This document sets the scene for a rice case, as described in the facilitator's notes for Module 2.

1. The Rice Case of Niana
Scene Setter
1. Introduction to Niana’s Rice Value Chain:Niana is the continent’s leading consumer of rice. It is
simultaneously one of the largest producers and one of the largest importers of rice in the continent. Rice
is consumed regularly in Niana’s urban and rural areas and is an important crop for the nation’s food
security. The country consumes 5.5 million metric tons (MT) of rice per annum. Two (2) million MT are
produced and consumed by rural farm households with some tradable surplus. The rice trade serves two
markets: the price-conscious urban market, which consumes annually1 million MT of mainly domestically
(60%) produced rice; and the quality-conscious urban market, which consumes annually 2.5 million MT of
mainly imported long-grain white rice. Trends point to more rice consumption nationwide as Niana’s
population grows and becomes increasingly urbanized.
2.Structure and Functioning of the Rice Market:(see Annex A below for the rice value chain map):
The quality-conscious rice market segment is served by importers of white rice, and they dominate the
market with a few local large-scale rice mills running a distant second. The price-conscious market
segment is mainly served by local white rice traders, medium-scale rice millers and more recently by
importers, as local mills cannot keep up with growing demand.
These medium-scale rice mills have a capacity of up to 20,000 MT of rice per annum, but the actual
quantities they mill and sell are much smaller (averaging 8,000 MT/annum) due toa shortage of supply
from farmers. Many mills have set up outgrower schemes and provide farmers with inputs and cash with
the expectation that they will increase yields to as much as 2.2MT/ha. Yet the outgrowers yield remains at
about 1.5MT/ha on average—just enough to pay off their debt. There are between 20 and 30 mills in this
category, and they produce only 10,000-20,000 MT per annum,a small percent of local demand.
Importers see this market segment as an opportunity and have started to bring in a wider range of quality
imported rice at lower prices to serve these price-conscious consumers.
There are only two large local rice mills with the capacity, in theory, to satisfy the demand of the qualityconscious urban consumer of long-grain white rice. But these mills have trouble sourcing enough quality
paddy—even with their own outgrower schemes—to keep their machinesrunning at acceptable levels of
capacity. As a result, domestic producerscan provide only 80,000 to 100,000 MT/year of white rice, or a
small percent supplied by importers for the largest and fastest-growing market segment.
Imported white rice satisfies this market segment through importerswho bring in 200,000 MT or more per
annum on a regular basis. This rice is most often packed in durable, branded bags in the country of origin
(high-producing nations in other parts of the world).This segment is undergoing further segmentation into
a series of different levels of quality and price in their respective product categories. These major
distributors have well-developed systems for selling to wholesalers, though most of the sales take place
inNiana’s large cities.
3. Inter-firm Relationships in the Rice Value Chain: The rice industry’svertical chain of relationships
are not resulting in substantial upgrading even though there has been some investment by some largescale rice millersinto their smallholder outgrower schemes with commercial and small-scale emerging
commercial paddy farmers. However, these investments are not organized around effective management
strategies that build trust. For example, few upfront discussions are held on pricing, quality, farming
practices or productivity benchmarks. There is almost no investment in or incentives for outgrowers to
upgrade. Instead, when investments are made, they are relatively hands-off, such as providing inputs on
credit as a means to pre-pay for the crop. The effectiveness of this strategy is defined by the consistently
low level of additional paddy sold into these schemes. These schemes represent a small percentage of
local production (less than6%).
The majority of production moves through a series of highly contentious negotiations, where tactics
revolve around taking advantage of any weakness of the other negotiator. For example, typical tactics by
local paddy traders include providing credit for social reasons (when the farmer is desperate) to lock in
crop. While this is a useful service for small-scale paddy farmers without access to transparent financing
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2. The Rice Case of Niana
Scene Setter
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services, their buyers (traders and millers) use this service to take exorbitant “rents,” or extra crop as
payment equal to interest rates of around 100% or more. Another known trader tactic is to target farmers
who are short of cashand take advantage of this weak position by offering farmers cash up front but at
very low prices for their paddy.Traders and some millers compete for paddy and will pay higher prices to
farmers already contracted and pre-financed by others. When they do cooperate it tends to be in the form
of collusion to set prices in a given market.
Small paddy farmers are known to put foreign matter at the bottom of the bag—ostensibly to cheat
aggregators.Farmers are pushed by government and donors to form farmer based organizations(FBO) as
a means to shift the power balance to the farmer. Typically, the main incentive driving FBOs is to serve as
a conduit to receive subsidized services (including finance, fertilizer and seeds)or resources (governmentpurchased agriculture equipment, new or used and typically not suited to the needs of paddy farmers) as
opposed to an organization run by the farmers to conduct commercial activities and generate revenues.
Group cohesion tends to be weak,as farmers see the group as a convenient vehicle to receive subsidies
individually rather than as a collective investment of their labor, resources, and management to grow their
farms. As a result, mistrust between FBO members and their leaders is common, and most members
prefer to buy their inputs or sell their produce individually. FBOs tend not cooperate on commercial
activities like purchasing inputs or organizing joint sale of crop because this type of commercial
cooperation is seen as inappropriate.
Farmer groups established by buyers tend to operate differently because they are driven by commercial
incentives. They are formed through group leaders(i.e. lead farmers) who are paid a commission by the
paddy trader or rice miller to organize farmers and deliver paddy to selected mills. These groups do
achieve economies of scale and their yields have tended to increase, but this is rare as traders and/or
rice millers in general do not see the value in investing in organizing farmers. A similar type of
cooperation comes from traditional labor-sharing networks where loosely related farmers share labor.
These groups tend to improve the utilization of labor especially for land preparation, but they rarely move
past this function.
Niana rice suffers from very low rates of farmer upgrading. Learning from and trying to emulate the
practices of better performing market actors is a hallmark of a well-functioning system, but better farmers
are typically isolated in their community as opposed to being seen as a resource for other farmers to
upgrade. As a result, adoption of new farming practices remains limited and is very slow. Small farmer
investments in upgrading are also very limited even though spraying and tillage services do exist in most
agricultural regions of Niana. It is not unusual for farmers to adopt a new practice when donor programs
are active only to revert back to traditional practices when donor funds cease. Even in these cases
competitive pressure seems not to affect sustainable adoption of improved farming practices.
Small-scale paddy farmerstypically purchase agriculture inputs directly from paddy traders. As a result,
traders will sell what they have available,which includes out of date or inappropriate products. Somelarge
input supply firms have retail trading networks,but they offer very little in the way of services or knowledge
with their product offerings. Large input supply firms use aggressive negotiation techniques, which are
typical of inter-firms relationships up and down the rice value chain.All these relationshipsare short-term
and opportunistic,characteristic of win-lose negotiation tactics. This reinforces a high degree of mistrust
between value chain actors. The little information on agriculture in newspaper and on radio tends to
focus on these traditional laments of mistrust.
By contrast,relationships among actors in the rice import channel are characterized by a reasonably high
level of trust and compliance. Importers distribute rice to wholesalers, often with minimum purchase
quantities set by importers, creating incentives for wholesalers to expand their distribution networks.
There is a continuous flow of information on changing prices and volumes required by the market. The
level of trust among importers, distributors and retailers is strong,as indicated by the fact that 95% of
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Bank finance for paddy farmers is rare.
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3. The Rice Case of Niana
Scene Setter
transactions among these actors are based on credit. Importers also have regular promotional activities
and incentives (e.g., provision of delivery trucks) for their distributors. Competing importers acknowledge
each other and exhibit some cooperation by working jointly to reduce or limit import duties, but otherwise
they do not cooperate. They are competitors and operate independently from each other, but competitive
pressure does not lead to substantial upgrades or innovation.
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4. The Rice Case of Niana
Scene Setter
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