Will foreign participation energize Vietnam’s rice sector?

Joining the WTO in 2007, Vietnam promised that from the beginning of 2011, foreign companies will be allowed to trade in rice in Vietnam. Saigon Tiep Thi wonders if foreigners will challenge state enterprises’ control over rice exports, and if so, what the result might be.

Two huge state owned enterprises, Vinafood I in the north and Vinafood II in the south, dominate Vietnam’s rice sector. Together they have a 70 percent share of exports that totaled six million tons in 2009.

A Cautionary Tale

Professor Vo Tong Xuan, the former President of the An Giang University, is a rice expert. The 2011 market opening, he notes, will be the second opening of the nation’s rice market since reunification. Back in 1993-1994, he explains, American Rice Company formed a joint venture with VInafood II to grow rice for export.

In some respects, the company was very successful, Xuan says. It selected several rice growing areas, and recruited Vietnamese farmers to grow the IR64 rice variety according to a technique provided by the company. The rice was whiter, more fragrant and more glutinous than normal rice. Because American Rice had well-established marketing channels in the US and Europe, it was able to sell rice in big quantities after two years of investment. In 1995, it exported 500,000 tonnes of rice at $350 to $400 per ton, at a time when ordinary Vietnamese rice could only command $200 to $220 per ton.

The joint venture provoked the enmity of local authorities, however. They accused it of ‘wrecking the market’ by buying rice from farmers at higher than the average market price. Reasoning that the operation of the US company would harm domestic enterprises, they compelled it to pay higher taxes than its Vietnamese competitors. This treatment persuaded American Rice to abandon the project. Since then, no other foreigners have displayed any interest in making an investment in Vietnam’s rice sector.

Depending on the Government

Market analyst Pham Quang Dieu notes that that there’s been a lot of turbulence in the rice market in recent years. However, Vietnamese companies have been insulated from these fluctuations and slow to react to them. Instead of marketing aggressively, Dieu says, they rely on the Government to negotiate contracts.

“Look at our top ten export markets,” he says. Countries like the Philippines, Malaysia, Iraq and Cuba always take seventy percent of our rice exports. That’s the result of the Government’s negotiations.”

Things are unlikely to change much in years to come, Dieu believes, because Hanoi persists in viewing rice as a strategic product that plays a big role in national food security. He doubts there will be significant changes in the rice export management scheme.

Trade expert Nguyen Dinh Bich tends to agree. “In 2011, though we will open the market to participation by foreign enterprises, the Vinafood companies’ monopoly control of exports will persist. Competition will develop only slowly, if at all,” he says.

Why not support farmers instead of exporters?

In principle, when domestic enterprises are weak and the market is inefficiently organized, foreign enterprises will jump in. That’s what has happened in other agricultural sectors. Companies from the US, Europe, Thailand, the Philippines and Indonesia have come and cooperated in farming tra fish, shrimp, pigs or fowls on a large scale.

However, analysts agree that the scenario is unlikely to repeat in the rice sector. They point to the Vinafood companies’ huge assets and ready access to cheap capital from the State. In the Mekong Delta, Vinafood II has a huge network of rice drying, husking and polishing plants. It controls the rice collection from farmers. Further, the analysts say, there’s a long tradition of Government intervention whenever the rice market’s unsettled.

Professor Xuan argues that Vietnam should adopt Thailand’s rice export management scheme, which he thinks can help dilute Vinafood’s monopoly power. The Thai Government supports prices by buying rice directly from farmers, and the volume of rice it purchases is big enough to allow it to control the market. Enterprises have the right to purchase the remaining volume of rice, but must pay at least the price set by the Government. When market conditions are favorable, the Government will invite exporters to bid for the rice it has bought up.

In consequence, the Government’s support goes directly to farmers instead of to middlemen. No enterprise is privileged. Xuan said that model can also work in Vietnam, though it would require considerable outlays by the Government. He’s for it: “This method would at the same time guarantee national food security, get the Government out of the exporting business, and in particular bring more balance into the market,” he concludes.

Tags: Vietnam rice