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Drought-Induced Decline In Sugar Production In Thailand: What It Means For Wilmar International Limited

Global warming is here whether we like it or not.

The near-yearly occurrence of haze in the region – due to the irresponsible burning of plantations – is a stark reminder to us of how important a clean and pollution-free environment is. For the businesses and farmers who thought they could save costs by burning their plantations for replanting instead of using environmentally-responsible methods, their decisions might be slowly coming back to haunt them. Global warming – exacerbated by the burning of plantations and forests – is also bad for business.

Extreme weather conditions such as El Nino are getting more and more severe, resulting in more natural disasters in the region, such as floods and droughts.

This year, droughts in Thailand could decrease its sugar production by around 14% compared to the previous season. Thailand is the world’s second largest sugar producer. So what is happening in Thailand would definitely affect the global supply and demand of sugar.

A short-term   boost for business?

In the world of commodities, someone’s loss might be another’s gain. With the possible shortfall in sugar production in Thailand, other sugar producers might be well positioned to benefit.

Singapore-listed Wilmar International Limited (SGX: F34) is one of the largest sugar producers in the region. The company sold about 13.1 million metric tons of sugar in 2015, generating revenue of US$4.4 billion.

In theory, a sugar shortage in Thailand would result in an increase in sugar prices. Theoretically, producers such as Wilmar International should benefit from the higher sugar prices. But, investors have to know that the price of sugar is just one of many factors that can impact the company’s profitability. For instance, Wilmar would also have to depend on currency fluctuations and the operating costs of its sugar business.

Long-term   impacts

Volatile weather patterns would also mean volatile markets for commodities. This is because the supply of these commodities would have to depend on how the weather behaves. This could lead to an increase in uncertainty in terms of being able to predict production levels for commodities each year, thereby increasing the risk of operating in such a business.

Therefore, it is time for businesses, managers, and investors to understand that global warming is not just about a few polar bears dying or a portion of the polar ice caps disappearing. It is also bad for business. Everyone has to play our part to ensure the sustainability of our businesses, livelihoods, and our planet.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim owns shares in Wilmar International Limited.