Contract Farming in the Lao PDR

Contract farming has spread rapidly in the Lao PDR in recent years. Growth in domestic demand for agricultural produce has been driven by urban expansion, providing new market opportunities for small farms, especially those located near urban centers. There is also increasing regional demand from Thailand, Viet Nam, and China for specialty crops including hemp, mulberry paper, castor bean, Job's tears, and palm nut, all of which are produced in Laos.

Thailand, in particular, has actively pursued contract farming as an area for economic cooperation in the Mekong region. Under an initiative of the Association of the Southeast Asian Nations (ASEAN) Free Trade Area (AFTA), for example, Thailand agreed to provide assistance to develop border areas in Laos for contract farming to meet the demand of its growing food industry (MPDF, 2004). Thailand has also announced that it would allow tarifffree importation of all approved agricultural products produced under contract farming in ACMECS¹ member countries.

There is also significant export potential for niche products and organic products. Although small and medium enterprises are marginalized by the advancing consolidation of multinational agribusinesses, certain niche markets remain competitive for small farms (UNDP/NSC, 2006). Diversification of agricultural activities into these high-value markets can improve small farms' incomes.

Contracts can take a wide variety of forms, ranging from a simple verbal agreement between farmer and trader to a written contract that explicitly details the obligations of each party. However, the majority of contract farming ventures in the Lao PDR are informal arrangements between farmers and small traders that operate outside legal boundaries. Firms have reported losses due to farmers violating the contract to sell their crops on the market, while farmers have reported losses because the contracting firm did not share the cost of a failed crop or did not collect the produce after harvest. In such cases, there is no legal avenue for farmers or firms to recover losses (ADB, 2007).

Nonetheless, a number of local and foreign private investors have established medium- to large-scale contract farming agreements with small holder farmers:

Tea, Phongsaly Province

Tea contract farming in Phongsaly involves 520 households and covers a production area of approximately 400 hectare (ha). The contracts are signed between Chinese traders and the Provincial Government, which organizes farmers to grow the tea for a predetermined price. The Chinese investors provide seed and technical assistance on production and processing methods, and they purchase all of the tea from the farmers to sell in the PRC market.

Maize, Bokeo Province

Maize is produced under verbal contract with a Thai import firm by approximately 600 households with a total cultivation area of 1,136 ha. The firm supplies contracted farmers with inputs including seed, fertilizer, and credit. The maize is grown in accordance with government regulations.

Soybeans, Udomsay Province

Soybean production is organized by an American-Lao joint venture feed mill firm in several districts. The firm provides seed and technical assistance for production technology yet offers a price slightly below market price. In 2004, many contracts were breached and the supply chain broken when Chinese traders offered more competitive prices and purchased soybeans from the contracted farmers.

Maize, Luang Nam Tha Province

An American non-governmental organization (NGO) registered as a trading firm operates contract farming of maize in three districts without a formal contract. The NGO provides farmers with in-kind credit in the form of seed and purchases their produce at the end of the season. During its first two years of operation, the NGO did not encounter any breaches of contract; however, in 2003, Chinese traders purchased all farmer output. The NGO did not possess the means to enforce the verbal contracts and lost the seed.

Sugar Cane, Phongsaly Province

Lao farmers produce sugar cane for a Chinese sugar mill across the border. The buyers provide some seeds and fertilizer but do not offer a guaranteed price. At harvest, the dried sugar cane is weighed and the cost of inputs is subtracted from the sale price. Although the transaction is one-sided, additional farmers have shifted to sugar cane cultivation—without input supports—to participate in the sales (UNDP/NSC, 2006).

Sweet Corn, Vientiane Province

Lao Agro Industry Co. (LAI) is a Thai–Lao joint venture affiliated with Lampang Food Products, a Thai food processor and exporter. LAI has been operating in the Lao PDR since 1994, processing bamboo shoot, baby corn, mango, and sugar palm seed. LAI contracts households from the sweet corn farmer production and marketing group (FPMG) to supply sweet corn to its cannery. The company provides credit for seed and fertilizer, while the local government provides credit for land preparation. Although only 11 households on 3.5 ha were contracted in the 2006/07 dry season, LAI is targeting a planting area of approximately 160 ha to produce 2,000 tons of sweet corn.

Horticulture, Bokeo Province

Thai processing firms organize contract farming of horticulture crops such as mustard cabbage in Bokeo Province. Information is not available on the number of participating households or land area under cultivation. Green bean production has largely been discontinued as farmers experienced negative health consequences due to high pesticide use; one farmer interviewed during a field visit reported a death in his family due to pesticide poisoning.

Rubber, Northern provinces

Para-rubber cultivation was introduced in Luang Namtha province in the mid-1990s with assistance from China. The rubber cultivation area in the Northern provinces has since expanded steadily due to growing demand from China. Although large-scale concession areas currently account for the majority of rubber production, the government is promoting smallholder rubber production as a way of stabilizing shifting cultivation and increasing upland farmer income (Manivong and Cramb, 2007).

Download this Discussion Paper [ PDF 127.3KB| 24 pages ].

Comment(s)

There are [1] comment(s) for this entry. Post a comment.

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