AGRICULTURAL COMMERCIALIZATION IN LAO PDR POLICY RESEARCH CENTER LAO PDR CENTER FOR AGRICULTURAL POLICIES VIETNAM Responsible Agricultural Investment Workshop AGRICULTURAL COMMERCIALIZATION IN LAO PDR - CONTRACT FARMING- November, 2017

Performance of contract farming in Lao PDR Vientian capital Green beans: Rotated crop with rice Cross-border contract farming with Chinese companies Pig: Key source of income & store of wealth Shift from old-system of production to the farming system (even target export) Home to many large pig raising farms CP group-farmers contract Rice: National self-sufficiency Shift from food security to more commercialization (even export) Top 3 rice surplus province Domestic millers-famers contract

Methodology 2.1. Data collection Literature and policy review Value chain survey In-depth interviews, PRA Expert consultation: DAEC; LURAS; DPC; National Economic Research Institute, MPI; DoP; DOA; NAFRI,... Household survey 2.2. Data analysis Method/Sector Rice Pig Bean Purpose Descriptive analysis Probit Determinant of CF participation Propensity score matching method Compiling counterfactual group Difference in difference Compare output indexed of CF, non-CF Data envelopment analysis (DEA) Analyze productivity efficiency

Contract farming types – horizontal coordination Centralized model Intermediary model Pig Bean Combined between Centralized and Intermediary Rice

Contract farming types – vertical coordination Model 2+3 Model 3+2 Pig and bean Rice Pig: In some cases, CP will co-invest with farmers to build the house. Compared to the model 3+2 in rice sector, in this model, CP Group is involved deeper in production when they co-invest with farmers and bear more risks. Decreasing risks/benefits borne by farmers Farmers/farmer groups: labor + land + inputs Rice miller groups: technical guidance + access to market (in addition to inputs on credit + guaranteed price for input repayment + market price for the remainder of crop Farmers: labor and land Company: input (breed, commercial feed, variety), technical assistance (vaccine, medical care), access to market

Improve income Pros and cons Pro 1 CF-household Non-CF household Rice Unit: thousand kips CF-household Non-CF household Rice Income from rice 481-569 higher - Increase in income from rice 382 159 Livestock HH income from pig before CF 69,600 21,800 HH income from pig after CF 58,400 12,600 Green beans Annual income before CF 6,250 Annual income after CF 13,370

Create more employment choices for farmers Pros and cons Pro 2 Create more employment choices for farmers Pig: 41/90 households not raising pigs before shifted to the business Green bean: Grow bean in dry season instead of leaving land idle Better access to technology Pro 3 Provide new seeds/varieties with higher yield, other better quality inputs (rice, pig, bean) Involve in input production (pig, rice): contract farmers to produce rice seeds/piglets; produce animal feed (CP) Provide technical guidance to standardize current farming practices (rice, pig, bean) Transfer the latest technology with high requirement from inputs, production facilities to production process (pig, bean).

Analysis of productivity efficiency Pig Green bean

Better access to market Pro 4 Better access to market Rice: both domestic and export market Green bean: Chinese market Pig sector: domestic market Risk sharing for farmers Pro 5 Natural disaster risks: rice millers rolled input debt over without adding interest; bean company takes all the losses Disease risks: CP bear all cost of feed, piglets, medicine Price risks: add price if market price increases (rice) buy and bear all the loss of inputs and initial investment while the farmers get paid later than usual (green bean) pig CF farmers suffer less income loss due to price decrease compared to non CF farmers.

Investment attraction in agriculture Pro 6 Cross border investment (bean) FDI investment (pig) Domestic investment (rice) Commercial agriculture promotion Pro 7 Farmer group development (rice, bean) Upscale the sector due to selective participation (pig) Domestic agribusiness promotion (rice)

Possible bias to large farmers Con 1 Small farmers excluded Pig: CP Group in pig sector requires at least 300 pigs 80% non CF small farmers have been recorded to stop raising pigs  Trade off: economics of scale >< social and political risks Monopoly and monosopny by companies Con 2 Pig: 2 companies CP Group, Betagro); green bean: 1 company (Xingtha); rice: 5 group millers but 1 or 2 companies in a specific district (“one miller one village”) rent seeking behavior + under-development of domestic companies and farmer organizations dependence on a specific company (inputs, technology, price squeezing, companies leaving the market, especially foreign ones). the group leaders are in charge of connecting farmers with millers, registering production area, receive and distribute varieties and fertilizers, and in harvest time remind the farmers to sell rice to millers. In case the farmers do not sell rice to millers, they have to collect back the money for varieties and fertilizers for millers It is found that some large-scale farmers who have good relationship with local officers and access to road prefer to be out of the group and sign contracts directly with the millers to avoid the control of the group leaders. This may help explain why it is found in a district in the survey only two contract companies, accounting for 83% and 17% of the rice bought by the millers. In addition, rent seeking behaviors by the local officers may arise making them favor some specific companies.

Farmers trapped in low-value added chain segments Con 3 The company dominates all over the value chains, especially the high value added segment (pig, green bean) The farmers mainly take primary segment, not control technology, gain low value and still bear a lot of risks (debt risk in rice) Risks of food safety and environment? Con 4 Not captured yet but true concern (green bean)

Opportunities Suitable for current situation agriculture in Lao PDR and Southeast Asia Big proportion of labor force work in agriculture Small-scale farmers Scattered production Align with Government’ strategy and policy and politically supported: Agricultural commercialization and diversification promotion An alternative to land concession A mediation solutions in the transition period that potentially allows for a win-win situation for all related actors Popular practices around the world, Southeast Asia and getting more popular in Lao PDR  available lessons learnt

Critical balances Agribusiness attraction ~ dependence, monopoly/monosopny Foreign investment attraction ~ domestic agribusiness development Small farmer engagement ~ high transaction costs Inclusiveness ~ low value added Intensive farming ~ environment and clean & organic image Risks ~ benefits Legal framework ~ social norms There are not clear incentive policies for farmers and farmer groups to participate in CF in Laos. For example in Vietnam, it is stated clearly that CF farmers can enjoy exemption from fee and rent for lands for processing factories, store houses, worker accommodation; prioritization for export contracts and temporary storage programs of the government; support for 30% total plant protection cost in 1st year, 20% in 2nd year; support for 50% of technical training cost for farmer organization and 100% for individual farmers for one time; support for 30% of seed cost in the first crop; and 100% financial support for storage for maximum 3 months. In Vietnam, CF enterprises are exempted from fee and rent for lands for processing factories, store houses, worker accommodation; prioritized for export contracts and temporary storage programs of the government; partial financially supported for transport, irrigation, electrical systems to improve land field; supported 50% for technical training cost;

Key factors Legal framework Enabling environment Institutional arrangement Farmer organization development Agribusiness development Agricultural market development Social norms and values

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