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Contract Farming for Exports in ACMECS: Lessons

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Literature Review Principle Sources of Data & Information ... Only in certain niche markets can Asian farmers still ... Required quality standards are too high ... – PowerPoint PPT presentation

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Title: Contract Farming for Exports in ACMECS: Lessons


1
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

2
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

3
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

4
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

5
Methodology Literature ReviewPrinciple 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

6
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
7
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
    Phanhat 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

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.
8
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

9
AssumptionsConcentration 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
10
AssumptionsConcentration and Consolidation
Five Top Grocery Retailers in the USA
1997 2000 2003
Kroger Kroger Walmart
Safeway Walmart Kroger
American Stores Albertsons Albertsons
Albertsons Safeway Safeway
Ahold USA (TOPS) Ahold USA (TOPS) Ahold USA (TOPS)
Top 5 24 Top 5 42 Top 5 54 (est.)
Top 5 is percentage of market share held by 5 top retailers Source Research conducted by the National Farmers Union, USA, 2004
11
Assumptions Vertical Integration and
Globalization Case of Walmart
  • Processors
  • Tysons 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
12
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.

13
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
  • Thailands 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

14
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).

15
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

16
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
Farmer
In-field Post-harvest Quality Control SME
Preliminary Processor SME
Food Processor, Distributor, Wholesaler
Retailer
  • Input Supplier
  • SME

Market / Consumer
SME indicates a potential role for SMEs / or
farmers to add value
17
Preliminary Findings from Lao PDR
18
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
19
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

20
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

21
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

22
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 Cambodias tipping
stemming factory, Kampong Cham
23
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.
24
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
  • lt200 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 lt1 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
25
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)

26
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

27
Border Crossing Points covered under the GMS
Transport Agreement Locations of the
principal contract farming areas (in green) in
Cambodia Lao PDR
28
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

29
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

30
The End
  • Thank you
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