Case Study: Contract Rice Farming in Vientiane Province

Established in 2002, the Lao Arrowny Corporation is a joint venture between a Lao and a Japanese investor to produce organic Japanese rice for export to Japanese expatriates in Southeast Asia. The company received approval from the Ministry of Agriculture and Forestry (MAF) to recruit small farms from an area covering 18,500 ha countrywide. As of 2004, the company had approximately 2,000 households with a total land area of 800 ha under contract.

The selection criteria for contract farms include: 1) owning their own rice field; 2) acceptance by fellow farmers as hard working in order to become members of the farmers' association; and 3) agreeing to not use chemical fertilizers in the growing process. While the company markets the rice as “bio-organic rice,” it is not sold as certified organic rice. In fact, the company allows farmers to use a small amount of chemical fertilizers, up to 30 kilo/ha.

Contract farmers receive the premium price specified in the contract for growing organic rice, less the amount of credit used for inputs. The company supplies raw materials in the form of in-kind credit for seed and organic fertilizer (bat manure) and provides technical assistance. The team leader of the extension staff was a former government extension agent who received training in Japan under official development assistance (ODA).

Lao Arrowny, however, faces several challenges that reflect the early stage of private sector development in the Lao PDR. The supply of rice from farmers presently exceeds the company's working capital for procurement and processing. The company lacks in-house processing capacity and incurs high transport costs to have the paddy processed in Thailand prior to third-country export. As a result, Lao Arrowny failed to meet the market demand in 2004, exporting only 540 tons of rice against potential demand for up to 10,000 tons.

Using a standard questionnaire, a farm survey was conducted in September 2004 with 585 farmers in Vientiane Province. The surveyed households include 332 contract farmers and 253 non-contract farmers in the same agro-eco and socioeconomic settings. The surveyed villages are fertile, low-land rice growing villages located in Vientiane Municipality, immediately outside of the capital city of Vientiane. These areas have relatively good road access, public health service centers, and agriculture extension centers, including the Agriculture Promotion Bank (APB).

Rice is primarily grown under rain-fed production, although in some areas supplementary irrigation is available. These areas represent a farming system in transition from subsistence to commercial orientation, as traditional agriculture adapts to the emergence of new economic opportunities from increasing demand for crops and livestock from the Vientiane urban center. Farmers generally have more than one plot of rice land, growing certain varieties for home consumption (typically sticky rice) and other varieties for sale.

The following sections describe the socioeconomic characteristics and rice production systems of contract farming households and non-contract farming households.

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1. Axelle Boulay
   (posted 22 September 2008 / 01:44:23 PM)
   
   Thank you very much for this publication that analyzes in-depth the impacts of contracts on adopters' livelihoods.
   
   You write: "contract farmers would have lower profits than non-contract farmers if they operated outside of the contract." and you deduce from this finding that "better-off farmers choose to produce independently rather than taking on the burden of fulfilling the requirements of a contract." I think it is important to mention that this deduction is only valid in the context of contract arrangements that include a provision of credit to contract farmers.
   
   In the context of my PhD, I conducted a study of contract farming for eucalyptus in Thailand. Contracting companies, which are using eucalyptus wood for pulp and paper production, do not provide credit to contract tree farmers. Based on an household survey of 450 eucalyptus tree farmers, I found that better-off farmers are more likely to adopt a contract because they have the financial capacity to comply with the terms of the contract (such as a minimum rotation length).
   
   Axelle Boulay, PhD scholar
   Australian National University