Factors Affecting Tea Production Schemes

Factors Affecting Tea Production Schemes FACTORS AFFECTING FARMERS’ CHOICE REGARDING PRODUCTION SCHEMES OF TEA PRODUCTION IN PHU THO PROVINCE, VIETNAM I. INTRODUCTION 1.1 Background of the Study Since the economic reform named â€Å"Doi moi† in 1986, Vietnamese economy transformed from centrally-planned economy to socialist-oriented market economy. Thanks to the reformation, Vietnam gained remarkable achievements in economic development. In period from 1986-2010, annual per capital GDP growth of Vietnam was 5.3%, staying at the second to the fastest GDP growth rate among Asian countries (McKinsey Global Institute, 2012). Consequently, poverty rate has declined significantly from approximately 70% at the end of 80th decade to about 10% in 2004 and Vietnam became a low middle-income country in 2008 (Tran, 2013). Along with the development of economy, agricultural sector has experienced improvement and contributed significantly to overall economy. Production value of agriculture, forestry and aquaculture in 2012 according to constant price in 1994 was 255.2 thousand billion dong, increasing 3.4% compared to 2011. Moreover, export value of agricultural and forestry produc ts reached 17.7 billion USD in 2012, increasing 18% compared to last previous year (General Statistics Office, 2013). Tea is recognized as one of the strategic commodity for exportation of Vietnam. In particular, in 2012, Vietnam exported about 146.7 thousand tons of tea and export value was 224.6 million USD, increasing 8.67% in terms of quantity and 9.29% in terms of export value compared to 2011 (GSO, 2013). Vietnam is the fifth largest exporter of tea in the world after India, China, Sri Lanka, and Kenya in terms of export volume. Export market of Vietnamese tea ara Pakistan, Taiwan, Indonesia, Russia, China, USA, etc. In order to have such achievement in terms of export, tea production has expanded over last 12 years. In 2001, harvested area of tea in Vietnam was 74.7 thousand ha and it was expanded to 115.8 thousand ha in 2012, compound annual growth rate for the period 2001-2012 was 4.06%. Meanwhile, compound annual growth rate for tea production in such period was 7.8%, from 340.5 thousand tons in 2001 to 923.1 thousand tons in 2012 (GSO, 2013). Tea is planted in many places in Vietnam, but mainly focus on five regions: Northwest (Son La, Lai Chau), Northeast (Ha Giang, Tuyen Quang, Lao Cai, Yen Bai), Northern midlands (Vinh Phuc, Phu Tho, Bac Can, Bac Giang, Thai Nguyen, Nam Tuyen Quang), North Central (Thanh Hoa, Nghe An, Ha Tinh), and Central Highlands (Lam Dong, Gia Lai, Kontum). 1.2 Statement of the Problem Phu Tho is an upland province located in Northeast of Vietnam. This region has high poverty rate of Vietnam with 17.39% in 2012 (MOLISA, 2013). In which, the poverty rate of Phu Tho province in 2011 was 17% (GSO, 2012). Thanks to natural conditions that are favorable for tea production, tea product from this region has been well-known in Vietnam. Tea production plays an important role in economic production of Phu Tho province. Tea production has been expected to created job opportunities and enhanced income of tea farmers. In order to encourage tea sector in local area, Phu Tho province has many favorable policies, programs to support farmers regarding seeds, fertilizers, techniques, extension services, and so on. Specifically, decision 23/2001/QÄ -UBND dated 20th December 2011 of People Committee of Phu Tho province mentioned support of agricultural programs in period 2012-2011, including tea commodity. However, tea production in Phu Tho province still has existing problems. Tea productivity is low due to old tea trees. In 2011, average productivity of tea in Phu Tho province was only 0.84 ton/ ha (Quoc, 2013). Furthermore, the problem of overuse of pesticides also brings about low quality of tea products. Moreover, the integration in production and consumption among farmers and tea processing enterprises in Phu Tho province is weak. Last but not least, tea farmers lack of knowledge and skills of modern production techniques and harvesting techniques as well. According to Thang, et al (2004), tea farmers have 4 different classifications including: unlinked farmers, contract farmers, worker farmers, and cooperative farmers. Corresponding with that are 4 schemes of production: Individuals, contract farming, waged agricultural workers and cooperatives. However, Wal (2008) stated that there are three main schemes of production corresponding to three types of tea producers in Vietnam: individual farmers (mostly smallholders), contracted farmers and worker farmers. 1.3 Objectives of the Study The main objective of the study is to determine factors that affect famers in selection of production schemes of tea production in Phu Tho province, Vietnam. Moreover, this study specifically aims to: + Identify the production schemes of tea farmers in Phu Tho province. + Identify difficulties and opportunities of farmers in each type of tea production; and + Recommend solutions that would help farmers to promote tea production and to improve their livelihood. 1.4 Significance of the Study The study of â€Å"Factors affecting farmers’ choice regarding production schemes of tea production in Phu Tho province, Vietnam† would help local officials and policy makers to have better understanding about those types of tea production. Therefore, appropriate policies would be recommended. Then, tea production and livelihoods of tea farmers in Phu Tho province would be improved. II. REVIEW OF LITERATURE 2.1 Review of contract farming 2.1.1 Definition of contract farming Contract farming has been applied all over the world for long time and there are many definitions about contract farming from different scientists and studies. Eaton and Shepherd (2001) stated that contract farming is a kind of agreement which farmers and processing or marketing firms agree with each other in integration regarding production and supply of agricultural products at fixed prices. Contract farming is also considered as a form of vertical integration in agricultural commodity chains. The firms, therefore, would have better control over production, quantity, quality, and the time to decide what commodity is produced (Prowse, 2012). 2.1.2 Types of contract farming The form of contract farming can vary in reality depending on the agreement of farmers and firms. According to Eaton and Shepherd (2001), contract farming can be divided into five models: The centralized model; the nucleus estate model; the multipartite model; the informal model; and the intermediary model. The centralized model: This is a kind of vertical integration where the firm purchases products from farmers and the firms will process and market the products. This kind of contract farming is often applied for tobacco, cotton, sugar cane, bananas, coffee, tea, cocoa and rubber. The extent of the involvement of the firms is diversified. The firms can provide only seed or provide land preparation, seeds, fertilizers extension services, and so on. The nucleus estate model: The firms have their own estate plantation where they make a pilot model of production for particular crop. Then, the firms will introduce the techniques of such models to farmers. The model is often used for people who are resettled and transmigrated. The multipartite model: This model involves a number of stakeholders including legislative bodies with farmers. Those bodies would be international company, provincial companies, joint-venture companies, and village committees, etc. Each stakeholder with be responsible for each stage of production and marketing such as inputs, credit, processing, and marketing. The informal model: This kind of model is suitable for individual enterprises or small firms. Specifically, the firms have contracts with farmers based on season that is why such contract is applied to fresh vegetables, and tropical fruits. In this kind of model, inputs are limited to seeds and fertilizers. Apart from that, technical advices are only available for grading and quality control. The intermediary model: When it comes to this kind of contract farming, the firms usually purchase products from collectors or middlemen who have informal contract with farmers. Since collectors appear between farmers and the firms, it brings about problems of lower income for farmer, and poorer quality. 2.1.3 Benefits to farmers from contract farming Access to reliable market: Market can be considered as one of the most important issues for farmers. Farmers usually face difficulty in terms of market, they lack of information and they do not know where they can sell products with better price. Thus, farmers should know where they can sell their products before they produce it. Contract farming can help farmers to deal with this issue by linking farmers with reliable markets. This is consistent with study of Eaton and Shepherd (2001) and Setboonsarng (2008). Access to credit: Farmers often encounter problem of credit to buy inputs or to expand production. This problem for small-scale farmers is more pressing than that of large-scale farmers. Setbonarng (2008) argued that farmers are constrained to credit in developing countries, even in places where microfinance exist. This is due to the fact that bank usually offer loans to microenterprises rather than agricultural production. Consequently, many smallholders cannot access credit at all (Glover Kusterer, 1990; Hayami Otsuka, 1993). The study of Simmons (2002) also has same conclusion regarding credit issue. + Provision of inputs: By joining contract farming, farmers can be provided inputs by firms or contractors. Those inputs would be seeds, fertilizers, and pesticides. Provision of inputs would reduce transaction cost per unit of output (Nagaraj, et al, 2008; and Bijman, 2008). + Reduction in risk of price fluctuation: farmers, who do not have contract and often sell their products to the spot market, usually have to face price fluctuation. Contract farming would overcome this problem. This is owing to the fact that the firms would specify the price in advance and this process is made during the time of contract negotiation (Eaton and Shepherd 2001; Setboonsarng, 2008; and Baumann, 2000). + Improvement of technology: Simmons (2002) argued that in the absence of contract farming, farmers have to face high cost of gathering technical information. Frequently, contract farming requires a certain level of quality. Also, the firms would support extension services and introduce new technology to farmers in order to have better quality for the products. This is also the same with conclusion of Bijman (2008) and Eaton Shepherd (2001). 2.1.4 Empirical studies on contract farming in agriculture The situation of contract farming between Tanganda Tea Estate and farmers is an example. Tamgada Tea Company has operating an outgrower schemes for large-scale farmers for several years. Then in 1975, they started their business with small-scale farmers. The form of contract is verbal in English and vernacular and there is no definite duration for the contract. Under the agreement, the company supported inputs such as seeds, fertilizers, and credit with low interest rate to farmers. The payment will be deducted at the payment of final green leaf. Company also provided free technical advice and transport services to farmers. In 1998, the company had full-time outgrower Extension Officers who help small-scale farmers to increase technical production (Woodend, 2003). Can (2008) stated that the largest contract farming in rice sector exists between Ankor Kasekam Roonoeung Co Ltd (AKR), a private company, and rice farmers. The company mostly exports Neang Mails (an aromatic Cambodian rice variety) to international market. The number of people joining the contract with the company has been increasing from 100 farmers at the beginning to 27,345 farmers in 2003 and 32,005 farmers in 2008. Under the contract, the company plays an important role in every stage of production and marketing as well. The company is the one who choose suitable area for growing rice, establish farmers associations, recruit new farmers, deliver seeds and technical support, monitor and solve problems in production, collect and purchase rice from farmers, sort and classify milled paddy into different kinds, and export to other countries including European countries, Australia, and Hong Kong. According to the contract, the company distributes Neang Mails seeds in credit to farmers in July, and then the company will buys output from October to January of the following year. The contract clearly includes the amount of seeds that the farmers have to return, the minimum prices, and penalties for contract violation. However, the contract does not include explicitly the penalties to the companies when they do not buy output of farmers at the negotiated prices. Moreover, the company establishes commune associations to support implementation of the contract. Each association has function of monitoring process and reporting to the company. Aside from that, associations also provide technical advice to their members. Setboonsarng, Leung, and Stefan (2008) had study about rice contract farming in Lao PDR. Authors mentioned a case study of contract rice farming in Vientiane province. Lao Arrowny Corporation was established in 2002, a joint venture between Lao and Japanese investors. The company produces Japanese rice and exports to Japanese expatriates in Southeast Asia. In 2004, the company had contract with approximately 2,000 farmers and total rice land of 800 ha. The criteria of the contract include three main points: farmers own their own rice land; farmers who want to become member of farmers’ association have to work hard and the decision will be given by fellow farmers; and farmers are not allowed to use chemical fertilizers in production. By implementing contract with the company, farmer will receive premium price which is included in the contract. In addition to this, the company supplies seeds, fertilizer and technical assistance. 2.2 Review of cooperatives 2.2.1 Definition of cooperatives 2.2.2 Benefits to farmers from cooperatives 2.2.3 Empirical studies on cooperatives in agriculture III. CONCEPTUAL FRAMEWORK 3.1 Conceptual framework 3.2 Hypotheses of the study V. RESEARCH METHODOLOGY Types and Sources of Data Primary data would be collected by deep interviews key informants in production chains of tea sector at Phu Tho province. Also, deep interviews will be implemented with Department of Agriculture and Rural Development of Phu Tho province, Northern Mountainous Agriculture and Forestry Science Institute, etc. Moreover, Implementation of participatory rural appraisal (PRA) in order to collect general information about current situation of tea production and factors that affect choice of tea farmers among production types at Phu Tho province. Last but not least, questionnaire survey will be conducted to collect information about situation of tea production, factors that affect choice of tea farmers in production integration at Phu Tho province, constraints and opportunities of farmer in each chain of tea production. In terms of secondary data, Documents related to tea production at Phu Tho province will be collected to have better understanding of current situation of tea production at Phu Tho province. 4.2 Sampling Method Sample size will be chosen by Yamane formula (1967) as follows: Where:n = sample size N = population size e = sampling error, e = 5% Analytical Tools To analyze factors that impact farmers’ choice in production types, the multinomial logit (MNL) model will be used. Because sum of the probabilities must equal to one, we have J types of production, and therefore we have J-1 estimated equations. And the most common type of production will be chosen as reference category. According to Greene (2003), the general formula for MNL is as follows: Where: Yi is random variable that denotes the farmers’ decisions among production types. xi is 1xK vector of farmers’ characteristics. ÃŽ ²j is a Kx1 vector of parameters. From equation (1), we can compute J log-odds ratios: Marginal effects could be computed by taking derivative of equations (1) with respect to xi as follows: LITERATURE CITED BAUMANN, P., 2000. Equity and Efficiency in contract farming schemes: The experience of agricultural tree crops. Working paper 139. UK: Overseas Development Institute. BIJMAN, J., 2008. Contract farming in developing countries. CAI, J. et al., 2008. Rice contract farming in Cambodia: Empowering farmers to move beyond the contract toward independence. ADB Institute Discussion Paper No. 109. DECISION 23/2001/QÄ -UBND dated 20th December 2011 of People Committee of Phu Tho province mentioned support of agricultural programs in period 2012-2011. DECISION No. 80/2002/QD-TTg of June 24, 2002, on policies to encourage agricultural product sale via contract farming. EATON, C. and SHEPHERD, A.W., 2001. Contract farming – Partnerships for growth. FAO Agricultural Services Bulletin 145. GLOVER, D. and KUSTERER, K., 1990. Small farmers, big business: Contract farming and rural development. Macmillan, London. HAYAMI, Y. and Otsuka, K., 1993. The economics of contract choice. Oxford University Press, Oxford. MCKINSEY GLOBAL INSTITUTE, 2012. Sustaining Vietnam’s growth: The productivity challenge. MOLISA, 2013. Decision 749/QÄ -LÄ TBXH dated 13 May 2013 about approval of result of poverty household in 2012. NAGARAJ, N. and et al., 2008. Contract farming and its implications for input-supply, linkages between markets and farmers in Karnataka. PROWSE, M., 2012. Contract farming in developing countries – a review. QUOC, V., 2013. Baophutho.vn, Efficiency improvement of tea commodity in Phu Tho province: current status and solutions, [online] available at: http://baophutho.vn/kinh-te/cong-nghiep/201210/nang-cao-hieu-qua-cay-che-phu-tho-thuc-trang-va-giai-phap-2200410/> [Accessed 26th Jan 2014]. SETBOONSARNG, S., 2008. Global partnership in poverty reduction: contract farming and regional cooperation. SETBOONSARNG, S., LEUNG, P. and STEFAN, A., 2008. Rice contract farming in Lao DPR: Moving from subsistence to commercial agriculture. ADB Institute Discussion Paper No. 90. SIMMONS, P., 2002. Overview of smallholder contract farming in developing countries. THANG, T.C. et al., 2004. The participation of the poor in agricultural value chains: A case study of tea. TRAN, V.T., 2013. Vietnamese Economy at the Crossroads: New Doi Moi for Sustained Growth. WAL, S.V.D., 2008. Sustainability issues in the tea sector. A comparative analysis of six leading producing countries. WOODEND, J.J., 2003. Potential of contract farming as a mechanism for the commercialization of smallholder agriculture, the Zimbabwe case study. APPENDIX Appendix: Export volume and export value of tea commodity in period 2002-2012 GSO and trademap, 2013