1. 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

2. 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

3. 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

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

5. 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

6. 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
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

7. 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).

8. Analysis of productivity efficiency
Pig
Green bean

9. 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.

10. 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)

11. 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.

12. 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)

13. 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

14. 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;

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

16. THANK YOU!