AGRICULTURAL COMMERCIALIZATION IN LAO PDR

1. AGRICULTURAL COMMERCIALIZATION IN LAO PDR
November, 2017
POLICY RESEARCH CENTER
LAO PDR
CENTER FOR AGRICULTURAL POLICIES
VIETNAM

2. Performance of contract farming in Lao PDR
Vientian capital
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
Green beans:
• Rotated crop with rice
• Cross-border contract farming with
Chinese companies

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
101
25 33
0
100
25
57 110
0
50
100
150
200
250
Rice in
Khammuone
Rice in
Vientiane
Capita
Pig in
Vientiane
Capita
Vegetable in
Oudomxay
Non-CF CF
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
Combined between Centralized and Intermediary
Pig Bean
Rice

5. Contract farming types – vertical coordination
“Managed” Coordination
(Hierarchical control)
“Invisible hand” Coordination
(Market Allocation)
Spot/Cash
Market
Specification
contract
Strategic
Alliance
Formal
Cooperation
Vertical
Integration
External
control via
price and
generic
standards
External
control via
specifications
and legal
appeal
Mutual
control
Internal
control via
decentralized
decision
structure
Internal
control via
centralized
decision
structure
Respective primary coordination mechanisms
Model
3+2
Model
2+3
• 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
Rice
Pigandbean
Decreasing risks/benefits borne by farmers

6. Pros and cons
Improve income
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
Unit: thousand kips
Pro 1

7. Pros and cons
Create more employment choices for farmersPro 2
• 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 technologyPro 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. • Rice: both domestic and export market
• Green bean: Chinese market
• Pig sector: domestic market
Better access to marketPro 4
Risk sharing for farmersPro 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. Commercial agriculture promotionPro 7
Investment attraction in agriculturePro 6
• Cross border investment (bean)
• FDI investment (pig)
• Domestic investment (rice)
• Farmer group development (rice, bean)
• Upscale the sector due to selective participation (pig)
• Domestic agribusiness promotion (rice)

11. • 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
Possible bias to large farmersCon 1
• 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).
Monopoly and monosopny by companiesCon 2

12. • Not captured yet but true concern (green bean)
Risks of food safety and environment?Con 4
• 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)
Farmers trapped in low-value added chain segmentsCon 3

13. • 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
Opportunities

14. • 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
Critical balances

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

16. THANK YOU!