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Participation Decision and Impact of Contract Farming System on Rice Farms in Myanmar
2019-12-02
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Aye Moe San
Lecturer, Department of Agricultural Economics, Yezin Agricultural University

ABSTRACT

Myanmar, once known as not only “rice basket of Asia” but also “the world’s largest rice exporter” stood as 7th largest global rice producer in 2014. Successive governments attempted priority on rice sector in any agricultural policies, thus, rice exists as a strategic sector due to wide spread utilization, contribution to country’s GDP, creating income and employment generation in Myanmar. Rice contract farming system was introduced by Rice Specialization Companies in Myanmar at the end of 2008, by encouraging private sector participation for rice sector development. Some companies practice written contracts with individual farmers while others apply written or verbal contracts with group of farmers. Under the rice contract farming system, rice farmers can get seeds, fertilizers, credit and technical support from contracted companies as well as they have stable market access as compared to the traditional system. This study attempts to evaluate the smallholder households' decision to participate into the contract scheme and the contribution of contract participation on smallholders’ rice farm performance in Myanmar, specifically in Danuphyu Township, Ayeyarwaddy Region and Pyay Township, Bago (West) Region. It uses full information maximum likelihood estimation of endogenous switching regression (FIML ESR) model on a total of 403 smallholders (220 contract and 183 non-contract smallholders). The empirical results show that age and education level of household heads, frequencies of production shocks experienced during the last five years, participation into farmer organizations, and frequently contact with extension services are influencing the decision of smallholders to participate in the contract farming scheme. Probability of smallholders' contract participation also differs between two study townships. Overall findings indicate that contract farming has positive and significant impacts on gross margin of paddy production. Contract scheme with individual smallholders along with provision of seeds, fertilizers and credit showed more effective ways to improve smallholder livelihoods rather than group contract arrangement with only fertilizers provision.

Keywords: Rice, contract farming, smallholders, Myanmar, Endogenous switching regression

INTRODUCTION

Myanmar was known as not only “rice basket of Asia” but also “the world’s largest rice exporter” during 1940s. Myanmar’s paddy production stood as 7th rank among top ten global paddy producing countries and 3rd largest rice exporter in Southeast Asia in 2014 (FAO, 2014). During 2013-2014, paddy accounted 35% of total crop sown areas, 40% of total gross agricultural output and contributed 13% of gross domestic product (GDP) in Myanmar. Labor engagement rate is also the highest in the rice industry as compared to other crops and approximately three-fourths of farm household income is derived from rice farming and related activities, especially in the main rice producing areas of Ayeyarwaddy, Bago and Sagain Regions (World Bank, 2014). Paddy production has been increasing more than 50% up to 2013-2014, which was two and half decades after market oriented economy was adopted, thus country has sufficient volume for growing population and considerable surplus to export.  Share of rice export value in agricultural export value and total export value were also increased after multi parties’ government era since 2011 (CSO, 2012).

"Rice" as being the staple food as well as a source of employment opportunities and export earnings in national economy, remains as a strategic crop for socioeconomic development of Myanmar. Government therefore reforms and implements various agricultural policies prioritizing the rice sector development which includes encouraging private sector participation. Poor paddy yield, usage of poor quality seeds, mixing large number of varieties which dilutes the quality of pre-processing paddy, limited post-harvest infrastructures, antiquated mills, high production and marketing costs, ambiguous and arbitrary trade policy measures, and high port and export procedure costs are major bottlenecks to smallholder dominated rice farming and rice sector development in Myanmar (Fujii and Satyanarayan, 2015).

Private rice specialization companies (RSCs) introduced the contract farming system along Myanmar’s rice value chain since 2008 monsoon season especially in major rice growing areas of the country. Contract farming system has been considered as one of the potential business models to link smallholders to world export markets along the stable supply chain as well as an institutional solution in the provision of inputs, finance and technical assistance to resource poor smallholders. Rice contract farming scheme in Myanmar is still a new phenomenon and there are limitations in studies and growing literatures. Therefore, an empirical research is essentially and statistically needed to get a better understanding about how this system has been empowered in smallholder rice farming and rice sector development. This study attempts to answer: "which factors are determing the probability of smallholders' participation in rice contract farming? How does rice contract farming influence on rice farm performance of smallholders?" in Myanmar.

Rice contract farming system with Rice Specialization Companies (RSCs)

Gold Delta RSC, Danuphyu township in Ayeyarwaddy region and Khittayar Hinthar RSC, Pyay township in Bago (West) region are purposively selected in this study due to their actively operating contract farming system, wide area of paddy production and large numbers of smallholders under contracts. Basic information and detail specification of contract farming schemes by selected RSCs are illustrated in Table 1.

Gold Delta RSC practices informal contract model, and is working seasonal written contract with individual smallholders and providing certified seeds along with farm inputs including seasonal credit, and product market. Gold RSC has two types of contract farmers who are seed producers and grain producers. There is more input provision, higher purchasing paddy price and strictly control measures in line with following good agricultural practices for contract farmers (seed producers), as compared to provision, purchased price and controls over cultural practices for contract farmers (grain producers). Khittayar Hinthar RSC also uses seasonal written contract with group of farmers by providing fertilizers and output market. It practices intermediary contract model which includes formally contracting with village head/farmer leader who informally contracts with a number of farmers.

Table1. Rice contract farming schemes in study areas

  1. Contract company

Company name

Khittayar Hinthar RSC

Gold Delta RSC

Location

Pyay township, Bago (West) region

Danuphyu township, Ayeyarwaddy region

Established year

2009

2009

CF target market

Domestic, International

Domestic, International

CF business model

Intermediary model

Informal model

CF product

Rice seed and grain

Rice seed and grain

Farmer selection criteria

  • Own or has proper paddy land not less than 0.40 ha and not more than 4.05 ha
  • Hard working, resource endowment, trustworthy and based on recommendation by village leaders/farmer-to farmer
  • Able and willing to adopt the guidance/techniques of contract company in rice farming
  • Loyalty to the CF scheme
  • Own or has proper paddy land not less than 0.40 ha and not more than 4.05 ha
  • Hard working, resource endowment, trustworthy and based on recommendation by village leaders/farmer-to farmer
  • Able and willing to adopt the guidance/techniques of contract company in rice farming
  • Loyalty to the CF  scheme
  1. Contract specifications

Type of contract

Written contract with group of farmers

Written contract with individual farmers

Contract duration

7 month seasonal contract

(June to December) 

8 month seasonal contract

(June to January)

Embedded items and services provided

- Fertilizer (Credit in kind):

  • Urea 200kg for farmer who has     < 1.93 ha paddy land
  • Urea 50kg and compound fertilizer 25kg per 0.40 ha for farmer who has 1.934.05 ha

- Knowledge transfer for improving yield and farm management

  • For contract farmers (grain)

- Rice varieties: Sinthwelatt and Hmawbi 2

-Seed: 62.7 kg per 0.40 ha

-Credit: 100,000 Kyats/0.40ha including seed cost

 

  • For contract farmers (Seed)

- Rice varieties: Sinthwelatt and Hmawbi 2

-Seed: 31.35 kg per 0.40 ha for Sinthwelatt variey, 20.9 kg per 0.40 ha for Hmawbi 2 variety

-Credit: 150,000 Kyats/0.40 ha including

seed cost only

-Fertilizers for 0.40 ha (credit in kind): 

Urea: 50 kg, Tsuper: 25 kg, Potash: 12 kg  

- Knowledge transfer for improving yield and farm management

- Access to company's facilities (eg. access to machinery facilities for land preparation, harvesting)

Production practices

No strict control over land preparation and planting method.

No strict control over land preparation and planting method for contract grain producers.

For seed contract farmers, there is strict control over usage of seed, fertilizers, land preparation and transplanting methods according to good agricultural practices.

Product quality criteria

Moisture content 15 % and good in quality

Moisture content 15 %, and good in quality

Pricing mechanism

Current market price at delivery time

For contract farmers (grain),

At Danuphyu 100 ton mill,

  • 4,000 Kyats/46 lb (4.05 US$/46lb)
  • 4,347Kyats/50 lb (4.40 US$/50lb)
  • 4,521 Kyats/52 lb (4.58 US$/52lb)

At Sankin/Sakagyi villages’collection point,

  • 3,900 Kyats/46 lb (3.95 US$/46lb)
  • 4,247 Kyats/50 lb (4.30 US$/50lb)
  • 4,421 Kyats/52 lb (4.48 US$/52lb)

(P.S. Company will buy with current market price if the market price at delivery time is higher than the contract price)

For contract farmers (seed)

At Danuphyu 100 ton mill,

  • 5,500 Kyats/46 lb (5.57 US$/46lb)

Negotiation price depends on the seed quality

Delivery of product

Only paddy produce will be accepted rather than cash repayment for fertilizers, and amount of product to be delivered is equal to the cost of supported fertilizer.

The deadline of product delivery is 31 December.   

Minimum (50 bsk/ac) of paddy has to sold to RSC. The value of credit in kind and cash has to be deducted from the value of product sold. The deadline of product delivery is 31 January.

Regulations of contract

Nil

Both parties have to follow all specifications of contract. If one side breaks, the action will be taken according to the current laws and regulations.

Note: Exchange rate during the survey period (June to December, 2014) is 1 US$ = 987.82 Kyat according to central bank of Myanmar.

Source: Author’s compilation based on interviews of RSCs and their related documents.

ANALYTICAL FRAMEWORK

A total of 220 contract smallholders and 183 independent smallholders from total 9 villages of two selected townships are randomly interviewed with well-structured questionnaires focusing on socioeconomic characteristics of households and detailed data on monsoon paddy farming activities during 2014-2015. Participation into contracts is not only self-selection of smallholders but also non-random selection by RSCs. Thus, participation decision could be influenced by the observed (farm and household characteristics), and unobserved factors (motivation and management skills) of smallholders. Full information maximum likelihood estimation of endogenous switching regression model (FIML ESR) is used by accounting both observed and unobserved selection bias (Lokshin and Sajaia, 2004). It calculates two separate outcome equations for contract and non-contract smallholders simultaneously along with contract selection equation.

where, Ii equals 1 for contract smallholders, and 0 for independent smallholders; Y1i and Y2i are outcomes (i.e., gross margin per hectare of monsoon paddy here) for contract and non-contract smallholders; Zi , X1i and X2i are vectors of factors (socioeconomics and institutional characteristics); α,  β1 and β2 are the parameters to be estimated; and εi,  µ1i and µ2i are the error terms. Under assumption of trivariate normal distribution of the error terms with mean zero and covariance matrix,

where,  Ω  =  variance – covariance matrix to control for selection bias,  σε 2 , σ µ12 and σ µ22 represent variances of the error terms in the equations (1, 2 and 3) respectively. σ µ1ε and σ µ2ε represent the covariance between µ1i and εi, and µ2i and εi respectively. The covariance between µ1i and µ2i, µ1 µ2) is unobservable as a smallholder cannot simultaneously be a contract and non-contract smallholder, thus σ µ1 µ2 cannot be estimated (Maddala, 1986).  As the coefficient α is only estimable up to a scale factor in the selection equation (1), the variance of σε 2 is assumed to be 1. According to Fuglie and Bosch (1995), under given assumptions of three error terms structure, the conditional expectation of the truncated error terms [µ1i | Ii =1] and [µ2i | Ii = 0] can be expressed as: 

where ,

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