Contract Farming for Exports in ACMECS: Lessons & Policy Implications Investment, Trade, & Transport Facilitation in ACMECS 13 March 2007, Bangkok, Thailand : Contract Farming for Exports in ACMECS: Lessons & Policy Implications Investment, Trade, & Transport Facilitation in ACMECS 13 March 2007, Bangkok, Thailand
Anthony M. Zola
Consultant to the World Bank
in association with
Mr. Chea Samnang, Cambodia
Mr. Phanthavadone Bandasack, Lao PDR
Mr. Chanthalath Pongmala, Lao PDR
MIDAS Agronomics Co., Ltd.
Mekong International Development AssociateS
Outline of the Presentation : Outline of the Presentation Tasks of the assignment
Methodology
Assumptions vis-à-vis agriculture value-chains in the GMS / Context
Hypothesis
Preliminary findings from Lao PDR
Preliminary findings from Cambodia
Some indicative policy implications
Tasks of the Assignment : Tasks of the Assignment Status of contract farming for export in Laos & Cambodia
Potential for additional contract farming for export
Obstacles / constraints to expansion of contract farming for export
Actions required to increase benefits of contract farming to farmers / economy
Methodology : Methodology Literature review
Interviews: farmers, officials, agribusiness operators, consultants, researchers, NGOs
Field visits to contract farming sites in Cambodia & Laos (and previously to sites in China & Thailand)
Observation visits to border crossings
Methodology: Literature Review–Principle Sources of Data & Information : Methodology: Literature Review–Principle Sources of Data & Information GMS: Research for the Rockefeller Foundation: Study on Enhancing Upland Food Security and Crossborder Agricultural Production Supply Chains in the Greater Mekong Subregion, 2004-present
GMS: Presentation for UNESCAP workshop on The Role of Global Value Chains in Agribusiness SME Development in the GMS, Kunming, 2006
Laos: ADB project preparation technical assistance for a Participatory Livestock Development Project, 2005 Laos: ADB supported Northern Regional Development Strategy, 2002-2004
GMS: Selected Issues Related to Contract Farming of Organic Agriculture in the Greater Mekong Subregion, Asian Development Bank Institute/ ADBI, August 2004
Laos: ADB/Greater Mekong Subregion/Working Group on Agriculture, Report on Training to Initiate Contract Farming in Oudomxay Province, Lao PDR, 2004
Methodology: Interviews & Field Visits : Methodology: Interviews & Field Visits Laos: Field work to update & confirm information, 3-5 March 2007
Cambodia: Field work to research status of contract farming, 6-17 March 2007
Thailand, Laos, China & Viet Nam: Field visits for Rockefeller Foundation research on food security and crossborder agricultural production supply chains, 2004-2005 Laos: Field work for the Lao Northern Regional Development Strategy, 2003-2004 Friend of the Upland Farmer Co., Ltd, Luang Namtha Province, northern Lao PDR, producing corn, soybeans, & cardamom under contract farming for export to China
Methodology: Recent Observation Visits to Border Crossings : Methodology: Recent Observation Visits to Border Crossings Laos: Field work to update & confirm information, 3-5 March 2007
with Meng-la, Yunnan, China at Boten, Luang Namtha & Naa Moh, Oudomxay
Laos: ADB project preparation, Participatory Livestock Development Project, 2005
with Meng-la, Yunnan, China at Boten, Luang Namtha & Naa Moh, Oudomxay
with Viet Nam at Nam Kan, Xieng Khouang; at Naa Meo, Houa Phanh;
Laos: ADB / Northern Regional Development Strategy, 2002-2004
with Viet Nam at Mouang Et & Naa Meo, Houa Phanh;at Nam Kan, Xieng Khouang; with China at Mouang Singh & Boten, Luang Namtha; at Na Moh, Oudomxay
with Thailand at Kaen Thao, Xayaboury & Tha-ly, Loei; at Sanakham, Vientiane Province & Chiang Khan, Loei; at Mouang Ngeun, Xayaboury & Chalermphrakiat, Nan; at Ton Pheung & Huay Xay, Bokeo & Chiang Saen & Chiang Khong, Chiangrai; at Mouang Mom, Bokeo & Shan State, Myanmar The Lao-Viet Nam frontier at Nam Kan Nonghet District, Xieng Khouang Province, where Vietnamese authorities claimed they are not equipped to facilitate exports by Lao traders to Viet Nam. • Myanmar: Study visit to Shan State with Mae Fah Luang Foundation March, 2004
- with China at Mong La, Mong Pawk, & Pangsang
Assumptions vis-à-vis global value-chains & implications for agricultural development in the GMS (Context) : Assumptions vis-à-vis global value-chains & implications for agricultural development in the GMS (Context) Current trends in global agribusiness
Concentration and consolidation
Vertical / horizontal integration & globalization
Regional development factors
Questioning of the development paradigm
Assumptions: Concentration and Consolidation : Assumptions: Concentration and Consolidation Global value chains are impacted by lower cost producers in North America resulting from:
Increase in market concentration in nearly all agricultural sectors.
e.g., Livestock. In 2004, the 4 largest beef firms processed 81% of all the cattle; the 4 largest pork firms process 59% of pork; and 4 chicken firms process 50% of all broilers
Emergence of vertically and horizontally integrated multinational food and agricultural corporations.
e.g., Grains. The 4 largest wheat processors have 61% of the market; the 4 largest soybean processors have 80% of the market
Consolidation of retailers / who also may be producers Source: Research conducted by the National Farmers Union, USA, 2004
Assumptions: Concentration and Consolidation Five Top Grocery Retailers in the USA : Assumptions: Concentration and Consolidation Five Top Grocery Retailers in the USA
Assumptions: Vertical Integration and Globalization – Case of Walmart : Assumptions: Vertical Integration and Globalization – Case of Walmart Processors:
Tyson’s Food
IBP, Inc.
Farmland Foods
Smithfield
Walmart operations in:
United Kingdom (#3)
Germany
Argentina
Brazil
Canada
Mexico
China
Korea
United States (#2) Poultry
Beef
Pork Retailer: Walmart
Assumptions: Implications for Global Value Chains : Assumptions: Implications for Global Value Chains Consolidation of agribusiness multinationals is creating large agro-industrial operations that pay less for raw materials & production inputs.
Vertical integration connects retailers back to the production and processing stages of the food system.
Retailers can now dictate terms to SME food manufacturers forcing changes back through the system to the farm level.
As the balance of power shifts to the retailers, SMEs in all parts of the food system are being marginalized.
SMEs and households in rural areas are likely to be left out of the development paradigm dominated by large retailers.
Only in certain niche markets can Asian farmers still compete, and these too can be expected to decrease as the North American Free Trade Agreement (NAFTA) expands to include Asian competitors in Central America and the Caribbean.
Assumptions: Regional Development Factors with implications for farmers & SMEs in ACMES seeking access to global value chains for agricultural products : Assumptions: Regional Development Factors with implications for farmers & SMEs in ACMES seeking access to global value chains for agricultural products Creation of economic development corridors
Emergence of middle class consumers with changed tastes and preferences in China, Thailand, Viet Nam
Trade liberalization (ASEAN, GMS, ACMECS)
WTO membership for China and Viet Nam with new legal obligations
Thailand’s obligation to impose SPS standards on products from neighboring countries; subject to supply side audits
Use of the Mekong River for trade, facilitating trade between China & Thailand
Assumptions: Questioning of the Current Development Paradigm in the GMS / ACMECS : Assumptions: Questioning of the Current Development Paradigm in the GMS / ACMECS International Conference "Critical Transitions in the Mekong Region" 29-31 January 2007, Chiangmai
Discussed: migration, reduction of poverty and social and economic disparity among peoples of the Mekong region.
"Connecting markets (by itself) doesn't always work," Jean-Pierre Verbiest, ADB country director for Thailand.
Highways can also lead to environmental risk and degradation.
The focus on social concerns has lagged behind. "While there is general growth, when you look at the distribution of growth, you see a different picture." (Rosalia Sciortino, a professor at Mahidol University and Chulalongkorn University).
Hypothesis : Hypothesis Link smallholder farmers to regional & global value chains through contract farming
Linkages with local & regional SMEs that can have downstream linkages to transnational & multinational companies and retailers
A value chain is a string of agro-enterprises working together to satisfy market demand for a particular product. : A value chain is a string of agro-enterprises working together to satisfy market demand for a particular product. Input Supplier
SME Input Supplier
SME Farmer In-field &
Post-harvest
Quality
Control
SME Preliminary
Processor
SME Food
Processor,
Distributor,
Wholesaler Contract Farming:
Credit &
Technology
Transfer
SME Transport &
Storage
SME Retailer Market /
Consumer Market /
Consumer SME = indicates a potential role for SMEs
& / or farmers to add value
Preliminary Findings from Lao PDR : Preliminary Findings from Lao PDR
Preliminary findings from Lao PDR: Principal Contract Farming Crops for Export, Locations & Export Markets : Preliminary findings from Lao PDR: Principal Contract Farming Crops for Export, Locations & Export Markets Short-term crops mostly for export to China: watermelon, green bell peppers
Singh District, Luang Namtha
Upland crops for export to China & Thailand: corn, sugar cane, cassava, soybeans, sesame, cotton
Corn, soybeans, sesame for China & Thailand: Bokeo, Luang Namtha, Oudomxay, Xayaboury
Sugar cane for China: Oudomxay, Luang Namtha, Phong Saly
Cassava for China: Oudomxay, Luang Namtha
Cotton for Thailand: Xayaboury NTFPs: cardamom & Styrax
Cardamom for Thailand & China: Luang Namtha & Oudomxay
Styrax for benzoin for France & China: Houa Phanh (photo)
Permanent crops: tea, rubber
Tea for China: Houa Phanh, Phong Saly, Oudomxay
Rubber for China: Luang Namtha, Oudomxay, Luang Prabang
Most Thais and Vietnamese are collectors Contract farming of Styrax tonkinensis for benzoin, Houa Phanh Province, northern Lao PDR, for export to Europe & China
Preliminary findings from Lao PDR : Preliminary findings from Lao PDR Contract Farming Modalities
Concessions / rubber, sugar cane, cassava, Jatropha, tree plantations
Some are operated as nucleus estates with technical outreach programs
Some companies rent farmers’ land & hire farmers as laborers; rubber
Contract farming between smallholders & Chinese companies; split: 50-50 or 60-40; rubber
Joint ventures
Usually between Lao & Chinese individuals; registered / not registered
Chinese guarantee the market, but not the price Marketing groups
Some villages organize farmer marketing groups
Provincial associations
Local investors establish an association, register with the provincial authorities, organize contract farming of a crop (e.g., Jatropha) & obtain the sole right to market a crop in that province
Most Thai & Vietnamese firms act as collectors & depend on Lao middlemen
Some Thai firms provide credit in kind and ploughing services; no written contracts nor fixed or guaranteed prices
Preliminary findings from Lao PDR Issues with Contract Farming -- Indicative : Preliminary findings from Lao PDR Issues with Contract Farming -- Indicative Farmers
Companies cannot be trusted; do not return to purchase; do not buy total harvest; most often with Chinese firms, even when brought to village by district officials
Companies not carefully checked out
Required quality standards are too high
Training is insufficient; superficial (e.g. rubber tapping at 0300 hours)
Some farmers are obligated to cultivate rubber to meet international agreements
Potential Solutions Offered
Examine more carefully the previous experience & contract farming record of the interested company
Company & district agriculture extension agents should provide farmer training: use of lead farmers; frequent refresher training
Contract farming should be voluntary, with clear understanding of all aspects of production
Preliminary findings from Lao PDR Issues with Contract Farming -- Indicative : Preliminary findings from Lao PDR Issues with Contract Farming -- Indicative Companies
Farmers cannot be trusted; often sell to traders offering highest price
Quality of produce is poor; farmers lack basic agricultural skills;
Farmers operate to their own calendar
Farmers lack understanding of needs of agribusiness processors
Transport costs are high
Poor quality village access roads
High transaction costs at borders
Lao traders cannot transport to China or to Viet Nam, but traders from both countries can import from Laos
Traditional border crossings are preferred to international crossings; rules are more flexible
Potential Solutions Offered
Organize community marketing groups; self-enforcement of contracts by peers
Repeated training; community selection of lead farmers for intensive training; training as trainer
Creative initiatives
Repeated training
Farmers transport to buying centers using appropriate local transport
Duty, responsibility, obligation of central government; Foreign Affairs, Customs, Immigration, Agriculture; detailed & prioritized in the NRDS
Increase the frequency of market days at traditional border crossings
Preliminary findings from Cambodia: Principal Contract Farming Crops for Export, Locations & Export Markets : Preliminary findings from Cambodia: Principal Contract Farming Crops for Export, Locations & Export Markets Short-term crops for domestic consumption (aiming for export later): rice & organic rice
Organic rice: Mostly in Takeo, and Kompong Speu
Rice for Thailand: Battambang
Rice for Viet Nam: Kompong Cham, Kandal
Upland crops mostly for domestic consumption with some export to Korea, Thailand & Viet Nam: tobacco, cotton, cassava, sugar cane, castor beans
Tobacco, cotton, for domestic use & Viet Nam: Kompong Cham, Kandal Cassava for Viet Nam: Rattanakiri, Kratie
Cassava for Korea: Kompong Speu
Castor beans for Korea: Kompong Thom
Corn for Thailand: Battambang
British American Tobacco Cambodia’s tipping & stemming factory, Kampong Cham
Preliminary findings from Cambodia: Principal Contract Farming Crops for Export, Locations & Export Markets : Preliminary findings from Cambodia: Principal Contract Farming Crops for Export, Locations & Export Markets Permanent crops:
Rubber for Viet Nam: Kompong Cham, Mondulkiri, and Kratie
Oil palm for Malaysia: Kompong Som
Sugar palm for
Europe: Kompong Speu, Kompong Cham
Organic cashew nuts for domestic use (later for export): upland minority areas Lead farmer (left) for British American Tobacco Cambodia in Kompong Cham Province & BAT technicians. BAT farmers have moved up the supply chain by investing in tobacco curing houses.
Preliminary findings from Cambodia : Preliminary findings from Cambodia Contract Farming Modalities
Concessions
Most domestic concessions have not been successful due to poor management
Concessions are available to foreign investors
<200 ha can be approved at provincial level
rubber, cassava, sugar cane, oil palm
Pilots for concession management underway in Siem Reap & Battambang
Joint ventures
Often between Cambodian & Vietnamese individuals; registered / not registered;
British American Tobacco is a large registered joint venture
if <$1 million, can be registered at the provincial investment office Cambodian investors
Oil palm, sugar cane, rice, rubber, cassava
Linked to processing & domestic or export markets
Contract farming of vegetables for domestic consumption: Sre Khmer
Foreign investors
Tobacco, sugar palm, cotton
Linked to processing & domestic or export markets
Most Vietnamese traders act as collectors & work with Cambodian middlemen
Manhattan Textiles contract farmers in Kompong Cham with harvested cotton
Preliminary findings from Cambodia Issues with Contract Farming -- Indicative : Preliminary findings from Cambodia Issues with Contract Farming -- Indicative Farmers
Prices are too low; especially cotton
Confused about which crop to grow; due to price volatility & small farm size
Bad seed
Insufficient training
High cost of transporting crop to factory
High cost of production: fuel (for pumps & tractors)
Potential Solutions Offered
Provide special tax incentives for firms promoting contract farming of cotton to allow firms to offer higher prices to farmers
Seed quality control by the company
Additional training by company contract farming outreach program; training in IPM
With tax incentives (above) company could provide transport services (or outsource to a SME)
Preliminary findings from Cambodia Issues with Contract Farming -- Indicative : Preliminary findings from Cambodia Issues with Contract Farming -- Indicative Companies
Farmers operate to their own calendar; farmers lack a business mind-set & any understanding of marketing
Low agricultural skills of farmers
Cost of obtaining organic certification by foreign organization is very high
Farmers think as individuals; lack cooperation
Farm size per household is small; leads to increased costs of operation
Farmers have inadequate land for contract farming; land held back for family food security
Transport costs are high
Poor quality village access roads Potential Solutions Offered
Creative initiatives (BAT approach)
Increase the frequency of training
Establish a Cambodian body to be certified and to certify other Cambodians; mutual recognition by ASEAN / GMS / ACMECS
Organize group activities; marketing groups
Organize farmer groups to purchase as groups, reducing buying costs
Improve irrigation to allow for second & third cropping; intensified land use
Farmers transport to buying centers using appropriate local transport
Slide27 : Border Crossing Points covered under the GMS Transport Agreement
&
Locations of the principal contract farming areas (in green) in Cambodia & Lao PDR
Some Indicative Policy Implications : Some Indicative Policy Implications Cambodia
Increased investment in rural infrastructure: upgrading rural market access roads & dry season irrigation
Carefully examine the BAT model of contract farming
Tax incentives for companies that operate reliable contract farming programs
Some Indicative Policy Implications : Some Indicative Policy Implications Lao PDR
Foreign companies & joint ventures interested in pursuing contract farming should be registered with provincial commerce & agriculture offices.
Intensive farmer training in cultivation techniques for selected crops (i.e., rubber), irrigated agriculture & post-harvest technologies & on-farm irrigation water management in areas, targeted for contract farming
Support national & regional forums for networking between Lao SMEs & large-scale wholesalers, distributors, and retailers; SMEs operating contract farming programs are the principal link back to the smallholder farmer
The End : The End Thank you