Food producers in Vietnam look to modernise due to pressure on exports

As the economy has industrialised the share of agriculture to GDP has more than halved – from 40% in the mid-1980s to around 16% in 2016. Nevertheless, the agriculture sector remains crucial for Vietnam’s development as it continues to employ nearly half of the workforce. This has meant that swings in commodity markets and the environmental effects stemming from climate change have the potential to reverberate throughout the economy.

This was underscored in 2016 when economic growth, though still strong, was below initial forecasts due to adverse weather conditions causing a decline in agricultural production. Vietnam suffered out-of-season cold snaps in the north, while the central region was plagued by drought and the south suffered a salinity crisis. According to the Ministry of Agriculture and Rural Development (MARD), the Mekong Delta has faced the most severe drought and salinisation in almost a century owing to the fall of water flow from major rivers into the area. Because of this, the agriculture sector grew by only 1.4% in 2016, its lowest growth rate since 2011, and lost around $680m in GDP.

Challenges

Environmental change, however, is only one of the hurdles facing the country. Investment in agriculture remains low, and the sector is confronting a host of challenges when it comes to global integration, falling growth, low competitiveness and food safety issues. Yearly investment in agriculture accounts for about 5.5% of the total, while the proportion of companies investing in agriculture only forms about 1% of the entire economy. Companies have remained cautious of spending money in this area mainly due to thorny issues related to land and credit policies.

Yet given the importance of agriculture in the country’s overall development, the government is keen to roll out a number of measures to expand the market and lower barriers for production and exports. For the 2016-20 period the government is targeting a 2.5-3% growth rate for agricultural production. This is seen as an ambitious goal for a sector that has been facing tough times of late; but officials believe it is achievable if, for example, the country can boost export quality and tap into new markets as well as encourage farmers to expand production and raise the quality of goods.

Coping With Integration

Vietnam is already a major exporter, with its agricultural goods meeting the demands of many countries, such as China and Ghana. The country’s major crops include rice, coffee, rubber, peppercorn, cashew, cassava, fruit, wood and wooden products, shrimp and fish. For the first 11 months of 2016 exports of these agricultural products was estimated at $13.7bn, according to the MARD. There are, however, issues that still need to be addressed, such as product quality, food safety and reliance on certain markets for some products. The signing of more free trade agreements (FTAs), such as the EU-Vietnam FTA, and the formation of the ASEAN Economic Community, gives Vietnam opportunities to tap into a greater number of markets, but also means the country will need to enhance its quality standards in the face of stronger competition.

New Markets

The goal is that FTAs will help Vietnam readjust its import-export market structure. Currently only a relatively small quantity of agricultural exports go to neighbouring countries, such as Thailand and Indonesia, contributing to a growing regional trade deficit. However, it is expected that once local FTAs are rolled out, more available markets will mean less reliance on what can be a fickle Chinese market. China was the biggest importer of Vietnamese rice in the first 10 months of 2016, consuming 35% of total exports, followed by Ghana at 11.5%. China also consumed 48% of Vietnamese rubber exports and 64% of fruits and vegetables.

Yet there are still questions over whether Vietnam has enough competitive edge to weather a more open and liberalised market. Ha Cong Tuan, deputy minister of the MARD, noted that there are around 3500 firms investing in the agricultural industry, but they account for only 1% of total enterprises, highlighting the fact that the majority are small and medium-sized companies. Further integration with the world market will make it harder for them to compete. Officials are thus hoping that more integrated markets will also mean the introduction of more investment capital coupled with modern technology and management methods.

Foreign Investment

In the past, foreign direct investment (FDI) has been hampered by the country’s small production scale and ageing infrastructure. The amount of incoming foreign capital has fallen since 2001, amounting to around 2% of total foreign investment volume, according to the MARD. Data from the Foreign Investment Agency shows that each agricultural project costs an average of $6.7m, while the average investment capital of all FDI projects amounts to just below $15m. Around 50 countries have invested in the agriculture, forest and fishery sector, though one-third of financing comes from Taiwan and Hong Kong. The list includes only a small number of developed countries.

Privatisations have included the initial pubic offerings of state-owned Vietnam National Seed Company and Southern Seed Company. Local sector player The PAN Group bought 75% and 80% of these firms, respectively, and is hoping to make future returns on investments in research and technology to produce seeds for the domestic market. To date, Vietnam has relied on seeds from other countries, and quality has sometimes been questionable.

Calls To Modernise

For small-scale farmers mechanisation is limited as investment costs often cannot be borne by a single holder. Thus automation and mechanisation in rice planting and harvesting, for example, remains low. The Mekong Delta, which hosts the bulk of the country’s rice production, has more than 5500 harvesters being used on 40% of the farmland, while rice-planting machines cover only 30%, according to the Department of Processing and Trade for Agro-Forestry-Fisheries Products and Salt Production. In general the Mekong Delta’s level of mechanisation stands at 1.6 horsepower per ha, below that of Thailand (4), China (8) and South Korea (10). The losses in rice production stand at 5-6%, or 3m tonnes a year, totalling $760m.

Alexander Kliegl, chairman of EuroCham’s Food, Agri and Aqua Business Sector Committee (FAASC) and managing director of DKSH Vietnam and Cambodia, told OBG that financing agricultural mechanisation is basically split into two categories: small farmers and large operations. He noted that the government has done a lot for small rice farmers in the Mekong Delta to finance the purchasing of machines through the Vietnam Bank for Agriculture and Rural Development. “But farmers use their land rights as collateral against machine loans and this can only be done once. The end result is a lot of farmers who cannot get machinery unless the companies selling those machines take the risk and provide the farmers loans for that,” he added.

Alternative Options

There are a growing number of companies and cooperatives that have started leasing and lending the machinery needed to cultivate small farms. “If the bridge between the cooperative and the small farmer is strong, it can be hugely successful. This has worked well in areas with large sugarcane production,” Kliegl said. “For example, for the cooperative, the return on investment for one $300,000 sugarcane harvesting machine is less than one season.”

Embracing mechanisation and implementing smart technology to boost output is an avenue to further the sector’s modernisation. One such move is a partnership between the Vietnamese IT firm, FPT Group and Fujitsu, the Japanese IT provider. Together, these companies have set up a smart agriculture cooperation centre, where sensors monitor the environment to enhance the cultivation of highvalue-added produce, medium-sized tomatoes and low-potassium lettuce. Fujitsu is developing two production facilities including a greenhouse cultivation and vegetable factory spanning over a 400-sq-metre area on the edge of Hanoi.

The government hopes this initiative will lead to more widespread use of smart, sustainable and environmentally friendly horticulture practices. To further advance this agenda the government backed a $2.2bn credit support package in December 2016 aimed at encouraging high-tech agriculture projects. Involving technology in the sector is also expected to help with food safety issues, which have been a challenge for the industry.

Food Safety

Vietnamese products are sometimes rejected for sale abroad because of foodsafety issues, which poses a problem for the agri-food industry. Pesticides, hormones, heavy metals and antibiotics are the main threats to Vietnamese exports such as rice to the US and fish, fruit, vegetables, spices and herbs to the EU, South Korea, Japan, Saudi Arabia and China. China has in the past returned several shipments of Vietnamese rice tainted with plant protection drug residues. An opinion poll conducted by Food Industry Asia in April 2015, found that food safety ranked as the top issue that would have the greatest impact on consumer preference in Asia from 2015 to 2016.

The issue with food safety and testing is not the lack of legislation, but lack of enforcement and risk-based assessment. In 2016, for example, a recently amended law, which criminalises the manufacturing of unsafe food, entered into force. “As this was not the case before it marked an important step in food safety. As of July 2016, the production of dangerous foods for public consumption can result in jail time,” Kliegl told OBG. “Furthermore, only specific government-run labs are appointed for food testing. But the problem is these laboratories are in general not properly equipped and do not have or use the right methods for proving if food is dangerous or safe.”

Traceability

Besides better enforcement of existing laws, a potential method of addressing food safety is through a track-and-trace system that allows companies and authorities to know where products have been at all stages of the supply chain, according to the 2016 EuroCham White-book report. This, it said, is not only useful in case of a product recall, but can also reduce food fraud, unintentional or intentional adulteration. Such a move can also help with disease management and is useful in the case of environmental emergencies. Traceability can also help curb counterfeit products. Farmers, however, can themselves be left unsure of products they use on their plants or livestock due to the wide availability of counterfeits or issues with improper labelling. Furthermore, because foreign buyers cannot make purchases directly from farmers but must got through a middleman, information about production is at best second hand.

Quality Concerns

Because of these factors, Vietnamese exporters suffer from the image of supplying products of low or unsafe quality. In 2015 the EU stopped 100 container shipments at the borders because of food safety concerns, including contamination by heavy metals, pesticide residues and antibiotics. “This is something that the government is aware of and understands but has not found an efficient way to address,” Kliegl told OBG.

Such concerns do not affect all subsectors, however. The seafood industry has achieved high-quality standards in many export markets. In the domestic market, however, many products have yet to meet basic standards. This is beginning to change with the entrance of new market players and partnerships with a focus on producing and supplying high-quality produce. VinEco, a food supply company and subsidiary of local conglomerate Vingroup, has introduced its own greenhouse products grown in cooperation with Israeli firm, Teshuva Agricultural Projects. The company has built a 24. 5-ha greenhouse for $44m that can supply 3500 tonnes of vegetables per year.

In October 2015 Mobile World Investment, an electronics retailer, opened a chain of convenience stores selling, among other things, fresh food and agriculture produce. The company plans to open another 350 outlets in 2017.

Coping With Climate Change

A potential threat to the renewed investment in agriculture is posed by climate change. In 2016 Vietnam was seriously affected by devastating drought in the central highlands, in which some 2m people were without access to water, 1.1m experienced food insecurity and 2m lost income, according to the UN Food and Agriculture Organisation. Previously, drought was only a concern for farmers in the north; however, the extreme dry conditions has caused a salinity crisis in the southern Mekong Delta area. Historically, the Mekong River’s annual floods washed away the salt brought inland by sea tides. Now it is expected that thousands of hectares of fruit trees planted along the coastal areas will suffer from the adverse impacts of climate change by 2030.

Rice & Rain

The central southern provinces have also been plagued by rainless months. More than 30,000 ha of rice in the region lack sufficient water, and the productivity of industrial crops has experienced sharp falls. According to the MARD, certain types of rice with a long lifecycle were often unable to adapt to changing weather conditions. A five-year inspection by the ministry showed productivity dropped sharply when traditional rice with a long lifecycle was used in warmer weather. The ministry recommended changing to rice with a short lifecycle as it is less affected by hot, dry weather.

Marieke van der Pijl, chairwoman of the Vietnam Business Forum’s Agri-business Working Group and vice-chairwoman of EuroCham’s FAASC, told OBG that 2016 has shown that in addition to changing crops, more actions are needed to address the impact of climate change in the country. “Farmers need to use seeds suitable to changing conditions and also use fertilisers that will reduce use of water and keep the soil in a good condition,” she said. “The impact of the third rice crop on the environment and natural resources also needs to be reconsidered as well as the planned construction of coal-fired power plants and other polluting industries in the Mekong Delta,” she added.

Under Strain

Rice is an integral part of Vietnamese culture, feeding both rural and urban populations. The bulk of production takes place in the south in the Mekong Delta, which produces more than half of the country’s rice. After reunification with the north in 1976, Hanoi moved to enforce collective agriculture in the south, but continuously falling yields and refusal of many farmers to join the collectives caused a rethink in policy. After allowing for more localised, small-scale production and for farmers to have more control in decision making, output surged and in 1989 the country exported rice for the first time in many years.

In 2016 rice production was estimated to reach 43.6m tonnes, down 1.5m tonnes against 2015, according to General Statistics Office of Vietnam. In line with declining production levels due to drought and less area for cultivation, exports have been falling in recent years. From 2011 to 2015 the country witnessed a 56.3% decrease in exported rice sales. The downward trend continued in the following year. Vietnam shipped 4.9m tonnes of rice in 2016 generating $2bn in sales, down 25% by volume and 20.3% by value. China has been the biggest importer of Vietnamese rice, receiving about 35% of shipments in 2016; however, that same year saw China reduce imports of Vietnamese rice by 20% due to increasing food safety measures. Projected exports for 2017 are expected to grow only slightly reaching approximately 5m tonnes.

Prodded by these disappointing figures, the government has taken steps to try and stem further losses by scrapping regulations such as those limiting export licences to only 150 traders and requiring minimum storage and production capacities. There are also plans to gradually reduce rice production and switch to more profitable crops, especially given the increasing construction of hydropower dams in the Mekong River that will only aggravate the problem of low water levels.

The sector also stands to face stronger competitive pressure from regional countries such as Myanmar, Indonesia and the Philippines, which are boosting domestic rice production. Thus the government is moving to reduce the area under paddy by 270,000 ha by 2020 and introduce other crops, animal husbandry and aquaculture in order to diversify the sector and yield higher profits.

Human Impact

In addition to the adverse effects of climate on output, the environmental impact of poor agricultural practices is a growing concern for the sector. As Vietnam looks to expand its industry for export some are expressing concern. “Business as usual is no longer an option for the sector. Growth has slowed down; [the sector] is vulnerable to climate hazards, and leaves a large environmental footprint,” Ousmane Dione, country director for Vietnam at the World Bank, said at a press conference in September 2016.

Indeed, human impact on the environment could be seen in April 2016 when tonnes of dead fish washed ashore at West Lake, Hanoi’s largest freshwater lake. In June that year Formosa Ha Tinh Steel, part of a Taiwanese conglomerate with significant investments in Vietnam, took responsibility for the pollution of 200 km of coastline. Leakage of toxic chemicals from the firm’s $10.6bn plant caused 100 tonnes of fish to wash ashore, media reported. The spill affected the jobs and economies of four provinces and recovery is expected to take up to a decade. In June the company agreed to pay $500m in damages, but protests against the environmental impact were still being held in coastal areas that rely on fishing as late as October 2016.

In a bid to address environmental issues, a joint delegation from the Ministries of Industry and Trade, and Natural Resources and Environment is planning to look into factory production and waste treatment facilities that pose a risk to water contamination, according to press reports. At the same time, the private sector is looking to boost efforts in this area. “Resources and waste management are key sectors in which foreign firms are able to contribute to Vietnam’s development,” Guillaume Crouzet, general director of the French Chamber of Commerce in Vietnam, told OBG. “One of the elements that helps a foreign firm decide to invest in Vietnam is access to proper resources.”

Seafood & Aquaculture

One way in which farmers are being given the option to diversify is in the Mekong Delta’s seafood industry. Indeed, the government has been setting up research centres geared towards introducing new farming techniques for the production of new species as well as investing in shoring up supply chains and improving canals for freshwater and seawater.

According to the Vietnam Association of Seafood Exporters and Producers (VASEP) there are more than 70 projects receiving FDI in the fisheries sector, with some $310m in registered capital. But the majority of these projects are small-scale, with an average of just $4.4m per project. In a bid to reduce budgetary pressures, the government is keen to attract more private players through better policies and increased credit incentives for attracting investment through public-private partnership (PPP) projects with multinationals. The association said there has been some positive results in this direction as the Vietnam Directorate of Fisheries has been working with businesses along the production chain such as Metro Cash & Carry, Cargill and Fresh Studio to implement PPP projects. But as Thuong Dinh Hoe, general secretary of VASEP, told OBG, “It is not so easy for foreign investors, because to process or develop seafood one needs to be near the raw material source, which is often in remote areas which lack the infrastructure found in big urban centres. Thus, until now, foreign investment in the seafood sector has been low.”

Exports

Sector exports fared better in 2016 after declining in 2015. In the first nine months of the year Vietnam exported seafood products to 161 markets for $5.1bn in revenue, up 5.3% year-on-year y-o-y, according to VASEP. Apart from a 68% drop in exports to Brazil, exports to the country’s main markets – the US, EU, Japan, South Korea and China – rose in the first three quarters of 2016. The US kept its top position with 21% of total seafood exports thanks to a rise in exported shrimp, catfish, tuna and bivalve molluscs. Total exports for 2016 were expected to rise by 7.5% to $7bn.

Challenges

A major challenge going forward are the anti-dumping measures implemented by the US government against catfish and shrimp. According to VASEP, the high cost of anti-dumping taxes means only two or three large companies can afford to export catfish to the US. The Mekong Delta catfish breeding programme is relatively new, developed in Vietnam around 10 years ago, and there are now strategies in place to keep costs down and improve product safety; however, small producers still find the additional cost a significant barrier to exporting catfish. In addition, supply of raw shrimp experienced shortages in the fourth quarter of 2016 owing to anti-dumping measures, more stringent quality standards from major import markets, as well as adverse weather affects. Shrimp exports for the fourth quarter, however, were expected to recover and reach $860m, up 5.3% on the same period in 2015.

Another challenge lies in developing value-added processed products. For shrimp, value-added products accounts for 30% of exports with the remainder being shipped as raw materials, semi-processed and semi-finished products in the form of fresh, live and frozen goods. Catfish products comprise mainly frozen fillets, which account for 95% of production. Because value-added processing requires more labour, long capital turnover and bigger risks, firms are more hesitant to invest in this segment.

Outlook

The rollout of new FTAs gives Vietnam added possibilities to export its agricultural goods, but tapping these markets will require an enhancement of the sector’s sustainability. This effort is likely to involve the consolidation of smallholders, lack of which has so far prevented the country from transitioning into a key agricultural export player. Also on the agenda are food safety, environmental impact, increasing the export of high-end manufactured products, diversification and commercialisation of by-products. The government has put forth sector goals it wants to see accomplished by 2020 that involve drastic reforms in promoting science and technology for increasing productivity and development, and creating high-quality and competitive products, all while improving farmers’ livelihoods. It is a tall order, but vital for the country’s future economic and agricultural development.

 

 

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The Report: Vietnam 2017

Agriculture chapter from The Report: Vietnam 2017

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