Factors affecting inputs procurement in debt of rice farmers in An Giang province.

It was discovered that the lack of capital for rice production and the cost of inputs are key elements to impact positively on rice farmers who procure inputs in debt.. In addition, hous

MBAVB4

PHAN BA NGOC PHUONG

FACTORS AFFECTING INPUTS PROCUREMENT IN DEBT

OF RICE FARMERS IN AN GIANG PROVINCE

MASTER PROJECT MASTER IN BUSINESS ADMINISTRATION

(PART-TIME)

Tutor’s Name: Dr NGUYEN MINH HA

Ho Chi Minh City

(2011)

All collaborators, who have been working for Vietnam Farmers’ Union in Tinh Bien district, An Giang province helped me to interview rice farmers

All of my family members have encouraged and sympathized with me during the study period as well as completing this thesis

ABSTRACT

Vietnam is a developing country which is contributed mainly by agricultural production and is the second largest exporter of rice in the world, and mostly quantity comes from Mekong River Delta, called the rice bowl of Vietnam Mekong River Delta not only has three main conditions: “vantage of circumstances - vantage of the location - human vantage”, but also gets lots of interest of government in investing and developing for success in agriculture In reality, the truth is that most of rice farmers are poor, even abject poverty They are always in debt when purchase of inputs with powerlessness Why and what happens? That’s why this study is executed

This paper is not ambitious to find out neither all of the reasons nor the solutions to improve the rice farmer’s life in Mekong River Delta, but it tries to figure out key factors driving them to procure farm inputs in debt or on credit Therefore, this study dealt with the reason why almost rice farmer in Mekong River Delta has to procure farm inputs in debt Accordingly, questionnaires, interviews and observation are used to reach the results of this study After collection and analysis of data by using SPSS version 11.5, the interpretation revealed precise results that satisfied the curiosity of the researcher It was discovered that the lack of capital for rice production and the cost of inputs are key elements to impact positively on rice farmers who procure inputs in debt

It was also found that householder’s rice growing experience, rice selling price, residential area, and value of the property effect negatively on inputs procurement in debt of rice farmers In addition, household size, farm size, and interest of purchase of inputs in debt affected positively rice farmers when they purchase inputs on credit And,

at the end, some recommendations and conclusion have been made to finalize the research

TABLE OF CONTENT

DECLARATION i

ACKNOWLEDGEMENT ii

TUTOR’S COMMENT iii

ABSTRACT iv

TABLE OF CONTENT v

CHAPTER ONE: INTRODUCTION 1

1.1 Rationale of the study 1

1.2 Research objectives 2

1.3 Research questions 2

1.4 Research methodology 2

1.5 Scope and limitations 3

1.6 Structure of the study 3

CHAPTER TWO: LITERATURE REVIEW 5

2.1 Definitions 5

2.2 Theories of household’s debt 6

2.2.1 Theories of poverty 6

2.2.2 Reasons for households purchase goods in debt or on credit 10

2.2.3 Consequences of the indebtedness 11

2.3 Reviewing previous studies 14

2.4 Hypotheses of rice farmers procure inputs in debt 22

2.5 Overview of Vietnamese household and rice farmers 23

CHAPTER THREE: RESEARCH METHODS 28

3.1 Research procedure and design 28

3.1.1 Research procedure 28

3.1.2 Research design 29

3.2 Data collection 30

3.3 Analytical tool 30

3.4 Data analysis process 31

3.5 Suggested research model 31

CHAPTER FOUR: EMPIRICAL RESULTS 37

4.1 Descriptive analysis 37

4.1.1 Householder’s age, gender and number of members in household 38

4.1.2 Householder’s education and experience in rice growing 38

4.1.3 Rice productivity and selling price 39

4.1.4 Cost of rice production 40

4.1.5 Cost of living 40

4.2 Correlation analysis 40

4.2.1 Multi co-linearity test 40

4.2.2 Autocorrelation test 41

4.3 Empirical results 42

4.4 Summary 49

CHAPTER FIVE: CONCLUTION AND RECOMMENDATIONS 50

5.1 Conclusion 50

5.2 Recommendations 51

5.3 Limitations 54

REFERENCES 56

APPENDIX 64

Appendix 1: Correlations 64

Appendix 2: Scatter Chart of Independent Variables 65

Appendix 3: Questionnaire 72

Appendix 4: List of respondents 79

LIST OF TABLES

Table 2.1: Rice seasons in the Mekong River Delta 25

Table 4.1 Result of descriptive statistics 37

Table 4.2 Number of members in household 38

Table 4.3 Descriptive Statistics of Rice Productivity and Selling Price 09-10 39

Table 4.4 Durbin Watson 42

Table 4.5 Result of multiple regression analyses 42

LIST OF FIGURES

Figure 2.1: Conceptual Map of Theories of the Causes of Poverty 8

Figure 2.2: Vietnam’s rice yield for period of 2006 – 2010 24

Figure 2.3: Vietnam’s rice export output and value for period of 06-10 24

Figure 2.4: Map of Mekong River Delta 26

Figure 2.5: Map of An Giang Province 27

Figure 3.1: Proposed research model 32

LIST OF ABBREVIATIONS AND ACRONYMS

GDP : Gross Domestic Product

IT : Input Trader

IMF : International Monetary Fund

IPM : Integrated Pest Management

MRD : Mekong River Delta

SPSS : Statistical Package for the Social Sciences

WB : World Bank

CHAPTER ONE INTRODUCTION

1.1 Rationale of the study

Vietnam is one of the largest countries in exporting agriculture products in the world, especially rice with the quality and value achieved 6.88 million tons and 3.23 billion USD in the year of 2010, it is the second largest exporter in the world Ninety percentage of rice exported quantity comes from Mekong River Delta (MRD), and food per capita in this zone accounting for 2.3 times in compared with the whole country At present, population in MRD is about 20 million people and 60% of these are farmers However, the farmer’s life in this region is too low with 900USD of GDP per capita against 1,200USD nationwide Poor households which have income lower 4.8 million VND per year, in Mekong River Delta are 12.60%, higher than Red River Delta (8.3%) and South East (2.3%) regions (General Statistic Office of Vietnam, 2010) The poverty always makes them in debt, debt for daily living and especially for inputs procurement

It is a vicious circle of farmers between poverty and indebtedness This is also true for the researcher’s observation with over 10 years experience for companies in plant protection distribution Nowadays with many progress of scientific techniques in agricultural sector, particularly in rice production for Vietnamese farmers, it can be seen that there are many new varieties with advantages of high yield, disease prevention, and fallen against strong winds, etc In addition, there are many kinds of fertilizers, pesticides, growing stimulation substances that are helpful for farmers to prevent diseases and to improve rice productivity Moreover, the elements of weather and soil conditions in the MRD are quite favorable for paddy cultivation as comparison to Central and Northern areas of Vietnam So why is the rice farmer still poor and falling into indebtedness chronically? According to Vo Tong Xuan (Thesaigontimes, 2011), the farmer, particularly the rice farmer has to pay high price of inputs and spend too much for cultivation that increase cost of goods while rice selling price is not directly proportional In the other hand, the rice farmer has to procure inputs in debt with usurious interest rate and therefore they have to sell rice immediately after harvest at

prices lower than market prices in order to pay back debt Do these main factors lead rice farmer falling into indebtedness and purchase of inputs indebt spirally? Therefore, this paper would like to find out what factors affecting inputs procurement indebt of rice farmers in Mekong River Delta, especially in An Giang province

1.2 Research objectives

The overall objective of the study is to find out main elements affecting the rice farmer

in purchase of farm inputs in debt or on credit The specific objectives of this paper are following:

- To identify factors causing purchase of inputs in debt and default of rice farmers

- To measure factors effect to rice farmer in inputs procurement in debt

- To suggest some policy implications for rice farmers to avoid getting indebtedness and default

is used for precise analysis of the reliability and validity of the measures, multiple regression of model as well as explanation of results of this research

1.5 Scope and limitations

As known, An Giang province is one of the largest rice growing areas in the Mekong River Delta as well as many rice farmers achieve high popular productivity in the country In particular, Tinh Bien district has many rice growing villages such as An Phu,

An Hao, Nui Voi, Vinh Trung, and Tan Loi Beside, other communes also have large areas for agricultural production Nevertheless, five communes as mentioned are convenient for data collection, thus these communes are chosen to make a survey and scope of research is bounded in these five communes for the thesis

Main studied subject was householders who have been growing rice on the areas mentioned above

1.6 Structure of the study

Chapter 1 is introduction part This chapter introduces rational of study, research objectives, research questions, scope and limitation, research methods as well as expected contributions

Chapter 2 is literature review This chapter presents concepts of credit, trader credit, consumer credit, debt, and household debt In this part, overview of Vietnamese households and rice farmers are generally referred In addition, it also indicates literature review about theories of household debt, key factors driving rice farmers in purchase of inputs in debt as well as relevant previous studies Then a research model will be suggested and hypotheses will be given out

Chapter 3 is research methods This chapter provides research methodology, the way to collect and filter data as well as to process the data

Chapter 4 is empirical results In this chapter, through descriptive statistics, relationships between variables, and multiple regression analysis model, the result will be determined the influence of factors in purchase of inputs in debt or on credit

Chapter 5 is conclusion and recommendations Through data analysis and findings from previous chapter, papers in this chapter aim to brief conclusions, research results obtained as well, and then policy recommendations The limitation to the topic and suggestions for further research will be also mentioned

CHAPTER TWO LITERATURE REVIEW

In chapter 1, overview of research problem was presented Chapter 2 discusses previous research relevant to this thesis A review of theory concepts of credit, trader credit, consumer credit, debt, household debt, and a proposed research model are mentioned in chapter

2.1 Definitions

Credit is the trust which allows one party to provide resources to another party where that second party does not reimburse the first party immediately, but instead arrange either to repay or return those resources at a later date The resources provided may be financial or they may consist of goods or services Credit encompasses any from of deferred payment (Wikipedia, 2012)

Trade credit: as credit is used in commercial trade that called “Trade Credit” to refer

the approval for delayed payments for purchased goods Trader credit can be in the form

of inputs provided to farmers or in cash or in kind advances, based either on repayment

at harvest or on agreed purchase (Douglas, 2003)

Consumer credit: can be defined as ‘money, goods or services provided to an

individual in lieu of payment Some forms of consumer credit include personal loans,

retail loans and mortgages, etc (Wikipedia, 2012)

Debt: is an obligation owed by one party (the debtor) to a second party, the creditor;

usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value A debt is created when a creditor agrees to lend a sum of assets to a debtor Debt is usually granted with expected repayment, in most cases, of the original sum plus interest According to Elizabeth (1996), debt can be classified into broad

categories Borrowing for consumption purposes in intended to meet the daily or seasonal needs of household or to finance contingencies The second category includes borrowing intended for production and investment purposes

Household debt is the debt owed by persons living in households, as opposed to

business debts It includes consumer debt and mortgage loans held by members of households for the homes they live in Through these concepts, household debt is represented by consumer credit (Wikipedia, 2012)

2.2 Theories of household’s debt

2.2.1 Theories of poverty

According to Ted (2006), there are five theories of poverty in contemporary literature, including: (1) Poverty caused by individual deficiencies; (2) Poverty caused by cultural belief systems that support subcultures of poverty; (3) Poverty caused by economic, political, and social distortions or discrimination; (4) Poverty caused by geographical disparities; and (5) Poverty caused by cumulative and cyclical interdependencies

The first theory of poverty is a large and multifaceted set of explanations that focus on the individuals who are responsible for their poverty situation Some conservative theoreticians blame individuals in poverty for creating their own problems (individual laziness, bad choice, incompetence, inherent disabilities), and argue that with harder word and better choices the poor could have avoided their problems Other variations of the individual theory of poverty ascribe poverty to lack of genetic qualities such as intelligence that are not so easily reversed

The second theory of poverty roots its cause in the “Culture of Poverty” This theory suggests that poverty is created by the transmission over generations of a set of beliefs, values, and skills that are socially generated but individually held Subculture adopts values that are non-productive and are contrary to norms of success In this case, individuals are victims of their dysfunctional subculture or culture

The third theory of poverty derives from the economic, political, and social system which caused people have limited opportunities and resources with which to achieve income and well being It means that systematic barriers prevent poor from accessibility and accomplishment in key social institutions including jobs, education, housing, health care, safety, political representation, etc

The forth theory of poverty is a spatial expression of the capitalist system This theory mentions to the fact that people, institutions, and cultures in certain areas lack objective resources needed to generate well being and income, and that they lack power to claim redistribution because social advantages and disadvantages concentrate in separate areas

The final theory of poverty is concerned with spirals of poverty, problems for individuals (earnings, housing, health, education, self confidence) that are interdependent and strongly linked to community deficiencies (loss of business and job, inadequate schools, inability to provide social services), etc

According to Blank (2003), cited in Michael (2006), there are six major theoretical approaches that describe the fundamental causes of poverty Blank started with the perspective of economic underdevelopment and the absence of effectively functioning markets She also suggested that poverty could be alleviated through the expansion of markets to poor regions such as the third world and stagnant regions In second perspective, Blank pointed out the lack of human capital development where individuals are either unprepared or unable to participate in the workforce In the third perspective, she noted that the market is inherently dysfunctional and thereby create poverty To capitalist society in Marxist viewpoint, it makes the cost of labor lower through the threat of unemployment and therefore poverty can be alleviated through regulation of the market The fourth perspective identified the social political forces that occur outside the market, such as political favoritism and racism that contribute to poverty In the fifth perspective, poverty is attributed to individual behavioral characteristics and choices, such as marriage, family size or alcohol and substance abuse Values about work and education that underlie this perspective suggest that the problem of poverty is within the control of the poor themselves and therefore the policies and programs need to influence

those choices through incentives or prohibitions The final perspective suggested that poverty is caused by the Governmental subsidies to alleviate poverty, referred to as social welfare dependency because welfare provides a guarantee for their livelihood It

is a reason people lives on governmental subsidies so much that they fall into poverty trap

Figure 2.1: Conceptual Map of Theories of the Causes of Poverty

Source: Blank, 2003

Theories

of Poverty

Theory #1:

The economy is underdeveloped

or inefficient

Theory #2:

Poor people lack skills and abilities

Theory #3:

Capitalism causes poverty

Theory #4:

Social and political force cause poverty

According to Waheed (1996), Dominique and Dileni (2000), Bales (2001), Wan and Cratty (2007), and World Bank (2007), cited in Nguyen Minh Ha and Nguyen Huu Tinh (2010), there are some elements effecting on poverty as follows:

 Career: The employee working in the agricultural sector often has lower

income than workers in the industrial or trade and service sectors because they bear many risks such as natural disasters, pestilent insects, low selling price of outputs, unstable price of inputs, etc Therefore, the probability of leading to poverty of the laborers working in agricultural sector is higher than laborers working in industry or trade and services sector

 Education: In rural areas, most of people have low education and they are

often a lack of understanding and lack of ability to acquire knowledge in service of production to generate income to feed themselves and their families So they often fail in agricultural production and it leads them to low income and poverty as well as lack of capital reproduction

 Household size: The higher number of household members has the lower

spending per capita is, and the proportion of dependents increase and it leads to the poverty worst This is reasonable because household income is generated from a certain number of members in family but to be spent for all household members

 Farm size: Farm land is the main means of production and is critical element

to household’s agricultural production in generating income Therefore, the lack of farm land or no land will lead farmers to low income and they will have no enough food to feed their families and fall in poverty

 Accessibility to formal credit: Formal credit sources play an important role

for production and business It helps to increase income for household and is a key factor to eradicate poverty If household could not access to formal credit, households would lack capital for production and this may lead crops to low productivity In other case, households must borrow from informal sources for their investment and this may

lead them to higher costs because of exorbitant interest rates from informal money lenders

2.2.2 Reasons for households purchase goods in debt or on credit

Purchase of goods (either for consumption or household investment) on credit or in debt

is real needs of households and when purchase of goods in debt or using of credit transaction takes place, the household may avoid using cash in advance Of course, it is also costly in that case but they have no alternative choices as facing with daily necessities or needs of production Purchase of goods in debt or on credit depends on many different factors of the economy as well as conditions of the households such as life cycle, disposable income, savings, poverty, unemployment status, inflation, recession, interest rates, etc All cash transactions are subject to cash in advance constrains while credit transaction can be financed by current income (or expected income in future) (Lucas and Stokey, 1987) Based on the research done by Isabelle et al., (2011), households are borrowing on a daily basis at slack financial times to make ends meet Coles (1992), cited in John (2004) explained that income shocks and unemployment could reach 25% of arrears and typically could be prone to self employed consumer In addition, poverty is main cause of purchase of goods on credit (Pujari, 2011) This can be understood that consumer credit reflect the transfer of household consumption from period of high income to the period of low income Household uses credit to bridge temporary drops in income and they use it to address specific needs The demand for credit of household will be ultimately derived from the underlying plan for consumption and its deviation from income and expenditures (Gantinah, 2007) defined According to life-cycle model, the demand for credit would arise wherever current income and spending possibilities fall short of consumption wishes In other words, within this model, credit is simply used to transfer consumption from periods where household income is high to periods where household in come is low (Albert and Franco, 1963) As well, Bridges and Disney (2004) suggested that individuals will spend some parts of their life in debt whilst saving and declining assets in others of the life-cycle Ariyapruchya., et al (2004), cited in Ke and Mali (2008) found that low income,

low age, low education, and occupations such as farm operator or low-skilled laborer tend to be associated with greater demand for loan Whereas, Arvai and Toth, (2001), cited in Ke and Mali (2008) argued that the education level of the head of household, household income, future income expectations and past borrowing experience have positive effect on the propensity to borrow

Once the financial situation of households is negative that lead household in debt as procurement on credit The study of Barnes and Young (2003) proved that shocks to real interest rates and income growth expectations, combined with demographic changes explain the growth of household debt This research also indicated that in the period of productive age (40 – 65 years), financial asset holding increases rapidly as a consequence of consumption-income interaction It can be understood that demographic factor impacts to household credit

The rise in household indebtedness has largely reflected a growing tendency of households to extract equity from the value of their house to finance consumption (Barba and Pivetti, 2008) They also argued that household would tend to borrow to fund current consumption in periods when income is low, relative to average income over their lifetime, with a view to then repaying the loans in periods when income will be high, relative to average lifetime income Other aspect, Norhana and Toh (2009) asserted that the low inflation rate and low interest rate environment that has reduced the cost of borrowing and increased the incentive for households to borrow to smooth their desired path of consumption over the life cycle

2.2.3 Consequences of the indebtedness

Maki (2000) studied that high debt-service burden could make consumption more sensitive to a drop in income or expected future income In his research, he also showed that when household debt service burden is high, household may be more likely to curtail spending because they must devote each month to service their debt Moreover, econometric analysis indicates that the lagged debt service burden is a statistically significant predictor of current delinquencies, which suggest that the measure is a useful

harbinger of household distress as well as predict changes in individual bankruptcies Carthy (1997), cited in Maki (2000) elaborated that an increase in debt-service burden could push up loan default that leads to credit consumption crunch This in turn could drive consumption down In the event of an adverse shock, risk in indebted household might have driven household to adjust their balance sheet and eventually drop down their consumption plan (Gantinah, 2007) In sum, when household income comes in lower than expected as well as high debt service burden, a household that took debt or purchased of goods on credit would cut back spending acutely than others who had not procured in debt or on credit

Antzoulatos and Copelman (1996), cited in Berrak and Neven (2006) recognized that the ease of credit constrains direct household to indebtedness boom and this may force household in financial pressure, as well as in increasing default risks and spiral cycle will start again

Land and other assets are mortgaged to moneylender for a mount of money, if household could not repay the principal and interest, the moneylender would take land or assets There are many reasons driving household to fail repayment, they may result from sheer bad luck, lack of commitment, unfeasible planning or unwillingness to comply with credit obligations These may lead household to distress pressure and bankruptcy risk Once household may fall into default, credit transaction could be constrained and interest rate may be exorbitant for new loans which are beginning of real debt crisis of the household This is thoughtfully recognized by Binswanger and Sillers (1983); Chavaes and Sánchez (1998); Zeller et al., (1997), cited in Edward and Ramón, (1998) that as a household’s level of indebtedness rises, it is forced to borrow from other informal sources, such as moneylender, traders, merchants and processors, but at higher interest rates and transaction costs, leading to effective real interest rates that can increase to as much as 100% per year Household can easily find themselves caught in a vicious cycle between debt, poverty and resource degradation as well as find themselves

in chronic debt to finance basic consumption and production needs (Edward and Ramón, 1998)

Study of May and Tudela (2005) explained that experience of household debt problems increases the probability of today’s arrears This model also indicated that unemployment and income gearing play important roles in explaining repayment problem in household debt As we knew, household borrows or purchases goods in debt (on credit) are dependent to their needs, but capacity to pay back depends on disposable income Therefore when households fell into unemployment status, low remuneration or slack of finance, etc it may lead them to arrears and related corollaries How is about rural households? It may have the same consequences to household who are living in city However, rural households or farm households may take more risks than urban households because their livelihoods are dependent on agricultural production as their main source of income Unfortunately agricultural production always faces to high risks with frequent crop failures (from natural calamities, pestilent insects, etc) These elements, excluding costs of cultivation and low selling price which leads higher household indebtedness over time This can cripple household capacity to increase income levels It is particularly true in developing countries where resources are limited Moreover, once farm household could not escape the cycle of debt, they committed suicide In most suicide cases about 75 percent of the household’s indebtedness was to informal moneylenders rather than formal sources (Sainath, 2010, cited in Malcolm Harper, 2011) According to Malcom (2011), that was a dramatic social phenomenon reported in many countries such as Mexico, Brazil, Japan, Russia, United Kingdom, India and United State Pujary (2011) mentioned a well known saying in India: “The farmer is born in debt, lives in debt and dies in debt.” In a more complete perspective of rural household debt (Amrit, 2010) generalized that debt can become a distress phenomenon if the borrower’s crop fails due to use of poor quality inputs, unprofitable investment, natural calamities, other unforeseen reasons, or if production becomes uneconomic because of high input cost, lack of remunerative prices which make it impossible for household to repay the principal and interest of debts In many cases interest becomes debt service burden for household it may force them to mortgage or sell land, thereby loosing their means of food security and livelihood These

indebtedness and failure to pay back the debt can be one of the important causes for household’s suicides

2.3 Reviewing previous studies

As mentioned in previous part, MRD is the heart of rice production region and contributes a large mount of exporting rice (after Thai) Nevertheless most of rice farmers are poverty and facing to many difficulties in daily living Because of prolonged abject poverty, the rice farmers often lack of capital for investment to new crops yearly

In order to produce rice cultivations, most of them must purchase inputs on credit or informal money lenders (also input trader) who are willing to provide them credit in cash or in kinds (such as seeds, fertilizer, pesticides, etc) This starts the vicious circle: lack of capital for rice production, buying inputs on credits or asking a loan, then falling into debt and default

Pujari (2011) indicated the main cause of the indebtedness of the farmers is their poverty The farmer has to borrow for various purposes, as he has no past saving of his own Some times, the crops fail because of the failure of seasonal reversing winds, or because of floods, etc when he has to make some improvement on his land as building, construction of well, etc or when he has to buy costly facilities, he is forced to borrow Pujari also pointed poverty forces farmer to borrow, and if the crop fails or low yield that will forces him to have so little for paying off his debt

In the report of Vietnam Poverty Analysis (2002) identified poverty in Vietnam is highly concentrated in rural areas - with around 90 percent of poor living in rural areas Therefore a higher proportion of population lives below the poverty line in rural areas than in urban areas

Pujari (2011) also mentioned some of debt may be inherited A person inherits his farmer's property; likewise he inherits his father's debt too In many cases bonded laborers continue to be so, often for generation As a consequence, when farmers are in debt or given credit in kinds because of poverty, they lose advantages in adopting

modern farming practices This could make them paralyzing in increasing their income levels and their earnings is mostly spent for repayment and then agricultural improvement would be neglected Many smaller farmers are in near permanent indebtedness, usually to pay off debts, only to then fall into new debt in order to pay for agricultural inputs and other household expenditure (Andrew, 2001)

According to Isabelle et al., (2011) households are borrowing on a daily basis at slack financial times to make ends meet They also borrow considerable amounts to marry their children, renovate their houses or invest in private education In examining the main causes of over indebtedness, the most frequent are ceremonies (42.65% of households), housing (25%), health (23.53%), agricultural investments (17.65%) and private education expense (16.18%) As Maslow's hierarchy of needs showing physiological needs are the literal requirements for human survival such as foods, clothing and shelter, etc Higher level is safety and security needs such as health and well-being Those needs are the most part of farmers in general

Mitra et al., (1986), Pujari (2011), and Claudia (2011) also noted that the farmers incur certain types of expenditure as meeting food needs, education, health care, celebrating marriage, religious festivals, births and deaths, etc which automatically led them to borrowing and indebtedness Daily cost of living as a trap laid for small farmer Many farmers are at risk of a falling into a food insecurity as well as debt trap

Having viewpoint with them, Rosanna (2004) and Amrit (2010) recognized that there was an increasing resort to credit, usually at usurious interest rates The farmers were forced to borrow to sustain their living as well as to pay for medical care As a result, some farmers found themselves constantly in debt for part or all of the year Paying off last year's borrowing leaves them unable to buy food or seed this year, so they have to borrow again Once, vicious spiral happens to the poor farmers

The poor often finds themselves in a vicious circle producing at a survival level makes it difficult to accumulate savings or other assets Hence, borrowing is an important strategy that low-income households used to deal with economic stresses and to ensure

continuity in critical levels of consumption (Elizabeth, 1996) It is not only true to the poor but also to the households with higher incomes borrow for consumption purposes, Elizabeth affirmed

In their study, Ke and Mali (2008) found that individuals, in their 20-30s prefer to borrow more as their age increases After hitting a certain age threshold, this probability declines, for Bosnia is around 45 Support to this argument, Rweyemanu et al., (2003) also discussed in their study that more than 80 percent of borrowers were aged between

18 and 45 years, with a bias toward older farmers With 932 samples of rural households used in their survey in study of Rural Credit in Vietnam, Mikkel and Finn (2003) employed that households with older heads are less likely to apply for credit and elder households are less likely to undertake risks (i.e apply for loan where repayment is uncertain) Most of them have supported age of households has affected to borrowing decisions for consumption or productivity purpose Moreover, Jonathan (2003) reported debt holdings by age follow the life circle pattern in all countries observed, although the age range where the incidence and volume of debt peaks differ between countries

Demand for rural credit (in cash or in kind) could be determined by household head, household size, household income, input expenditure, farmer’s experience in farming, etc When income is very low, the marginal utility of consumption is very high This can

be understood strong demand of debt is in inverse proportion to households’ income Once income is higher, individuals can spend it to consume and need to borrow less (Ke and Mali, 2008) So, the poor farming households find themselves in chronic debt for finance daily consumption and production needs Their study is also significant in household head as proved that the head of households tends to have higher probability of participation, be less credit constrained than other members and demand higher amount

of debt Meanwhile, farmers with high input expenditures tend to borrow more The same applies to farmers with great farming experience and those with high incomes, was found by Rweyemanu et al., (2003)

Are there any relationship between land or assets owned by farm households and credit demand? Answer to this question, Mikkel and Finn (2003) confirmed land is a

statistically significant determinant of credit This can be understood that the greater landholdings the more likely a farmer is to demand credit access to fertilize and other inputs In addition, Seong (nd) pointed the debt size of large farms is likely to be bigger than that of small farms because investments get bigger as the farm size increase This means that large farm sizes have sufficient capacity to repay or use debt as one of their portfolios Looking at the landless will comprehend much more landholding’s effect to credit demand There were 48% of all loans taken by landless households are for consumption purposes (daily needs, ceremonies and medicines, etc) To the landholding, most loans for buying inputs and machinery rise with farm size (Shamika, 2003) Moreover, when farm households own lands, it can be used as collateral for formal credit It may imply that rural households with large land sizes could have a higher repayment capacity and default can be lowered if large land is undertaken as collateral (Tran, 1998; Le, 2002, cited in Robert at el., 2007)

Whereas rural households with large size of land use credit as financial leverage to increase income, the farming households with plots resort to credit as the ending solution Small and medium farmers cultivate small areas not only due to small parcel of land but also inadequate capital for buying inputs (Rahman and Takeda, 2006) Hence households are more likely to borrow once they acquire some assets or possess a large size of land to use as collateral for borrowings (Ke and Mali, 2008)

The growing of rice is dependent much on climate changes such as El Niño and La Niña oscillation Natural calamities are usually unforeseen such as droughts, heavy rain or unexpected floods can make repeated crop failures Lean season has been caused by pestilent insects force farmers to the difficulties in livelihood and production Debt is a growing problem for farmers, in many cases, indebtedness are a direct or indirect consequence of drought and floods Bad weather has meant greater expenses and poor harvests, and as a result, many farmers are now in debt (Rosanna, 2004)

Dechassa (2002) contributed that the farmers are indebted to previous loans and could not pay back their dues, largely due to lack of sufficient cash at hand Most farmers

could not purchase the inputs for the next year production as well as for the following year because drought led them to unsatisfactory harvests

Under climate change, crops in many regions will be prone to environment stresses not observed in today’s climate Many annual crops such as wheat, soybean and rice have a threshold temperature which seeds do not form properly A brief episode of hot temperature (>32-360C) can devastate crop yields (University of Reading, 2007, cited in Biksham and Thiyagarajan, 2010) Climate change causes variation in the ecological system in agriculture by increasing average temperature The eco-climatologic (crop) cycle and water system have become variable (frequency and intensity of drought, flood and rainfall has already undergone changes) and pestilent insect group have changed in regard to their bleeding behavior and resistance to pesticides (Vietnam Institute of Strategy and Policy on Natural Resources and Environment, 2009) It is found that the large portion of rice household income in MRD comes from rice cultivation account However the risks have just mentioned above as drought, heavy rains, unexpected floods

or pestilent insects that have certain effect to rice crops For these reasons, the rice farmer may have to sow again or to supplement fertilizer or plant protection solutions to save their cultivation Insect infestations and natural disasters are a serious production risk, particularly bad for rice crop

Many studies have demonstrated the use of an appropriate amount of input will help to exploit long term effectiveness of land and water resources, protect of biological control

of pests as well as to get a high productivity However, long-standing perception of farmers is the more they use inputs the higher productivity and quality of rice they can get As a result, they often abuse these supplies, causing pollution of soil, water resources and especially mark up the unnecessary cost for the crop so much

According to Helena et al., (2003) there are many scientists agree that monocultures and overuse of agrochemicals have increased outbreaks of disease Pesticide also kills so called “friendly insects”- crucial predators on pests or disease vectors – and fertilizers too can have a very harmful effect on vital soil organisms The massive use of pesticides helped resistance to develop rapidly among pests Smita (2011) considered that many of

farmers are actually consuming much pesticide that they went into debt to purchase This may worsen the farmer as they cannot escape the cycle of debt

As mentioned in the studies of Helena et al., (2003) and Stima (2011), the overuse of inputs, especially chemicals not only has caused soil to deteriorate, environment to damage but also has caused farmers to fall into debt when they attempt to purchase more inputs on credit Moreover, Rajendra (2008) asserted the chemical control to suppress the insect pests is proving ineffective as the pests have developed high level of immunity for most of such chemical pesticides used for the control of bollworm complex Such a high level of resistance requires repeated application of insecticides leading to heavy expenditure, crop failure, and vicious cycle of debt for farmers

Input prices for rice has increased rapidly, from land preparation, seeds, fertilizer, pesticides, preservation, irrigation, to harvest and post harvest, etc but the price of rice is uncertain A repeated phenomenon happens: price rice is declined as bumper crops and inverse as failure crops Debt is incurred, but the farmers only know how much income they can get after they sold their rice Many distribution layers of input traders make cost

of inputs increasingly The farmer have no choice because they have to protect their family by providing day to day indispensable needs and they have to grow rice seasonally to repay debt as well as to improve their living

Narayanamoorthy (2006), cited in Singh (2008) pointed the net income of farm households after deducting costs/expenditures from their earnings has dramatically declined in Indian Supporting for this point of view, Prabhakar (2007) indicated with the parallel increase in the cost of farm inputs under the liberalized trade regime, incomes have declined, leading to loses, debts and bankruptcies and eventually to loss of land

According to Reddy's report (2007), rising costs of cultivation, low remunerations, high risks with frequent crop failures, declining agricultural growth, and mounting debts have all led the farmer to a distress situation Rahman and Takeda (2006) also argued net returns from rice selling was still lower for small and medium farmers than for large

farmers, due to the increase of some elements of the inputs that affect the cost of production and reduce the price of the product On the other hand, when the farmers are

in debt, it is difficult for them to adopt modem farming practices This would cripple their capacity to increase their income levels as well as they cannot repay the loan taken Mostly the small farmer loses both ways gets a low price while selling his produce, but has to pay high prices while buying inputs (Pujari, 2011)

To the small farmers who always procure inputs on credit have a few choices or less power in selecting qualified inputs Because of purchase inputs in debt, the farmers virtually have no choice to quality inputs from money lender (also called IT) The consequence of this is the field gets pestilent insect easily and low productivity at the end of crop Chrystal (2009) contributed that there are setbacks in communication and transport networks for farm inputs Most farmers are faced with several constraints and challenges in an attempt to access quality seeds, fertilizers and pesticides needed for enhancing agricultural production In the other hand, Andrew (2001) expressed financial constraints force smaller farmers to dispose of their paddy when market prices are at their lowest, immediately after harvest In practice, many smaller farmers have relatively little choice in selecting outlets for disposing paddy, as they are dependent upon input suppliers

Pujari (2011) and African Biodiversity Network (2007) clarified the moneylenders (input traders) themselves enlarge extent for rural indebtedness or they attempt to persuade illiterate farmers or marginal farmers to adopt new crops, while promising favorable outcomes and good sale prices The moneylenders encourage the farmers to borrow from them, convince the farmers to procure inputs on credit which are charged high interest rate and made false account, as a result the farmers get into debt Moreover, once the crop has been grown, the real outcomes turn out to be different, the moneylender pay lower rates than previous promised, and the farmer finds himself in debt, struggling to pay back the cost of original inputs

Loan et al., (2006) pointed that farmers themselves feel compelled to deal with the traders who have previous funded their needs or working capital in production such as

fertilizer, pesticide and gasoline As a result, the farmers sell their product without strong enforcement In this case, the traders play 2 roles: one side is capital provider (in cash or in kinds) and other side is paddy rice buyer

Rosanna (2004); Singh and Lakhwinder (2008) employed the root cause of the indebtedness was also the informal money lender (also called IT) It is important to note that the lenders provide credit to borrowers easily, but charge exorbitant rate of interest

if the farmer does not earn enough to repay on schedule, beginning a spiral into continually increasing indebtedness

Dejene (2003), cited in Jemal (2003) argued in his study on economic importance of the informal institutions in Ethiopia that the poor households are often marginalized in the formal credit markets because of: (1) lack of collateral, which makes lending to the poor households as a risky venture; (2) transaction cost of lending and borrowing by the poor

is often high; and (3) probability of debt collection to the poor is higher than to the rich

In reality, it is widely known that agriculture highly depends on nature and is operating under high degree of uncertainty In the case of crop failure, unemployment, disease and death, the borrowers may not have simply enough money at the time of payment This kind of default is quite common and leads to indebtedness of the lenders (Singh and Lakhwinder, 2008) Further in Singh study, a cumbersome procedure of loan issue, which also requires time and transaction cost, discourages the borrowers in approaching

to the formal financial institutions for credit

Mikkel and Finn (2003), had an evidence in Long An province (a province of MRD) that

no less than 99 percent of the total number of loan involved collateral in the form of land with land use right – (called red book) Thus, land plays not only a significant - but a fundamental - role in determining the operation of the credit market, including who gets access to credit According in their study collateral is used for 70 percent of all formal loans (including other provinces in the report) whereas no collateral is needed in the informal sector Land with red book is used as collateral in the majority of formal loans

Rweyemanu at el., (2003) discussed most borrowers live in rural areas and far from credit offices would incur high transportation costs and be limited credit access

Hence, the rural household have no assets or have very little would be rejected a given loan even thought for production purpose because lack of collateral for formal lender Not to mention, the household may have to face with cumbersome procedures as well as high transaction cost which are also main reasons in forcing the farmer far away from formal capital source

2.4 Hypotheses of rice farmers procure inputs in debt

Rural households as well as rice farmers who grow rice cultivations have the same characteristics as household in general However, differences between households living

in urban and rural areas, between the industries with other industries, depending on the specific effects on each particular environment Therefore, through the models and previous studies, hypotheses that rice farmers purchase inputs in debt or on credit are given as:

H1: Lack of capital for rice cultivation and low income have positively influence on debt when rice farmers procure farm inputs

H2: Householder's characteristics affect positively purchase of inputs in debt

H3: Householders' expenditure has a positive impact on inputs procurement in debt

H4: Farm size and asset of farmers affect positively purchase of inputs in debt

H5: Natural calamities and pestilent insects influence on debt when rice farmers procure inputs

H6: Consuming much farm inputs for crops affects positively purchase of inputs in debt

H7: High input cost impacts positively debt when rice farmers purchase inputs

H8: Dependence upon input traders has a positively influence on purchase of inputs in debt

H9: Bank's complicated procedures affect positively purchase of inputs in debt

2.5 Overview of Vietnamese household and rice farmers

Vietnam is one of world’s richest agricultural regions and is the second-largest exporter worldwide of rice Vietnam’s land area of thirty three million hectares has three eco-systems that dictate rice culture Among them, MRD is a dominant of rice production with an area about 3.9 million hectares for rice cropping The MRD is the center of the rice production region of the country with interlaced irrigation system

The MRD region comprises twelve provinces such as Long An, Tien Giang, Dong Thap, Ben Tre, Tra Vinh, Vinh Long, An Giang, Kien Giang, Hau Giang, Soc Trang, Bac Lieu, Ca Mau and Can Tho City This region is well known as “Rice Bowl” of Vietnam, which includes about seventeen million people and eighty percent of them are engaged

in rice cultivation Recently MRD has produced about twenty millions tons per year, approximately reaching a half of the country’s total production and contribute over ninety percent of rice export in the country

There are three main seasons in the MRD for rice cultivation (see table 1) Belonging to hydrology, rainfall pattern, availability of irrigation of each region, seasons can be divided to three kind of rice crop: summer – autumn crop, winter-spring crop, and rainy crop

Even though the MRD is known as the country’s rice bowl, many growers are facing to the poverty “There are too many growers here and most of them are on a very small scale could generate up to a 30 percent margin, most farmers still survived on less than

US dollar one a day” said World Bank’s Rural co-ordinator Steven Jaffee, who is mainly responsible for a World Bank study of the country’s rice production According to this report (Saigon-gpdaily, 2011) the persistent challenge of rice production in the MRD

was that “output and export growth do not translate into livelihood success for most rice growers”

Figure 2.2: Vietnam’s rice yield for period of 2006 – 2010

Vietnam's Rice Yield 2006 - 2010

Figure 2.3: Vietnam’s rice export output and value for period of 06-10

Vietnam's Paddy Rice Export Output and Value 2006 - 2010

Source: generated from websites http://www.agroviet.gov.vn and http://www.gso.gov.vn

Table 2.1: Rice seasons in the Mekong River Delta

In MRD, An Giang has the largest population of 2,149,500 people, 455.900 households with a total natural area of 356.480 hectares, of which 280.658 hectares of agricultural land This area is very suitable for rice cultivation and in fact An Giang province has over 600,000 hectares for grain crops (mainly rice cultivated area) and average rice yield

is 6.33 tons/hectare, so this province is considered the rice bowl of the West In this research, Tinh Bien district is chosen to implement the survey Tinh Bien district has 3 towns (Nha Bang, Chi Lang, and Tinh Bien) and 11 communes: An Cu, An Hao, An

Nong, An Phu, Nhon Hung, Nui Voi, Tan Lap, Tan Loi, Thoi Son, Van Giao, and Vinh Trung

Figure 2.4: Map of Mekong River Delta

Figure 2.5: Map of An Giang Province

CHAPTER THREE RESEARCH METHODS

3.1 Research procedure and design

Research problem: determination of result why rice farmers always fall into debt when they procure farm inputs will be mentioned in this step

Research objective: This part presented main objectives that the research could reveal reasons which effect to rice farmers’ debt

Literature review: In this procedure, theory of poverty and previous studies were mentioned as well as hypotheses will be given

Research model: based on literature review, research model was proposed with independent and dependent variables

Research model testing: after having research model, questionnaires were designed and tested In this phase, trial survey was tested to measure the understanding of respondents (n=10) After that, questionnaires were adjusted before mass simulation progress

Research results: This was the official study period 250 respondents were collected from rice farmers in five communes in Tinh Bien District There were 216 valid respondents were encoded and inputted after filter Then, through descriptive statistic and multiple regression analysis, the result would be determined the influence of factors

in purchase of inputs in debt

Recommendations: Policy recommendations and limitations were given from empirical results

3.1.2 Research design

Quantitative research is implemented in the form of direct interviews of rice farmers in the study area through a questionnaire survey (see in appendix 3) The survey was designed on the model theory and edited after conducting interviewing 10 farmers growing rice in My Thanh Nam commune (Cai Lay district, Tien Giang province) to examine the appropriateness of the survey to avoid errors such as missing or extra information, unclear information which makes the respondents misunderstood or give unvalued answers

The research was implemented in the direct interview of rice farmers at Tinh Bien district, An Giang province

3.2 Data collection

Data were collected directly from rice farmers based questionnaire survey was designed

to be convenient methods by five interviewers who have been working for Vietnam’s Farmer Union at Tinh Bien district, An Giang province They are: Mr Nguyen Son Bang (Nui Voi commune), Mr Chau Chal Thonl (Vinh Trung commune), Mr Le Van Ngoc (Tan Loi commune), Mr Chau Soc Canh (An Hao commune), and Mr Nguyen Thanh Tuyen (An Phu commune) These five collaborators are the head of farmer unit in commune were chosen as the aforementioned Each collaborator had interviewed 50 samples with 50 packets of seasoning or polo T-shirt for rice farmer who participated in the interview After collection and filter, there are 216 valid responses for input data

The subjects answered are householders in five communes were selected Data were collected by directly interview at the house or at the field when they arranged to be willing to answer the questionnaire or at the suitable point for the interviewer to present, explain and support for rice farmers completed the questionnaire

3.3 Analytical tool

All data of this research will be run by SPSS software, version 11.5 to analyses comprises of statistical tests for descriptive analysis, correlation analysis, and validity of specific models Besides, Microsoft Excel 2003 is also applied for data input as well as other processing

3.4 Data analysis process

3.5 Suggested research model

Base on conceptual framework and factors driving rice farmers purchase of inputs in debt A research model is proposed with nine group of variables: poverty, householder’s characteristics, household’s expenditure, household’s farm size and equity, calamity and

Input data in excel

Data test and initial processing

Transfer data into S.P.S.S

software

Data analysis

Descriptive statistic (quantitative)

Regression analysis Sampling statistic