Illegal Viet Rice Floods Cambodia Market
Outstanding in their field
Government ignores plight of farmers, millers in free market fallacy
An estimated of 800,000 tonnes of low-quality Vietnamese milled rice has been imported illegally into Cambodia since 2015, flooding the domestic market with cheap rice driving small domestic millers out of business because they have been unable to compete.
After being a net exporter of milled rice, Cambodia became a net importer 2015 with these massive imports from Vietnam, which amounted to almost 50 percent of annual domestic consumption.
In early 2016, disenchanted millers and exporters formed an adhoc team to lobby the former Minister of Commerce to submit a plea to the Prime Minister seeking Government intervention into an impending crisis hitting the industry. That effort has had little success. The recent Sen Kra Ob harvest season has been catastrophic due to the collapse in global prices.
As the usual foreign buyers of paddy did not show up, combined with tightening liquidity at commercial banks and weak financial health of Cambodia’s millers, the Sen Kra Ob harvest season was almost totally unsellable as the offer price was too low. This has created an endemic financial situation for farmers who are already heavily indebted with very high interest rates short term loans.
Farmers have faced extreme difficulty to sell their paddy as prices have dropped dramatically. Millers are confronting working capital issues to procure paddy since National Bank of Cambodia instructed banks to restrict lending from the fourth quarter of 2015 to try to combat possible lending bubbles. Commercial banks also started to cut all further loans to the rice millers since then, creating a massive crisis for the industry.
Rice industry operators expect that the worst is yet to come as the major harvest of jasmine is due in October, November and December as there will be higher tonnages at stake while millers will remain unable to access affordable and realistic loans for working capital. Foreign buyers of paddy such as Vietnam may not be active in buying this major crop as they have started to plant their own variety of Jasmine rice, selling at a much lower price globally.
The millers and the Ministry of Commerce reached out to PM Hun Sen, who summoned a high-level inter-ministerial meeting at the CDC, under the chairmanship of former DPM Keat Chhon on how to best to design a set of policy measures to improve industry competitiveness.
The current distress suffered by farmers and millers alike serves to confirm that a sense of urgency is needed to come up with pragmatic policy measures so as to allow the rice industry to become competitive, survive and thrive.
The government may need to bring all the stakeholders together to gain a full understanding of the problems, not only domestically but also how the regional and global competitive forces can impact local reality. Thus many pertinent questions beg to be answered by key players, both the government and the private sector.
First, price floor policy should be set at US$218 per tonne. Despite demonstrating goodwill in an attempt to disburse an emergency fund of US$27 million to the millers, the Rural Development Banks has ruled that loan recipients must procure paddy at a determined level in order to “artificially” help farmers.
How can such a policy work given that the global price is trending downward each day and that Cambodian farmers are already hardly competitive overseas given high costs of financing, logistics and utilities? How can a price floor, which is a welfare transfer to the farmers, incentivize millers to buy paddy given that it impacts their profitability?
Second, the Rural Development Bank issued a policy proposal to apply 8 percent interest on working capital for millers, considered as “emergency loans.” Does 8 percent make a difference given that our neighboring competitors have access to 2.5 percent?
Is there a way to provide the same level playing field than our competitors so that our farmers and millers can also have access to 2.5 percent interest rates or interest rates that are lower than 5 percent? Could the government study this possibility since our neighbors can do it? Why not us, given than we can also have access cheap concession soft loans at below 1 percent interest rates from either China or Japan? This is not a subsidy as the bank such as the RDB would still have a positive spread of 3 percent if it lends it back at 4 percent.
The government may have overlooked the fact that farmers cannot survive without the millers and as such millers are the Achilles Heel of the rice industry. The government encouraged investment in rice processing without adequate accompanying economic policy measures to promote the industry. Millers to this day have not been listened to when they are the ones who have taken the most risks in investing in fixed assets and competing in the global markets.
Comprehensive policy measures are lacking
When the rice industry turned to the government for pragmatic policy measures and intervention, they were told that Cambodia practices a free market economy and cannot intervene. Do we all have the same understanding of what free market means and what commodity trading is really about. Do we know that the US, Japan, the EU, all practice a free market economy, yet they have huge government interventions for their agriculture sector?
When it comes to agriculture, no business can survive without government intervention because commodity trading is simply prone to market failure. The free market just does not work for commodities.
Where should Cambodia go from here and does Cambodia really wants to promote its rice industry? Is rice the ultimate crop to promote or is it other crops? Should the government remain committed to promote the rice industry, it has to conduct a pragmatic consultation with all the stakeholders to understand the challenges, the opportunities but also to be aware of the costs of the set of new policy that are needed to make the industry competitive.
Some of the issues would be to look into a selection of seed varieties, as we cannot grow numerous qualities that are not in demand by the market. We are not a large country and certain varieties such as the non-fragrant Long Grain White are not competitive. Should we discard it?
Should the government decide to downgrade the importance of rice cultivation, are we ready to accept to face future food security and safety problems? Should we focus more on other higher value added commodities like Pepper, soybeans, corn and others?
David Van Vichet is a Cambodian Professional involved in advocacy in development area with the government and private sector