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
• Tasks of the assignment
• Methodology
• Assumptions vis-à-vis agriculture valuechains in the GMS / Context
• Hypothesis
• Preliminary findings from Lao PDR
• Preliminary findings from Cambodia
• Some indicative policy implications
2
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
3
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
4
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
5
Methodology:
Interviews & Field Visits
• Laos: Field work to update &
• Laos: Field work for the Lao
confirm information, 3-5 March
2007
Northern Regional
Development Strategy, 20032004
• 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
Friend of the Upland Farmer Co., Ltd,
Luang Namtha Province, northern Lao
PDR, producing corn, soybeans, &
cardamom under contract farming for
export to China
6
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
• 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.
7
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
8
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
9
Assumptions:
Concentration and Consolidation
Five Top Grocery Retailers in the USA
1997
2000
2003
Kroger
Kroger
Walmart
Safeway
Walmart
Kroger
American Stores
Albertson’s
Albertson’s
Albertson’s
Safeway
Safeway
Ahold USA (TOPS) Ahold USA (TOPS) Ahold USA (TOPS)
Top 5 = 24%
Top 5 is percentage of market
share held by 5 top retailers
Top 5 = 42%
Top 5 = 54% (est.)
Source: Research conducted by the
National Farmers Union, USA, 2004
10
Assumptions: Vertical Integration and
Globalization – Case of Walmart
Processors:
• Tyson’s Food
• IBP, Inc.
• Farmland Foods
• Smithfield
Poultry
Beef
Pork
Retailer: Walmart
Walmart operations in:
• United Kingdom (#3)
• Germany
• Argentina
• Brazil
• Canada
• Mexico
• China
• Korea
• United States (#2)
11
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.
12
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
13
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," JeanPierre 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).
14
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
15
A value chain is a string of agro-enterprises working
together to satisfy market demand for a particular product.
Input Supplier
SME
Contract Farming:
Credit &
Technology
Transfer
SME
Farmer
In-field &
Post-harvest
Quality
Control
SME
Transport &
Storage
SME
Preliminary
Processor
SME
Market /
Consumer
Food
Processor,
Distributor,
Wholesaler
Retailer
Input
Supplier
SME
SME = indicates a potential role for SMEs
& / or farmers to add value
Market /
Consumer
16
Lao PDR: Northern Region Develpoment Strategy
Major Exports by Province.
Preliminary Findings from Lao PDR
Major exports (to China & Thailand).
Export include:
Palm fruit, Cardamom, Sugar cane,
Lumber, Rice, and Handicrafts.
Major exports (to China,
Thailand and Viet Nam)
 Wood, Clinber bark, Tiger
grass (Thysanolaena
maxima), Bakerin praen
(Afzelia xylocarpa), Maize,
Chillies, Palm fruit,
Cardamom, Sesame,
Mulberry paper, Ginger,
Cotton, and Sugar cane
Major exports (about 85% to China
and 15% to Viet Nam) Exports
include: Cardamom, Sugar cane,
Benzoin, Livestock, Sesame, Honey,
Wood products, and Chillies.
PHONGSALY
Maojr exports (to Viet Nam and
France)
 Soy beans, Maize, Peanuts,
Cardamom, Clinber bark, Oil
palm fruit, Ginger, Longan,
Mango, White benzoin,
Handicrafts, and Cedar
LUANG
NAMTHA
OUDOMXAI
Pakmong
HOUAYSAI
XAM NEUA
Major exports (to China & Thailand)
 Maize, Soyban, Green
vegetables, Paddy rice, Tobacco,
Oranges, White Sesame.
Major export (Mostly to Thailand)
 Sesame, Job's tears, Mulberry,
Dragon blood (Dracaena
cambodiana), Jute, Palm fruits,
Beans, Cardamom, Benzoin,
Resin, and Tiger grass
(hysanolaena maxima),
LUANG PHRABANG
Xam Tai
PHONSAVANH
Phoukhoun
Namkan
Khoun
SAYABOURI
Vang Vieng Thong Khoun
XAISOMBOUN
Major exports (Viet Nam)
 Paddy rice, Maize, Livestock,
Bananas, Starch root crops,
and Pine
Major exports (Thailand and
Viet Nam)
 Wood and wood products,
and NTFPs
PHONHONG
Longsan
Khock Khao Do
Major exports (Thailand)
 Maize, Peanuts, Sesame, Job's tears,
Mulberry paper, Resin, Wood
products, Ginger, Cotton, Tamarind,
Vegetables, Livestock, Medicinal
herbs, and Handicrafts
Houay Hung
Na Sack
VIENTIANE
LEGEND
National Capital
N
Provincial Capital
District town
National Road
ADB-Financed Roads
Proposed ADB-Financed Roads
River
17
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
18
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 6040; 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
19
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
20
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
21
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
22
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.
23
Preliminary findings from Cambodia
Contract Farming Modalities
•
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
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
•
•
•
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
24
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
•
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)
– High cost of production: fuel
(for pumps & tractors)
25
Preliminary findings from Cambodia
Issues with Contract Farming -- Indicative
• Companies
• Potential Solutions Offered
– 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
– Creative initiatives (BAT
approach)
– Farmers think as individuals; lack
cooperation
– Farm size per household is small;
leads to increased costs of
operation
– Organize group activities;
marketing groups
– Organize farmer groups to
purchase as groups, reducing
buying costs
– Farmers have inadequate land for
contract farming; land held back
for family food security
– Transport costs are high
– Poor quality village access roads
– Improve irrigation to allow for
second & third cropping;
intensified land use
– Farmers transport to buying
centers using appropriate local
26
transport
– Increase the frequency of training
– Establish a Cambodian body to be
certified and to certify other
Cambodians; mutual recognition
by ASEAN / GMS / ACMECS
Border Crossing Points
covered under the GMS
Transport Agreement
&
Locations of the
principal contract
farming areas (in green)
in Cambodia & Lao
PDR
27
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
28
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 & postharvest 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
29
The End
Thank you