Value Chain Financing Approach: A Good Way to Sustainable Agricultural Growth in Vietnam45277

The paper aims to mainly describe the performance of the internal and external financing mechanisms existing in the Seng Cu rice value chain in Lao Cai and focus on the impact of the con

Value Chain Financing Approach: A Good Way to Sustainable Agricultural Growth in Vietnam

Bui Thi Lam (1),(2),( * ) , Tran Huu Cuong (2) , Ho Thi Minh Hop (1) , Nguyen The Kien (3) , Philippe

Lebailly (1)

(1) University of Liège, Gembloux, Belgium

(2) Vietnam National University of Agriculture, Hanoi, Vietnam

(3) VNU University of Economics and Business, Vietnam National University, Hanoi, Vietnam

* Correspondence: btlam.hua@gmail.com

Abstract: Nowadays, there is an increasing interest in the value chain financing approach (AVCF) as

a crucial tool towards sustainable agricultural development The paper aims to mainly describe the performance of the internal and external financing mechanisms existing in the Seng Cu rice value chain in Lao Cai and focus on the impact of the contract farming on rice production based on cost and benefit analysis of 160 representative producers, classified into three groups: small, medium and large scales Besides this, in-depth interviews with 45 other stakeholders involved in the chain also conducted to obtain the insightful qualitative analysis The study points out that the combination of internal and external finance in the chain create a financial ecosystem, in which each type of player likely meets their tailored demands and becomes paramount to their success However, in practice, the participation of agricultural bank in the chain still limit and financial shortage seems popular for many Concerning the farming contracts established between the enterprises and local producers, it remarkably contributes to not only better input usage and higher value-added of producers in terms

of value and proportion, but also well manages the quality of the product flows the chain Finally, the recommendations for policymakers, producers, and agribusiness are suggested to enhance the effectiveness of these financing sources and to sustainably develop the Seng Cu rice chain in the locality as well as the agriculture sector nationwide

Keywords: Agricultural value chain finance; small producer; rural finance; sustainability; Vietnam

is well-document, agriculture still is considered as an unattractive field for investment due

to the prejudices about high risk and low profitable ratio Therefore, agricultural investment still remains a large bottleneck to promote agriculture development and achieve other Millennium Development Goals (MDGs), that Vietnam has been striving to fully achieve In fact, Vietnamese farmers have been facing with various endogenous and exogenous obstacles to access formal credit service, that restrict agricultural productivity and other economic opportunities (HLPE, 2013) Left with no other options, farmers take a loan from informal sources with much higher interest rate to finance their production investment and

other urgent cases, hence, are continuously stuck in their miserable lives

In recent years, the studies on Agricultural Value Chain Financing (hereinafter: AVCF) have become strangely attractive because of their effectiveness in many fields:

economic, social and environmental as a whole In short, AVCF encompasses the flow of products, finance, agricultural knowledge and market information from production to consumption phase In essence, value chains differ remarkably across regions and products, therefore, large-scale and “one-size-fits-all” subsidy programs funded by central governments are not appropriate and costly It should be clearly identified what are the tailored demand of each chain participator and how distribute the benefit existing in the chain Under AVCF approach, small farmers likely gain a greater share of their value and assume fewer risks (Miyata et al., 2009; Olomola, 2010; Saigenji & Zeller, 2009) and the chain

is developed towards sustainability

In this paper, Lao Cai is chosen to represent the research on AVCF, in which Seng

Cu rice is the case study The province is located in the Northern Midlands and Mountain (NMM), the largest ecological area, concurrently, the homeland of the majority of the poor

in Vietnam (GSO, 2017) The paper aims to describe how are the AVCF mechanisms performing and its impacts on agricultural production based on the cost and benefit analysis

of 160 Seng Cu rice growers surveyed To do this, the remainders of the paper are organized

as follows Section 2 provides the literature review of AVCF and section 3 explains the methods used for choosing the research site, collecting data, and then, analyzing data Next, section 4 presents the results and discussion, comprising the picture of Seng Cu rice value chain and the finance existing along the chain Besides this, the study also focuses on the impact of contract farming on different farmer subgroups classified based on Seng Cu rice cultivation, including small, medium and large scale Finally, section 5 concludes the main findings of the paper with some brief policy implications needed

2 Literature review

Until now, AVCF is likely an interesting topic for agricultural development agencies and has increasingly been applied worldwide, especially in developing nations and agriculture-based regions This approach supports chain actors via tailoring services and products along with a specific value chain in order to reduce the financial cost and risk as well as enhance the effectiveness and competitiveness of agricultural product, each value-added stage as a whole chain (AfDB, 2013; HLPE, 2013; Miller, 2012; Miller & Jones, 2010) More broadly, AVCF also is able to tackle the environmental issues, that are being considered a weak performance to reaching the triple bottom line (economic, social and environmental) of green microfinance (Allet & Hudon, 2015)

It is clear that the agricultural sector is characterized by the heterogeneity of financial needs, especially smallholder farmers They not only have a diversity of agricultural activities (crop; livestock) and/or economic performance (farm; non-farm), but also the combination of production and consumption unit With traditional credit, formal financial institutions cannot provide timely and sophisticatedly enough as farmer’s desires Under this more comprehensive approach to agricultural finance, it significantly contributes to the chain being more inclusive and convenient because of financial availability for smallholders (Miller & Jones, 2010) Similar requirements also take place with other chain participants

The different actors in the chain, therefore, should be funded with different instruments and financial providers (Miller, 2012)

According to IISD (2015), agriculture evolves a hugely wide range of activities, from farming performance to the productive infrastructure system as well as research and development In parallel with it, agriculture finance also encompasses four groups of financial demand, including (i) the needs of farmers and agribusinesses; (ii) the transactions among participants along with the chain, (iii) rural infrastructure investments; and (iv) generating knowledge and innovation

Concerning the source of finance existing in the particular chain, Miller (2012) classifies and defines as follow:

Internal value chain finance refers to the financial sources occurring inside the chain among participants For example, suppliers provide in-kind credit to a farmer (i.e., trade credit) or wholesalers funds in advance inputs and buyback agreement (i.e., contract farming)

agri-External value chain finance implies the funds derived from outside the agri-chain, whereby banks and other financial institutions create one-to-one relationships via contractual agreements with different actors

Figure 1: Financial sources existing in a typical agricultural value chain and its impacts Source: author’s illustration adapted from Miller and Jones (2010) and AfDB (2013)

Similarly, the study of AfDB (2013) also analyses deeply four key roles of AVCF

approach in agricultural development and economy (Figure 1) Firstly, it likely enhances the

competitiveness of agricultural products and the chain It has become more and more

important in the context of the domestic and international trade strongly driven by the consumer tastes that change increasingly rapidly Thus, without linkage among players in the chain, the gap between products at farm gate and consumers’ desire is widened,

resulting in a reduction of not only the price and quantity of products sold, but also the

economic benefit of all participants in the chain, and so forth Secondly, AVCF is able to boost

agricultural development towards sustainability via the use of natural resources and

strengthening resilience against shocks (De La O Campos et al., 2018) In reality, the poor are characterized by small scale producers with tiny investment, and their businesses were running under difficult and constraining conditions Therefore, proper financial services to secure the best possible investment choices can help them transform their farming production from subsistence to commercialization45 and to approach sustainable income

and livelihood Thirdly, AVCF can escape from the vicious cycle of poverty through address

its grass-root reasons, lacking access to affordable, quality and full-range of financial services Understandably, financial shortage negatively affects not only the production stage due to low investment but also their power bargaining with marketing actors Their income and livelihood, therefore, is undermined by both of endogenous and exogenous drawbacks

Finally, AVCF improves financial inclusion in the agricultural sector Financial Inclusion is

defined as the popularity and diversity of formal financial services accessing and using by citizens in society (Fungáčová & Weill, 2015) The availability formal sources of borrowing directly affect to the shadow (i.e alternative) banking system, comprising microfinance institutions and trading credit among enterprises, as well as informal sources, such as underground banks and unregulated pawnshops The expansion of the non-banking services, e.g informal sources from family, friends or moneylenders, negatively impacts on financial stability and economic growth (Bruhn & Love, 2014) The growth and development

of a country is significantly dependent on the expansion of banking and financial services

to the currently financially-excluded class of citizens in the economy, as they possess untapped valuable potentials that could be of tremendous benefit to the economy at large (Michael & Sharon, 2014) However, financial inclusion still is the big challenge worldwide, especially in less developed nations

3 Methodology

3.1 Research Site

According to Bui et al (2018), Lao Cai is the ideal site for researching on the montane rice sector because the province has typical socioeconomic and political characteristics representing the NMM region and it is also endowed the favourable natural condition for rice growing More detailed, as per GRiSP (2013), rice planted in low-latitude areas, with high solar radiation, and cool temperature tends to get higher productivity Rice cultivators, therefore, should exploit these geographic features to obtain high quality and high yield to improve their economic situation In the national market, Seng Cu rice is the unique kind of rice recognized the special and safe product in Lao Cai province (Figure 2.c)

45 There are three levels of market orientation: subsistence, semi- commercial and commercial system In parallel with it, there are significant differentiations in terms of farming system, farmers’ objective, input management, and household’s income sources

Source: Figure 2 (a) and (b) are author's own elaboration; Figure 2(c) is cited from

https://vnexpress.net/thoi-su/ban-do-cac-loai-gao-dac-san-o-viet-nam-3768497.html

Figure 2: Description of the research sites for the study

Regarding cereals, rice cultivating is often prioritized than maize, so most cropping land is devoted to it (Figure 2.b) Maize is planted on steep hills and places where it is not possible to harvest rice because of water shortages There are two main typical agro-ecologic zones in Lao Cai, upland and lowland In upland, rice is planted in small terraced plots on hillsides and limited water condition nearly without public irrigation On the contrary, rice

in the lowlands is grown in much larger, flat fields and harvested twice per year Producers

here also take advantage of the well-constructed irrigation system (Figure 2.b) and many productive infrastructures

Concerning Seng Cu rice production, the study chooses four largest production-area communes from two districts, existing in two different ecological zones (i.e upland versus lowland, in accordance with rainfed versus irrigated) Figure 2(a) maps (i) two lowland communes, namely, Muong Vi and Ban Xen (green 1 and 2, respectively); and (ii) two upland communes called Nam Lu and Lung Khau Nhin (orange 3 and 4) The results of in-depth interviews of the agricultural officials indicated that the majority of rice growers in those communes, more or less, are planting Seng Cu rice, but the proportion of their

(a)

(b)

v nj(c)

Paracel

Islands

Spartly Islands

cultivated land spent for Seng Cu rice fluctuated significantly, especially in the uplands Arguably, the purpose of Seng Cu cultivation strongly influences this difference While lowlanders aim to maximise profit, uplanders prioritise food security This is why upland rice farmers tend to plant high-yielding hybrid varieties, not Seng Cu rice

The household survey with the stratified random sampling method was carried out

in 2016 The structured questionnaire was used to collect primary data on (i) the specific characteristics of the household; (ii) Seng Cu rice-farming practices and input management; (iii) costs and income generated from Seng Cu rice production; and (iv) the households’ feedback on two important services, agricultural credit and extension The sample size was calculated by the following formula used in the work of Cochran (1977):

n = ( )

Where: n is the sample size; Z is the statistical value containing the area under the normal curve (e.g Z = 1.96 for 95% level of confidence); p is the estimated proportion of a feature that is present in the population (in general, the p value is equal to 0.5); and e is the

desired level of precision (7.5%)

Based on the above equation, the sample size of 170 households is identified However, the authors removed 10 non-representative outliers and divided the 160 remaining observations into two ecological production zones, containing 80 rice-growing households (see more at (Bui et al., 2018))

To analyse the costs and benefits of other actors in the Seng Cu rice chain, the authors conducted 31 individual interviews, including 9 small collectors in upland communes, 10 large collectors in Lao Cai city and districts, and 12 retailers in Lao Cai city in 2017 through convenience and judgment sampling methods The authors also interviewed annually the local authorities 2015 to 2017 at three administrative levels to have an overview of subsidised programmes for the agricultural sector, including Seng Cu rice

3.3 Data Collection

The study collected both secondary and primary data in order to achieve qualitative and quantitative analyses For each type of data source, the collecting methods are elaborately described below

3.3.1 Secondary data collection

Normally, a study is started by identifying the research questions existing in the subject area through archival research, which provides the historical context to the observed data changed over time and relevant issues This type of activities is conducted through the analyses of existing materials and published/unpublished written documentations (Angrosino, 2007) In this research, archival research, firstly, gathered all previous reports and relevant official statistics about the given regions and the socio-economic situation in the locality The result of this step is to identify the proper research sites and representative agricultural products for the study (Seng Cu rice) Moreover, this data source also supports and/or compares the primary data collected from the fieldwork in the next steps Moreover, the second type of documents which serve literature review and discussion, etc are also collected It consists of articles, books, consultancy reports, technical notes, project reports, government official reports, policy documents, and so on

3.3.2 Primary data collection

Primary data is the original data, served for the specific studying purposes, therefore, the researchers have to organize and conduct by themselves to collect accurate information It exists in the diversity of types, like numeric, textual, visual or a combination

of the above (MacIntosh & O'Gorman, 2015)

Participant Observation is defined as an ethnographic research approach in which the researcher’s participation in the lives of the local people while also maintaining an appropriate distance in order to develop ongoing relations with the people in it, and actively reflects on what is going on (Emerson et al., 1995; Fetterman, 2009) However, in this study, the research likely priorities the studied issues among the local ongoing background due to the limitation of time and funding This method plays a pivotal role to what extent, in the evaluation of the validity of data collected through the interview (Kelly, 2005) It is important to note that finance is usually a sensitive and delicate topic in any society

In-depth interviews were frequently conducted with officials working at Lao Cai Development of Agriculture and Rural Development and clerks of the agricultural banks in the research site as well as stakeholders directly involved in the chain

Group discussions are held for 8 to 10 household participants to identify the current local rice farming practices and the reasons why farmers did not (want to) apply advanced practices; the main difficulties and how to overcome them Besides this, the role of SC rice

in household’s economic opportunities, livelihood and culture is also sketched out

Household survey is a very important stage among data collection process This method is considered the most suitable in the case of a heterogeneous population (Shallabh) The structured questionnaire and face-to-face individual interviews were applied to capture (i) the specific characteristics of the household; (ii) SC rice farming practices and input

management; (iii) costs and income generated from SC rice production as well as other economic activities; and (iv) the farmers’ feedback on two important services, agricultural credit and extension

3.4 Data Analysis

In order to evaluate the impacts of contract farming on Seng Cu rice production, in this study, the authors divided the whole sample into three subgroups based on the scale of cultivated land for Seng Cu rice and their status whether they contract with an enterprise or not In mountainous provinces like Lao Cai, the scarcity of agricultural land is popular On average, the agricultural land per local household was 0.82 ha in 2016, therefore, almost rural households are small operational holdings, that is no worth to apply the threshold less than 2 ha of land, that is popular in the world (HLPE, 2013) Yet, the author divides the sampling size into three underlying subgroups based on their cultivated area owning The household belongs to 25% of the smallest Seng Cu rice area in the year surveyed is considered the small scale group Similarly, 50% and 25% of 160 households surveyed has larger areas are categorized the medium and large scale groups, respectively More detailed, there are 40 households labeling small scale farmers, who had average SC rice cultivation at 0.15 ha And, 80 medium-scale farmers planted 3.1 ha in that year Similarly, 40 large scale farmers used 8.8 ha for Seng Cu rice growing, and they often harvest twice times per year

Comparative analysis within subgroups always apply the Student’s T-Test to determine whether the sample means of two continuous parameters are significantly different from

each other or not

The study uses main indicators in the value added analysis named Value Links 2.0 and proposed by GIZ (Springer-Heinze, 2018) as follow

Intermediate Cost (IC) includes the total value of purchasing variable inputs (goods

and services) used the agricultural production cycles

Gross Output (GO) is the total value of main and by-product outputs generated Value Added (VA) is the total worth created on agricultural production and calculated the following equations: VA = GO - IC

3 Results and discussion

3.1 An overview about Seng Cu rice value chain in Lao Cai

3.1.1 Main characteristics of participants in the Seng Cu Rice Value Chain in Lao Cai

In order to sketch out a clear picture of finance along with the Seng Cu rice value chain, the authors divide into three main components The first is the description of farming practices of the Seng Cu rice-growing households, therefrom, assess its influence and households’ characteristics on productivity (see more from(Bui et al., 2018)) The Frontier 4.1 Program and Stochastic Frontier Analysis (SFA) was applied to measure the technical efficiency of each household surveyed It is important to note that households should adjust current farming practices and be facilitated access to some important services (irrigation,

extension, and credit) to improve production effectiveness (ibid) The second part focuses

on the cost and benefit analysis of each type of value chain actors and the distribution of benefits among them (Bui et al., 2019) Some main important points will be summarized in the underlying paragraphs Finally, the central contribution of this paper is to describe how are main financing source existing in the chain performing and who are involving in Besides this, the paper also examines its impacts on the operational chains, of which focus

on the influences of contract farming on households Clearly, producers play a crucial role

in determining the quantity and quality generated

As the early stage of value chain analysis introduced by (M4P, 2008) and Heinze, 2018), identifying the chain participators and mapping the marketing channels must

(Springer-be always clarified It can (Springer-be seen from Figure 2 illustrates that there are five main actors participating in the Seng Cu chain in Lao Cai They consist of (i) input suppliers, (ii) producers (in upland and lowland), (iii) small collectors, (iv) large collectors, and (v) retailers They also parallel with five key value-addition phases, including input supply, production, collection, processing, and trading Besides producers, marketing actors (comprising the Tien Phong Cooperative (T.P.C), the Muong Khuong Cooperative (M.K.C) and large collectors), also have a pivotal role in the chain’s development Here, this type of wholesaler is responsible for multiple functions in the post-harvesting phase (collecting, processing, trading, delivering), requiring high technology to manage the quality of milled rice Furthermore, six market channels in the chain to transform raw materials into final customers of the product

Our in-depth interviews reveal that large collectors account for the biggest share of purchased paddy output (approximately 80% for 4,000 tonnes in 2017) In which, they collected about 60% and 50% of total amount paddy produced in the upland and the lowland areas, respectively Sadly, the study points out that these actors often deliberately mix ordinary rice with Seng Cu to pursue the maximizing-profit, resulting in strong reduction of quality and significant dissatisfaction of high-end customers

Figure 2: Marketing Channels of Seng Cu Rice in Lao Cai (Source: In-depth interviews, 2016-2017) T.P.C and M.K.C are two business units exploiting the trademarks “Seng Cu Rice Lao Cai” and “Seng Cu Rice Muong Khuong” and establishing the contract farming with producers in order to better manage the quality of paddy However, T.P.C and M.K.C just only bought about 700 tonnes (about 14%) and 200 tonnes (4%) at the same year observed

In fact, they want to scale up their performance to optimize the utility of the processing machinery system invested before The reason explaining for their tiny volume collected was a financial shortage and they just borrowed a small size of loan from the local banks due to lack of collateral or low assessment of mortgage assets by clerks, or both Clearly, it needs interventions from local authorities to facilitate credit access for potential agribusinesses and/or agro start-ups, at the same time, enhance the awareness of large collectors in protecting the trademark and quality of this special product

3.1.2 Opportunities and challenges in development of Seng Cu rice chain in Lao Cai

The section is derived from the findings in the Seng Cu rice value chain analysis mentioned above (see more (Bui et al., 2019) and (Bui et al., 2018))

Table 1: SWOT analysis of production phase in the Seng Cu rice in Lao Cai

SWOT

Strength (S) S1: Strong trademark of SC

rice

S2: Many producers have

relatively good experiences

in rice production

S4: High quality leads to

high selling price and economic benefit for chain actor, especially producers

S5: Established the link

between fertilizer companies and producers

S6: Set up the linkage

between producers and the marketing actors (TPC,

MKC)

Weakness (W) W1: Most of producers have

low education, low bargaining power, and then, receive lower

price

W2: improper farming

practices

W3: financial shortage and

many obstacles to access preferential credit W4: outdated technology in processing and storing

W5 Quality decline due to the

deliberately mix ordinary rice into SC rice to maximise profit

W6: Established linkages are

still weak

Opportunities (O)

O1: suitable natural condition

O2: large potential for

expanding the growing area

O3: SC rice is highly paid

attention by local authorities

O4: Supporting policies on

special agricultural products

Breakthrough strategy:

(1) Strengthen the farmer - enterprise linkages (i.e

production and consumption) (2) Enhance the production capability through the common interest groups (i.e vertical links)

Adapting strategy:

(6) Enhance the effectiveness of extension and share the knowledge among CIGs’ members 7) provide training for group leaders of collective groups about market knowledge,

for both producers and

agribusiness

O5: The increasing demand of

high-end customers on SC rice

O6: Vietnam has signed and/or

jointed a vast regional and

SC rice

(9) Facilitate credit access both

farmers and agribusiness

Threats (T)

T1: difficulty in production

because insects are attracted

by its perfume, causing vast

diseases

T2: Poor infrastructure and

important public services

(irrigation, credit, extension)

T3: Lack of appropriate

machines in terraced fields,

T4: Easily affected by climate

change and nature-related

risks

T5: Weak governance of local

authorities

T6: High competitiveness from

other high-quality rice

big rice planting region

Protection strategy:

(10) Increase to effectiveness of agricultural extension and technology application to help producers achieving sustainable farming practices based on the principle “Gain more for less” suggested by WorldBank (2016) (11) Suggest suitable solutions against nature-related risks, better performance when crop disease outbreak occurring (12) Enhance trade promotion activities and advertise clean products in business link (12) Increase the coordination among relevant departments and chain sectors as the PPP

model

Source: authors After the result of strength, weakness, opportunity, and threat (SWOT) analysis is the set of strategies for upgrading this important agricultural value chain Briefly, there are four main plans based on SWOT analysis, comprising Breakthrough strategy (S-O); Adapting strategy (O-W); Regulating strategy (T-S) and Protection strategy (T-W) In doing

so, the relevant actors are able to determine 12 specific activities in order to boost effectively the Seng Cu rice value chain and each chain participant

3.2 Value chain financing mechainisms in the Seng Cu rice chain

Lao Cai is characterized by the multifaceted importance of Vietnam: border province, close to China; homeland of the poor; cultural diversity of ethnic minorities; mountainous terrain, scarcity of agricultural land and agriculture as the major livelihood of local people For these reasons, the Vietnamese Government always pay attention in regional development through various financing supports over three past decades It is evident that in rural Lao Cai, there is the co-existence of formal, semi-formal and informal

financial suppliers and non-reimbursable Government’s subsidies Formal sector, VBARD and VBSP, consists of two state-owned and well-intended banks as the powerful tools of Government in agricultural development and poverty reduction Its plenty of loanable fund help them to make up a predominant market share in terms of amount of clients and outstanding loan Yet, the upper hand of these bank in rural financial market as quasi-monopoly has still been controversial and various criticisms from international donors and researchers (Bui et al., 2019; Dufhues, 2007; Sauli et al., 2017) Under this financial market in rural areas, access to formal credit often one of the most obstacles of farmers (Bui et al., 2019; GSO, 2016) and agro enterprises (Sauli et al., 2017) Table 2 illustrates the actual access and usage financial sources of all participants in Seng Cu rice value chain based on our field trip study in Lao Cai province

Table 2: The main financing sources and its popularity in the value chain of Sengcu rice in Lao Cai

Sources

Participants

VBARD VBSP Gov subsidies NGOs Informal loan Trade credit Contract farming

in the field trip, that can be better evaluated the production capability (human, natural, physical and capital owning), leads to inaccurately assessment and ill-timed disbursement