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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

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Contract Farming for Exportsin ACMECS: Lessons & Policy ImplicationsInvestment, 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
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

Tasks of the Assignment
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
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: Literature Review–Principle Sources of Data & Information
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

Methodology:Interviews & Field Visits

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
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

Methodology:Recent Observation Visits to Border Crossings
  • • Myanmar: Study visit to Shan State with Mae Fah Luang Foundation March, 2004
  • - with China at Mong La, Mong Pawk, & Pangsang

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.

slide8
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 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)

Assumptions: Vertical Integration and Globalization– Case of Walmart

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.
slide13

Assumptions: Regional Development Factorswith 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
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).

Assumptions: Questioning of the Current Development Paradigm in the GMS / ACMECS
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
slide16
A value chain is a string of agro-enterprises working together to satisfy market demand for a particular product.

Contract Farming:

Credit &

Technology

Transfer

SME

Transport &

Storage

SME

Market /

Consumer

Input Supplier

SME

Input Supplier

SME

Farmer

In-field &

Post-harvest

Quality

Control

SME

Preliminary

Processor

SME

Food

Processor,

Distributor,

Wholesaler

Retailer

Market /

Consumer

SME = indicates a potential role for SMEs

& / or farmers to add value

slide18
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

Preliminary findings from Lao PDR: Principal Contract Farming Crops for Export, Locations & Export Markets

Contract farming of Styrax tonkinensis for benzoin, Houa Phanh Province, northern Lao PDR, for export to Europe & China

preliminary findings from lao pdr19
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
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 PDRIssues with Contract Farming -- Indicative
preliminary findings from lao pdr issues with contract farming indicative21
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 Lao PDRIssues with Contract Farming -- Indicative
slide22
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

Preliminary findings from Cambodia: Principal Contract Farming Crops for Export, Locations & Export Markets

British American Tobacco Cambodia’s tipping & stemming factory, Kampong Cham

slide23
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

Preliminary findings from Cambodia: Principal Contract Farming Crops for Export, Locations & Export Markets

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
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

Preliminary findings from Cambodia

Manhattan Textiles contract farmers in Kompong Cham with harvested cotton

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 indicative26
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

Preliminary findings from CambodiaIssues with Contract Farming -- Indicative
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 implications29
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