FAO’s Regional Rice Initiative organized a study tour and workshop on “Knowledge exchange on the promotion of efficient rice farming practices, farmer field school curriculum development and value chains”, which was held in Yogyakarta, Indonesia at the end of September, 2016. I was asked to make a presentation in rice value chains in the region.

1. Author
www.fao.org
Developing rice value chains
in SE Asia
Andrew W. Shepherd
Based on a presentation made at the FAO “Knowledge
exchange on the promotion of efficient rice farming
practices”, Yogyakarta, Indonesia, 26–29 September
2016.

2. www.fao.org
The presentation
1. What do we mean by “value chains”?
2. Traditional rice value chains in SE Asian countries
3. Scope for developing modern value chains for rice

3. www.fao.org
The use (and abuse) of “value chains”
1. “Value chain” was initially used in the agricultural context to
describe identifiable linkages between the producer of a particular
product and the consumer, where value is added at all stages of the
chain in the process of meeting consumer demand
2. However, over time the usage has become broader, such that it is
now often used synonymously with:
▫ The world market for a commodity (e.g. the rice value chain), or
▫ All of the marketing channels for a particular product in a
country (e.g. The Philippines rice value chain)
• To avoid confusion I refer to 1. as a “modern value chain” and 2. as a
“traditional value chain”. The next slide illustrates a proposed
example of a modern rice chain under discussion for development in
Cambodia. This is followed by a slide illustrating the traditional
“value chain” for rice in the Philippines.

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A proposed modern rice value chain
for Cambodia

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The Philippines traditional
rice “value chain”

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Whichever definition you use the chain
involves ….
• Those who produce and handle the product (farmers;
buyers; processors; exporters; retailers; etc.)
• Those who provide direct support to the above (input
suppliers; extension staff; mechanization services;
transporters; banks; etc.)
• Those who provide indirect support (researchers, utility
and communication companies; certification agencies;
etc.)
• A policy and regulatory environment that dictates how
the chain can function

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Traditional rice “value chains” in SE
Asia
The following slides provide a brief description of
the main features of traditional chains in
Cambodia, Indonesia, Lao PDR, Myanmar, the
Philippines, Thailand and Vietnam

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Cambodia

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There has been a rapid increase in harvest mechanization
in the last decade, reflecting labour shortages and market
opportunities

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Cambodia
• Vietnamese purchase of wet
paddy has caused Cambodian
mills to also start drying to
compete with Vietnamese
traders
• Significant changes to the
milling sector with several
large-scale mills recently
constructed and some
medium-sized ones going
bankrupt
• Mobile millers, such as the one
shown here, mill for farmers’
own consumption

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Indonesia
• Two harvests (Feb-May 60%;
Oct. onwards 40%)
• Rice harvesting, post-harvest
and milling are complex and
vary much across the country
• Little harvesting
mechanization. In Java, heavy
use of hired labour groups
with high post-harvest losses.
Elsewhere individual farmer
harvesting or community
groups
• Threshing equipment usually
rented but delays between
harvest and threshing cause
quality and quantity losses, as
does poor drying

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Indonesia
• Farmers sell wet or dry paddy
to traders with whom they
sometimes have credit
linkages
• Important role of rural
cooperatives
• Some modern, high-quality
mills mainly supplying
supermarkets but many mills,
like the one shown here, are
antiquated, with low
conversion rates.
• Around 110,000 mills. Surplus
capacity. Some smaller mills
just remove the bran and sell
on to larger mills

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Lao PDR
• Insufficient returns to labour for small farmers
and number of rice farmers declining
• Ageing farm population
• At same time, yields are increasing, mainly
through wet season lowland production
• Increased availability of improved seeds needed
• Multiple paddy and rice traders with complex
marketing systems
• Significant informal trade of paddy to
neighbouring countries

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Lao PDR
• Market dominated by
“sticky” rice
• Large number of small
and medium-sized rice
mills, with most having
2-6 t. a day capacity with
old technology and low
conversion rates. No
resources to upgrade
• Some investment in new
mills

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Myanmar
• Following marketing liberalization and abolition of
government marketing agency, Myanmar again has a
(small) export surplus
• Farm size 2-3ha on average. HYV and traditional.
Inadequate seed availability
• 80% production wet season, other 20% in irrigated areas
• Farmers often have other work, but employ labour when
needed. Obtaining finance a common problem
• Government provides seasonal loans but insufficient
• Possibility of warehouse receipt finance being actively
investigated

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Myanmar
• Sales both at mill and farm
gate. 20,000 mills, half with
capacity over 15t a day.
30,000 dehuskers for
farmers’ own consumption.
• Farmers and traders
sometimes deposit paddy at
mill to await a favourable
price, but this can be risky
as storage is poor, as shown
• Efficient system for rice
marketing with wholesale
market in Yangon

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Philippines
• Farmers do own harvest or
employ labourers
• Threshing is mechanized
• Palay drying at side of road,
etc., although large proportion
delivered wet to mills,
particularly on Luzon
• Good-quality drying facilities
are limited
• Palay for farmers’ own
consumption milled at small
huller mills known as “kikisan”
• Around 10,000 commercial
mills but most not of good
standard.

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Philippines
• Financing a major constraint. Farmers sometimes receive
production loans from traders
• Market dictated by price and does not reward good post-
harvest handling. Highest proportion of “brokens” in SE Asia
region
• Government continues to target self-sufficiency although
rising production costs, rapidly growing population,
production difficulties and antiquated milling equipment
make this difficult
• National Food Authority (NFA) has intervened in the market
both as a buyer of palay and as an importer of rice. The
Authority is highly indebted and its activities criticised for
disrupting the market

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Thailand
• Farmers sell directly to
traders or to mills at
assembly markets. Around
1000 mills
• Very few facilities for
farmers to mill own paddy.
Poorest 50% of farmers buy
more rice than they produce
• Millers sell to exporters or
domestic rice traders, who
may carry out further
polishing, cleaning and
broken separation

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Thailand
• Exports usually account
for 40-50% of
production.
• Retailing most advanced
in region. Rice
increasingly sold
branded, with 5%
“brokens”
• Biggest problem faced as
result of political
involvement in the Paddy
Pledging Scheme

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Vietnam
• Main production systems:
Mekong Delta; Red River
Delta and northern uplands
• Liberalized market and move
away from collective
production from 1981 moved
Vietnam from deficit to major
exporter
• Farm size remains small and
rice quality low with use of
farmer-retained seed common
• Production of specific varieties
for the market relatively rare
• High-yielding varieties with
fertilizer give 3-4 crops a year

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Vietnam
• Subsidies to sector gradually
reduced and now concentrated
on the poorest
• Rice remains unprofitable
compared with other crops
and farmers diversifying, but
land conversion has to be
approved by Government
• Farmers sell both dry and wet
paddy through collectors and
directly to mills. Close
relationship between traders
and farmers, and credit
arrangements sometimes
involved
• Adoption of integrated
farming in Mekong Delta,
(paddy with ducks, fish,
shrimp)

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Vietnam
• Dehusking (to produce brown
rice) and polishing (to the
white rice stage) often done by
different companies.. One
estimate: 300,000 dehuskers
and 30,000 mills
• Transportation in Mekong
area mainly by boat
• New value chains slowly under
development to target niche
markets (e.g. “safe” rice;
jasmine rice)
• Increasing differentiation and
branding

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Summary of main issues relating to
traditional rice value chains
• Small size of individual farms, unimproved seeds, farming
systems fairly slow to change, low yields and poor returns
• Poor post-harvest handling (harvesting, threshing, drying)
• Small and inefficient mills (with the exception of Thailand)
with relatively little new investment in most countries
• Farmers are often net rice buyers
• Government involvement in value chains (everywhere)
• Obsession with self-sufficiency (Indonesia; Malaysia;
Philippines)
• Evidence of dynamic value chain response where
opportunity presents itself

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Some conclusions on traditional chains
• Difficulties are experienced throughout the chains. This argues for a
“whole chain” approach to upgrading
• For example, there is little point in improving production
techniques if post-harvest handling, milling and storage are not also
considered
• Similarly, finance is often a constraint. An approach to financing
that addresses all stages of chains rather than one that just targets
farmers is required
• Better mills and traders are concerned with product quality and
would increasingly prefer to purchase wet paddy and dry it
themselves
• Development agencies need to work more with traders and millers
and not see them as the “evil middlemen” who exploit farmers.

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The scope for developing modern
value chains for rice

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Modern value chains for all products are
driven by consumer trends
• urbanization
• growth of supermarkets
• women’s employment (urban and rural)
• smaller families
• refrigerators and cars
• demand for processed, semi-processed and ready-
to-eat products
• globalization
• increased awareness of quality and safety

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Modern value chains usually require
contract farming or similar arrangements
• credit access is enhanced (in-kind or via banks)
• inputs can be more easily obtained (less uncertainty
regarding availability, timing, quality)
• services and technological assistance also available
(mechanization, transportation, extension)
• production and management skills of farmer groups
can be enhanced
• market outlet is more secure, promoting a reliable
revenue stream and income stabilization
• meeting certification standards becomes possible, as
does provision of traceability

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But there are potential risks for
farmers
• firms might renege on contractual terms:
 of particular concern for long-term crops (e.g. oil palm)
or other products where there is “asset specificity” (i.e.
when investments made cannot be used for any other
purpose)
• firms may fail to deliver inputs on time
• loss of flexibility and possible increase in risk
• inability to benefit from high market prices when contract
fixes price in advance

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And not all farmers are suitable for
modern value chains
They must have capacity to meet market requirements in terms
of:
• agronomic suitability, climate, pests and diseases in the
farming area
• location, input supply and infrastructure
• assets and access to finance (e.g. to pay labourers)
• meeting certification requirements
• land area
• social structure and education levels
• a certain willingness to take risk

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There can be gender and other problems
from involvement in modern chains
• land used by women for food crops is allocated by men
for value chain production
• contracts in man’s name, men attend training courses
but women do the work
• payment to men, who spend the money unwisely
• social obligations (e.g. funerals) can conflict with
contractual obligations, particularly for perishable
products
• farmers may encounter jealousy from those who are not
part of the value chain
• value chain involvement may lead to labour constraints

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However, developing modern value
chains for rice through contracts could
permit
• Introduction of new varieties to an area
• Strict technical supervision
• Closer collaboration between farmers and buyers
• Certification
• Traceability
• Approved input and service supply and access to
finance
• Improved farmer organizations

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This requires TRUST, which can be
enhanced through ….
• Transparency – maximizing communication (e.g.
through exchange visits between farm and mill)
• Reliable assessments of potential profitability for
farmers
• Clear transparency in grading and pricing
• Timely delivery of inputs and input price transparency
• Timely payments
• Agreed arbitration procedures

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Mutual trust can also be strengthened
by …
• Working through groups or
through farmer leaders
• “On-the-ground” presence
of extension workers
• Planning for possible
problems right from the
beginning
• Contract flexibility
• Contract language that is
easily understood

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Still relatively few “modern” value
chains in the SE Asian rice sector
• Rice is mainly a “commodity” that can be traded
without meeting quality requirements that farmers
find difficult to meet
• For standard rice there are multiple buyers so
purchase guarantees in contracts give little benefit
• As there are many buyers, side-selling is easy
• However, there are a few examples of rice contract
farming (examples on the following pages) and the
number is likely to increase

36. www.fao.org
Enhancing Milled Rice Production in
Lao PDR (EMRIP)
• Project provided training to mills and mills
received support for improvements
• Millers organized and paid for extension to
farmer groups with intention of buying high-
quality paddy from farmers
• Main lessons:
▫ Flexible pricing arrangements are preferred
▫ Farmers need to be sure of alternative outlets
▫ Side-selling an issue unless strong relationships
are built

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Lao Arrowny Corporation
• Joint venture between Lao and Japanese investors in
Vientiane province
• Koshihikari rice was marketed as “bio-organic” rice as
use of some fertilizers was permitted
• 2004 study concluded that contract farming had been
beneficial to farmers involved
• No in-house processing capacity and high transport costs
to have paddy processed in Thailand for export to Japan.
• 2009 flooding in Laos made production difficult and
farmers unable to repay credit
• Political turmoil in Thailand increased milling problems

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Rice seed production for
PT Pertani, Indonesia
• Smallholders provided with free foundation seed and
extension advice
• Must deliver at least 75% of production to PT Pertani
and remaining 25% only for own use
• Four extension visits per farmer per crop.
• 15% of crop rejected on visual inspection prior to harvest
but could be sold for consumption purposes
• Company does drying of paddy seed
• Final price paid is less than market price but accepted by
farmers as other benefits are provided by the company

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SL Agritech, Philippines
• Company has contract farming arrangements for
hybrid seed. Said to be largest hybrid seed
company in Asia
• Also does contract growing for its brand, “Dona
Maria Premium Quality Rice”, with hybrid seeds
provided on credit
• Expansion planned in Visayas and Mindanao to
meet needs of rapidly growing urban areas.
• Yields of over 14t per hectare have been achieved

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AKR Cambodia
• Contracts with farmers to grow aromatic variety
• At one time 87,000 participating farmers,
working through farmer associations
• Company provides seed, with farmers supplying
mill with the same quantity of paddy at harvest
• Associations monitor production progress and
provide technical advice.
• Tendency for farmers to move out of the contract
as they became more experienced

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AMRU Cambodia
• Around 2,000 farmers to produce organic rice, with
plans to increase to 10,000
• Supported by French-funded project
• Contracts implemented through agricultural
cooperatives
• Contract development and negotiation involves Ministry
of Agriculture
• No financial support or input supply to farmers
• Company provides technical support and training,
transport for the paddy, and bags, which are marked to
ensure identification of the producer

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Elsewhere
• Thailand. Production of “Japanese rice”
▫ Several mills involved, using variety of contractual terms and
conditions
▫ Seed shortage a problem
▫ Mill liquidity also a problem
• Myanmar. Rice Leading Companies (RLCs)
▫ Provide inputs on credit as well as technical support
▫ Aim to improve quality and link with exporters
▫ Liquidity has been a problem
• Vietnam. e.g. An Giang Plant Protection Joint Stock Company
(AGPPS)
▫ Input supply, private extension service, storage to await price
rises
▫ An Giang’s model has encouraged replication by other companies

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Factors that should contribute to
success of modern rice value chains
• Value chains most likely to be successful when rice with specific
characteristics is produced (e.g. specific varieties; aromatics;
organic; certified)
• To avoid side-selling the total price paid should offer a significant
premium over the local market price for paddy
• Companies need to hold numerous meetings with farmers to ensure
that each party’s needs are fully understood
• Field staff can both improve production and identify potential
problems with the contract
• Companies must have sufficient liquidity to supply inputs on time
and pay for paddy on delivery. Alternatively, linkages with financial
institutions should be developed.

44. Author
www.fao.org
Thank you!
Andrew W. Shepherd
Agricmarketing@gmail.com