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Agriculture shifts to value-added products

Update: February, 06/2012 - 09:23

Viet Nam's agricultural sector is at a turning point as it starts to become more consumer-oriented rather than driven solely by high-volume output. Viet Nam News reporter Le Quynh Anh sat down with three senior experts to discuss what the future holds for the country's signature sector.

Viet Nam has already established itself as one of the world's largest exporters of agricultural products, and the sector brings in billions of dollars every year. Why now are there talks of restructuring the sector?

Dang Kim Son, Director General of the Institute of Policy and Strategy for Agricultural and Rural Development

 

Dang Kim Son
Despite relatively limited investment over an extended period of time, agriculture is one of the few sectors that has consistently enjoyed a trade surplus, even in times of crisis. This ‘forgotten sector' generated US$25 billion from exports last year, so can you imagine how much growth this sector is capable of once it gets the investment needed to match its potential?

From my observations, the arrival of such investment is imminent. Foreign and domestic investors have started to get excited about the business opportunities in this sector. A study by my institute shows that investing in agriculture has the lowest incremental capital-output ratio and triggers the biggest economic spread effects.

If we are poised to take advantage of this moment, this will provide us with an unprecedented chance to pull off another breakthrough, three decades after the first one when we moved forward from annually importing 500,000 tonnes of rice to exporting 1.5 million tonnes in 1979.

I have just returned from the World Economic Forum (WEF) in Davos and what I observed there might be seen as a strong harbinger of good things to come. Viet Nam's efforts were highly regarded, it was deemed to be exemplary in terms of promoting agricultural development in developing countries.

During this forum, the Vietnamese delegation had received many meeting requests with representatives from multinational groups and development agencies for further discussion. Co-operation with multinational groups, already in place here on a pilot scale, will not only benefit Viet Nam in terms of capital, but in technology transfer and access to much wider markets. What is even more exciting about this kind of co-operation is that it will lay the groundwork for agricultural products to become the first type of Vietnamese products to ever be included in global value chains.

Steven Jaffee, World Bank Rural Development Sector Co-ordinator

The Vietnamese society is changing rapidly and this demands change from its agricultural sector. The primary source of the sector's comparative advantage has been the country's natural endowment—ample land and water resources, a long coast line, and a favourable climate. Combine that with lots of hard-working farmers and some critical infrastructure investments made by the Government and the results have been very impressive. Yet, the younger generation is looking outside of agriculture and there is increased competition for land, water and coastal resources. Vietnamese agriculture needs to become less resource and labour intensive and more knowledge-based. It needs to generate "more from less"—more revenue for farmers and more consumer satisfaction, while using less land, water, pesticides, and labour. Innovation—in production practices and in products— will become increasingly important if the sector is to remain competitive and if Vietnamese farmers are to maintain a reasonable living standard.

Viet Nam has been very successful in generating a very large volume of agricultural exports. However, this has not yet translated into much generation of wealth for Vietnamese farmers. Part of the problem is the small size of most Vietnamese farms. Yet, other issues relate to the fragmentation/multiple-layering of many supply chains, high logistical costs, and the fact that most agricultural exports take the form of raw commodities at the lower end of the quality spectrum. Vietnam's ‘discounted' commodities translate into lower prices for farmers. The better than average yields obtained by Vietnamese farmers cannot compensate for this.

And now, Vietnamese agriculture is experiencing rising labour costs. It will be difficult for it to remain competitive as the supplier of ‘low cost/lower quality' commodities. Rising labor costs will necessitate labour-saving technologies plus require Vietnamese agriculture to raise the quality of its product mix and shift more of its exports toward value added products.

So in which way is the sector being restructured?

 

Steven Jaffee
Jaffee: Vietnamese agriculture has repeatedly met and exceeded the production targets which have been set for it. The challenge now is to restructure the sector so that it produces what consumers actually want rather than what planners desire. With regard to exports, the challenge is to ‘rebrand' Vietnamese agriculture so that five or ten years from now Vietnamese agriculture is no longer an invisible supplier of cheap, lower quality raw materials, but that international buyers and consumers will recognise Vietnamese products for their quality and appreciate the sustainable way that they are produced. This will require lots of changes in production practices, in the interfaces between farmers and agribusiness companies, and in the way that agricultural supply chains are managed. Much innovation will be needed and this will need to be driven by the private sector, both local and international. I don't see much innovation originating from the state enterprises active in the sector.

It is important not to forget the Vietnamese domestic market. You have 90 million people and a rapidly growing middle class. Income growth, urbanisation and other factors are already bringing about major changes in food consumption patterns. These changes will accelerate over the coming decade. The value of the domestic food market will far exceed—perhaps by 100 per cent—the value of Vietnam's agro-food exports by the end of this decade.

Oddly enough, for policy-makers, the domestic market doesn't seem to exist, except for food security concerns. Yet, experiences in other middle-income countries show the critical role which the domestic market plays in agricultural commercialisation. It is here where farmer groups and SMEs to test out new products and begin to develop recognized brands. It is here where farmers and firms sort out quality management. The local market also provides refuge in the face of highly volatile international commodity markets.

 

Vo Tong Xuan
Son: The development of agriculture in this new period should involve every factor of the economy. The Public-Private-Partnership is going to be adopted on a much larger scale to promote much closer collaboration between the public and private sectors. New policies and mechanisms are being drawn up to transform the sector into a market-based one, so it will become a level play field for all stakeholders. The Government's basic roles now are to provide trailblazing policies and make necessary institutional reforms. From my perspective, lawmakers themselves are also excited about these changes. It's very clear for all of us that for Viet Nam to become an industrialised country by 2020, it has to start with agriculture.

Vo Tong Xuan, leading agronomist, Rector of Tan Tao University

What we should start doing right away, which we are already late in doing, is to conduct comprehensive primary market research to see what the world needs, what we can offer and then connect the dots to come up with suitable production and marketing plans. We can't just sit at home and wait for them to come to us for an order as we have done in the past. That complacent period has gone!

Let me give you an example of how we miss out a comparative advantage because of our limited understanding of the market. I remembered during a trip to Bangkok, I was surprised to discover that the luggage of a Swedish diplomat was full of Vietnamese potatoes on the request of his Bangkok-based colleagues who loved eating them. I know that the potato crop in Western countries is often harvested during September and the stock is only enough to supply until March. There can't be a better time for Viet Nam to step in because we start to harvest our potatoes in February. And the northern part of Viet Nam in the typically cold season is an ideal place to grow high-quality potatoes. But look at this region now. Almost every farmer is still struggling to grow rice, whose greatest enemy is paradoxically the cold weather. If only they knew better!

The top hurdle for Vietnamese agricultural products is the lack of a stable market, our buyers vary every single year. As business can't secure long-term contracts with buyers, they consequently can't make the same commitment with the farmers.

Farmers, in turn, have limited choices when it comes to selling their produce. In many cases, they have to accept prices offered by certain intermediary traders. So they end up receiving the same amount of cash regardless of their commodities' quality. It discourages them from striving for better quality, so how could we expect them to be more innovative. Part of it is adopting technology application, when at the end of the day, their efforts are not going to be paid off.

So I think the model involving four actors: the Government – farmers – companies – scientists may provide one solution to this. Farmers, ideally in groups or co-operatives, produce raw materials that are sold to the companies at good prices. Scientists at the same time instruct them on how to do their jobs more effectively. This would allow farmers to focus all their efforts on growing crops or livestock.

All of you here have intensive experiences working with different stakeholders. What are their main concerns that policy-makers should address to ensure the transition happens as expected?

Jaffee:Agriculture and agribusiness companies look to governments for the provision of reliable infrastructure, an effective education system, well-performing systems to protect bio-security, adequate arrangements for environmental protection, and the protection of intellectual property rights. They also expect a level playing field and not to face market entry restrictions due to a panoply of state enterprises. In Vietnamese agriculture and agricultural markets, the government should be doing less and facilitating more—in relation to R&D, resource management, and supply chain management. There is enormous scope for increased collaboration between the government and the private sector with this collaboration not only realising increased wealth but also increased achievement of social objectives.

Xuan: I have worked not only with farmers in Viet Nam but also in many different parts of the world and I have to say that Vietnamese farmers stand out with an incredibly high level of dedication and hard work. However, what are holding them back is partly because they are not given full land ownership rights and somehow limited autonomy to make decisions. That's why they hesitate to invest in their land because who knows it might be taken away some day. So there is an urgent need to make amendments to the Land Law so the land accumulation can take place thus pave the way for remarkably larger-scale farming model. Land accumulation over a long time will help us overcome our natural disadvantage compared to other players in the region which is the scattered distribution of farm land. — VNS

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