 106 760.29 22 084.79 20.69

According with the estimations of the IRSG (2005), increasing demand for natural

rubber will continue in the near future due to the strong economic growth of

countries like China and India and high oil price. Nonetheless, the potential future of

high latex prices and potential shortage of raw material is worrying the main latex

consumers. Already the US and the EU are actively seeking to diversify not only

their suppliers but also the main source of the raw material (Van Beilen 2006), this

could have a negative effect on future latex prices from the producers point of view.

6.2.3 Effect of basal area.

The development of latex-timber clones is well advanced in different countries

around the region. Many latex-timber clones in Thailand show superior latex

production and faster growth than the traditional RRIM600 (RDF 2005). It is unclear

if smallholdings would be able of capitalise on the higher latex production capacity

of the new clones, since labour shortages could seriously limit the amount of latex

tapped. However, the timber potential of the new clones would enlarge revenue for

smallholdings without any additional cost (Table 8).

The results are for a 15 rai (2.4ha) plantation and again indicate that the optimal

rotation length stays relatively unaffected as basal area improves whilst the NPV

increases. For a plantation of 5 rai, the utilisation of any clone that could increase the

basal area of one rai by 25% would have the same effect on the NPV per rai as the

planting of additional 45 rai of rubber (NPV for a 50 rai plantation = 82 655.44

bahts/rai ).

39

Table 8. Effect of increasing basal area on optimal rotation and NPV for a 15 rai(2.4ha) rubber plantations in Songkhla province, Southern Thailand.

Increments ofbasal area

Optimal rotation(years)

NPV(bahts/rai)

Long term NPV(bahts/rai)

0% 21 79 194.95 123 537.9515% 21 82 315.03 128 405.0325% 20 82 081.29 131 728.3035% 20 84 199.56 135 127.8045% 20 86 317.82 138 527.30

Preliminary results from Indonesia, Thailand and Vietnam (Thuy Hoa T. el al. 2005,

Lam et al. 2005, RFD 2005) suggest that most of the new latex-timber clones could

produce 25-40% more timber than the RRIM600 clone. This is not only important for

smallholdings but also for the wood industry in general as timber supply could be

increased in the future without expanding the area planted with rubber. Main users of

rubberwood should also participate in the promotion of new clones between rubber

producers.

6.2.4 Effect of the discount rate

Clark (1976), indicates that at higher interest rates optimal rotation would be shorter

than at lower rates as the discounted value of timber decreases faster under high

interest rates. In other words, timber value equals the opportunity costs of logging

early under high rates than under low interest rate.

It is clear that for rubber plantations, high interest rates will shorten optimal rotation

and low interest rates will extend it. After the economic crisis in the late 1990's,

interest rates in Thailand were low. However, increasing inflation since 2002 has

produced an increase in interest rates in recent years (Table 9).

A 2% increase in the discount rate reduces optimal rotation age by one year at any

price level and vice versa. The fact that most of the revenue from latex occurs when

plantations are between 7 and 14 seven old whilst timber revenue occurs after 21

years, seems to compensate for changes in the interest rate, thus reducing its expected

effect on optimal rotation. Discount rate also has a strong effect on profitability.

40

Table 9. Effect of changing interest rate (3%, 5%, and 7%) on optimal rotation andNPV as latex prices changes for 15 rai plantations in Songkhla province, SouthernThailand; NPV is in bahts/rai.

Latex price 3% discount rate 5% discount rate 7% discount rate(bahts/kg) Rotation NPV rotation NPV rotation NPV

40 21 63 142.74 20 41 427.70 19 26 985.9445 21 75 084.06 20 50 267.18 19 33 607.8850 22 89 472.37 21 60 818.05 20 41 537.6655 22 101 859.91 21 70 006.50 20 48 445.2660 22 114 247.45 21 79 194.95 20 55 352.8665 22 126 634.99 21 88 383.40 20 62 260.4570 22 139 022.53 21 97 571.85 20 69 168.05

Timber revenues are the most affected by changes of the interest rate. Interest rates

thus have a different effect on latex and timber profitability as revenues from latex

are distributed over many years and timber revenue only occurs at the end of the

rotation. Figure 7 shows the discounted value of timber as percentage of NPV for

different latex prices.

20

30

40

50

60

40 45 50 55 60 65 70 75

Latex price (bahts/kg)

Perc

enta

ge o

f NPV

3 %5 %7 %

Figure 7. Timber value as percentage of NPV for different interest rates (3%, 5%,and 7%) and with changing prices.

When latex prices are high, the revenue from timber is more significant when interest

rates are low. Nevertheless, the importance of timber value as a percentage of NPV is

relatively small when latex prices are high. With low latex prices, the effect is the

opposite; revenue from timber is more significant when interest rates are high.

41

Additionally the importance of timber as a percentage of NPV is clearly different as

interest rate chances under low latex prices.

The combination of low latex prices and high interest rates could be very difficult for

smallholdings. Under such circumstance, smallholdings would be better off with a

strong timber component in the plantation. The importance of timber seems more

significant during difficult economic times. The investment in timber production will

not only generate additional revenue at the end of the rotation, but it would also

insurance rubber producers against potential drops of latex prices.

6.3 The ORRAF effect

As previously mentioned, ORRAF is in charge of applying the planting and

replanting policies of the government as well as providing new technology to rubber

producers. The total planting aid from ORRAF is 7 300 bahts/rai (slightly more than

1 000 /ha) which is paid during a 5.5 years period. The payment partially covers the

cost of seedlings and labour. The fund is financed by different sources but most of it

comes from rubber related taxes paid by producers, consumers and exporters of latex.

Additionally and in cooperation with the BAAC, ORRAF also offers loans to farmers

interested in planting rubber (ITTO 2006). In the previous calculations, the subsidy

by ORRAF was not taken into account. Table 10 presents the results of NPV for a 15

years old plantation with and without the subsidy as latex prices change. Only the

effect of changing latex prices is evaluated as it generates most of the income.

In average, the ORRAF aid improved the NPV in 6 363.78 bahts per rai and in some

cases it reduces the optimal rotation by one year. The distribution of the ORRAF

payments varies between regions, but around half of the 7 300 bahts is paid the first

year to cover the purchase of seedlings and planting cost. The subsidy strongly

reduced initial investment. This is reflected in the NPV, which gives higher weight to

the cash flows that occur during the first years.

42

Table 10. Effect of the ORRAF's planting aid on optimal rotation and NPV forrubber plantations in the Songkhla province, Southern Thailand.

Without ORRAF's aid With ORRAF's aid

PriceOptimal rotation

(years)NPV

(bahts/rai)Optimal rotation

(years)NPV

(bahts/rai)Subsidy as %

of NPV40 20 41 427,70 20 48 158,48 13,9845 20 50 267,18 20 56 997,96 11,8150 21 60 818,05 20 65 837,44 10,2255 21 70 006,50 20 74 676,93 9,0160 21 79 194,95 21 85 925,73 7,8365 21 88 383,38 21 95 114,17 7,0870 21 97 571,84 21 104 302,62 6,4575 21 106 760,29 21 113 491,07 5,93

This financial aid improves the welfare of small rubber producers, especially when

latex prices are low. Based on the information presented by Somboonsuke (2002) and

Rach-Chachoop (2000) in the year 200, when latex prices were at 25 bahts/kg and

timber prices 20% lower than today, ORRAF's subsidy accounted for 40% of total

NPV. Nowadays, the combination of high latex and timber prices makes these

payments far less significant for smallholdings.

From Table 10 it is also clear that the importance of the aid programme, on the

smallholding economy, diminished as latex and timber prices increase. In other

words, the investment of ORRAF in the subsidy generates decreasing returns

(measured as a proportion of tot