Contract Rice Farming in Cambodia

The largest contract rice farming operation in Cambodia is organized by Angkor Kasekam Roonroeung Co Ltd (AKR), a private Cambodian firm established in 1999. Its main business is to export non-certified organic Neang Malis (an aromatic Cambodian rice variety introduced by AKR) to the international market¹. AKR has invested about US$8 million in a high-tech rice mill that has a processing capacity of up to 10 tons per hour or up to 30,000 tons per year. In 2005, the company worked with farmers in four provinces (Kandal, Kampong Speu, Takeo, and Kampot), which were selected based on their ideal agronomic conditions for the cultivation of the Neang Malis organic rice.

At the start of the contract farming operation, only about 100 farmers joined the contract because of a lack of trust in AKR's contract arrangement as well as the company's low milling capacity. Subsequently, the total number of contracted households reached 27,346 in 2003 and 32,005 in 2004. More than 80% of the contract farmers are located in a province (Kampong Speu) near the AKR headquarters where the condition of the agriculture infrastructure is generally good.

AKR's experience shows that contract farming was generally successful in Kampong Speu province and in some nearby areas in Takeo province. Field observations indicate that the distance from the operating sites to the AKR headquarters is not a factor determining the success of contract farming. Rather, most of the successful cases were farmers in former forestland and land close to mountains where rice can be produced at higher quality and yield. On the other hand, farmers that are close to AKR (and therefore close to main roads) and have more market experience tend to have higher levels of defaulting on the contracts. This latter group of farmers is made up of the former contract farmers of the survey.

AKR is involved in every stage of rice production and marketing. Its roles include: 1) identifying areas suitable for growing fragrant paddy; 2) establishing farmer associations based on existing commune structures and bringing these under its management; 3) using these associations to recruit farmers; 4) delivering improved seeds and technical advice to contract farmers; 5) monitoring and solving production problems; 6) collecting and purchasing rice output at AKR's gate; 7) sorting milled and packaged paddy into different types; and 8) exporting rice to international markets, including Europe, Australia and Hong Kong. Since all steps of production and processing are well coordinated, AKR shortens the supply chain under contract farming and thus lowers transaction costs for rice export, relative to the normal supply chain.

According to AKR's contract arrangement, the company distributes Neang Malis seeds in credit during July and buys back the output from October to January of the following year. This arrangement requires farmers to repay the credit seeds and transport the harvested paddy to the company's rice mills. The amount of seeds that farmers need to return, the minimum guaranteed price, and the penalties for contract defaults, are explicitly stated in the contracts. However, while contract farmers agree to obey AKR's quality control mechanisms, conditions related to production methods are not clearly specified in the contracts. The contracts also do not clearly state AKR's liabilities if it does not buy contracted rice at the predetermined prices. The contracts state that AKR is obligated to buy rice from farmers at the minimum price without clearly specifying the terms of purchase in detail. In practice, AKR often uses technical reasons to reject or lower the prices of rice that farmers have transported to the firm.

AKR establishes commune associations to help enforce contracts. Each commune association consists of a head, a deputy and the village head. The head and deputy are trained by the firm to understand the basic technical aspects of organic farming and the farming of Neang Malis. Each association routinely observes the progress of its members and reports to the AKR management. The progress report includes every stage of production from plowing, transplanting, water management, and harvesting. Each association also provides basic technical advice to its members, advises them not to use chemical fertilizers, and helps them grow other crops after the harvesting season. The associations also help members develop mixed or integrated agriculture (e.g., growing vegetables and raising livestock) to increase incomes and reduce poverty. Commune associations report to AKR any issues related to the production process such as drought, flood, disease, insect and other significant issues that affect production. The firm channels its policies through the associations and provides extension services via its agents. At present, these associations are tightly controlled by the firm and have little bargaining power. However, they have a promising future and could develop into independent organizations representing the interests of the community.

AKR associations appear to be a good model for community-based agricultural development. They provide the basis and experiences for the future development of farmers' associations in Cambodia where farmers are predominantly smallholders.

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Comment(s)

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1. Anthony M. Zola
   (posted 02 July 2008 / 12:54:22 AM)
   
   This is an excellent contribution to the current debate about contract farming in mainland Southeast Asia.
   
   I have conducted research for the ADB, much less sophisticated than this study, and had similar results. Smallholder farmers were better off if they were engaged in contract farming than when they sold daily labor to local concessions / nucleus estates.
   
   My congratulations to the research team. It is not an easy topic on which to conduct research.
   
   Anthony Zola
   Bangkok, Thailand
   & Vientiane, Lao PDR