A few weeks ago, tire-grade rubber on the Singapore Commodity Exchange (SICOM) fell to its lowest point in 5 years. When adjusted for inflation, some traders say the prices are the same as they were 15 years ago. Prices are so low that some farms have stopped tapping their trees, which raises even more concerns for the global supply of natural rubber (NR).
Approximately 85% of the world’s NR is grown by small farmers in Southeast Asia. The general rule for these farmers is that one kilo of rubber buys one kilo of rice. When prices were at record highs, one kilo of rubber bought about 2.5 kilos of rice. With current prices, one kilo of rubber buys about one-half a kilo of rice. As a result, some farmers are cutting down their rubber trees in order to plant other crops in order to survive.
Another report from a tire industry trade publication indicated that the average price of a new truck tire actual fell from 2012 to 2013 by about $20. With oil prices also falling, it would appear that the trend would continue since the major price hikes of a few years ago were attributed to rising raw material costs. Logic would dictate that all of the factors for falling tire prices are in place.
Unfortunately, the global supply of NR is as unpredictable as any other agricultural commodity. But unlike corn or soybeans, the farmers cannot just decide to plant something else next season. It takes 7 years for a rubber tree to reach maturity, so the lost production from farmers who are cutting down their trees can potentially reduce the supply for almost a decade. It doesn’t appear to be a major issue right now, but things can change in a heartbeat so fleets should be prepared. Major savings today could lead to another round of price hikes in the future. The scary part is that it all comes down to a kilo of rice.