Contract farming within the Vietnamese export-oriented rice sector

Rice is a globally commercialized commodity and a staple food for nearly half of the world population (Chen et al., 2006). Most of the rice traded on the world market comes from developing countries (Achmad et al., 2012). In the last five years, about 85% of the export rice quantity has been exported by six countries, namely India, Thailand, Vietnam, USA,

13 Pakistan and Myanmar (USDA, 2016). Of these, the Southeast Asian countries, Vietnam, Thailand, and Myanmar, export the most (see Figure 2.1).

Figure 2.1: Export rice quantities from major suppliers worldwide in 2011-2017 Source: USDA (2018).

Vietnam has a great potential to become one of the key exporters for rice in addition to many other agricultural products such as coffee, pepper and tea as well as seafood (Saigenji, 2010).

Since the late 1990s, Vietnam has transformed from being a major rice importer to the second largest rice exporter from Southeast Asia (Baldwin et al., 2012; Giraud, 2013), supplying about 20% of total global rice trade in the year 2015 (USDA, 2015). However, currently with more than 66% of the population working in the agricultural production and nearly 70% of small and medium-size farming households, the Vietnamese export rice sector is facing a great challenge to compete in the global rice market. The same applies to other emerging and developing countries (USDA, 2015; Reardon et al., 2014). In addition, Vietnamese rice exports are still characterized by low value added, low product quality and cost leadership, leading to low competitiveness in comparison to its major competitor, Thailand (Nielsen, 2003; Baldwin et al., 2012). Generally in the recent decade, the FOB³

3 Free On Board (FOB), the term refers to the price of export products at the loading port excluding insurance and shipping fees (Ramberg, 2011).

2011 2012 2013 2014 2015 2016 2017

India 10.250 10.480 11.588 11.046 8.600 10.800 10.300

Vietnam 7.717 6.700 6.325 6.606 7.000 4.880 6.000

Thailand 6.945 6.722 10.969 9.779 10.000 10.300 10.000

Pakistan 3.399 4.126 3.600 3.700 4.600 4.200 4.000

USA 3.298 3.295 2.998 3.472 3.325 3.300 3.550

Myanmar 1.357 1.163 1.688 1.735 1.800 1.500 1.700

0 2.000 4.000 6.000 8.000 10.000 12.000 14.000

Rice export quantities (,000MT)

14 price for the main export rice varieties, such as “Viet 5% broken” or “Viet 25% broken”, from Vietnam has been 20 to 30% lower than for Thai export rice (Thawatchai, 2011;

Ramberg, 2011).

Since most rice producers are smallholders, the enforcement of CF in Vietnam has the potential to support rice farmers in improving rice quality and access to target markets, reducing transaction and production costs, and controlling output quality (Tuan, 2012). In this regard, the introduction of CF scheme has been greatly supported by the Vietnamese government since the turn of the millennium. Particularly, the decision No 80/2002/QD-TTg dated June 24th 2002 named "Policy on the Promotion of Agricultural Produce and Purchase through Contracts" and decision 62/2013 QD-TTg established in 2013 have officially promoted the implementation of CF in Vietnamese agricultural production. These decisions also develop a flexible framework for diverse economic entities in the country. A long-term strategy has been implemented to improve farmers’ bargaining power and to create an official group for smallholders. These decisions also clarify national policy efforts to support the private sector in supplying agricultural inputs such as seeds, fertilizers, pesticides, credit, and extension services to farmers (Ya’kub et al., 2012) in order to secure national food demand, improve Vietnam’s competitiveness on the world market, and upgrade the bargaining power of export-oriented rice farmers (Goletti et al., 1997; ADB, 2005).

However, while large shares of other major Vietnamese agricultural export products are sold under CF (cotton: > 90%; fresh milk: > 90%; tea: > 40%) (UNCTAD, 2009; Prowse, 2012), the export rice value chain still involves numerous different actors, namely; collectors, paddy millers, millers, middlemen, retailers, and wholesalers. These maintain informal trading relations (Loc and Son, 2011; Ngoc and Anh, 2014; Reardon et al., 2014). As presented in Figure 2.2, the export rice value chain is dominated by the traditional channel. A large share (93.1%) of export-oriented rice is sold to independent paddy collectors and only 2.7% to millers directly (Loc and Son, 2011; Ngoc and Anh, 2014). Due to the numerous types of potential trading partners involved in the traditional marketing channel, the linkages between the farmers and the processing/exporting companies are generally rather loose, thereby limiting control over the raw product quality and thus diminishing prices received (Saigenji, 2010; Loc and Son, 2011). Only a few companies in Vietnam process and export rice via CF (Saigenji, 2010), translating into 4.2% of rice quantity sold under contract (Loc and Son, 2011; Ngoc and Anh, 2014).

15 Figure 2.2: The marketing channels of export rice sector in the MRD of Vietnam.

Source: (Loc and Son, 2011; Ya’kub et al., 2012; Reardon et al., 2014)

In the past, farmer organizations which had depended on the superiority of socialist forms of production called “collectivization” did not play a role in trading products between farmers and large food companies in the Vietnamese export rice supply chain; most especially in the export rice sector (Pingali and Vo, 1992; Minot and Goletti, 2000). This was in contrast to various export products from other emerging and developing countries (Minot and Sawyer, 2016), Even though such farmer associations do now exist in the export rice sector, their role to date is limited to the provision of support services (Naziri et al., 2014). In this regard, farmer associations cannot be considered a potential trading option within the modern marketing environment of the Vietnamese export rice sector but rather as providers of (market) information to their members (Moustier et al., 2010). Nowadays, due to strong incentives from the Vietnamese government, “collective action” has been established in the country (Frédéric and Dao, 2005, Naziri et al., 2014). In the Vietnamese vegetable sector, for instance, this recent collective action scheme has successfully encouraged the participation of the private sector, farmer associations and smallholder farmers (Naziri et al., 2014).

Due to its particular importance, there have been many economic studies focusing on the export rice sector in Vietnam. Apart from a few studies focusing on farm productivity and efficiency (Pingali and Xuan, 1992; Hoang and Yabe, 2012; Duy, 2012), most of the research refers to the influences of governmental policies such as price control (Ghosha, 2004; Gibson and Kim, 2013); quality control (Ryan, 1999; Nielsen, 2003; Coxhead et al., 2012), export liberalization and flexibility (Goletti et al., 1997; Pingali et al, 1997; Lutz et al.

2006; Ya’kub et al., 2012) or the de-collectivization process (Pingali and Xuan, 1992). These

16 are considered not only to offer benefits for farming households but also to encourage greater participation from the private sector in the Vietnamese export-oriented rice value chain. A noticeable line of research also refers to the influence of programs carried out by non-governmental organizations in granting initial support for an enhanced marketing and trade policy (J. Ryan, 2002; Jaenicke et al., 2010). Even though the introduction of the CF scheme in Vietnam over the past 10 years and more offered greater opportunities for smallholder farmers to access modern marketing channels, there have been to date few research studies on this institutional arrangement (Reardon et al., 2014). The determinants of farmers’ contracting decisions in this sector are therefore still widely unexplored. As a result, this study focuses on what determines smallholder farmers’ contracting probability in the Vietnamese export rice sector.