Mekong Region Land Governance Project

Bridging China’s demand for agro-commodities and smallholder production in Laos

Bridging China’s demand for agro-commodities and smallholder production in Laos

Members of MRLG’s RAI alliance, including partners from the Investment Promotion Division, Ministry of Planning and Investment, GIZ and district government departments visited Chinese agribusiness investments in Luang Prabang and Xayaboury provinces, to learn from private sector experiences of contract farming in Laos.

Cassava is one of many agro-commodities with seemingly limitless cross-border demand in China, and production and processing of the root crop is a highly profitable industry in Southeast Asia. An investor in Nan district explained that “cassava starch has more than 1,000 different uses. China can’t produce enough domestically, it has to import, and will continue to need more.” 

The cassava company in Nan district uses seasonal contracts in which farmers in surrounding villages grow cassava for the investor, who provides them with all inputs and technical advice. This form of contract farming has expanded rapidly for different commodity crops throughout Laos in recent years.

A cassava drying area in Nan district, Luang Prabang province, Laos. Cassava continues to be in high demand in China for its many uses, including animal feed and industrial starch.
(Photo: Rob Cole)

But for both investors and farmers, contract farming remains relatively new and often requires some experimentation to get started. The investor in Nan district initially made individual contracts with farmers, but found them too complicated and tried making contracts with village heads instead. This enabled him to expand production to about 150 households.

The approach has been mostly effective except a few cases of side-selling, when other buyers come to offer higher prices, as farmers are not signatories and the village head holds responsibility for contract issues. Outcomes could be improved with adjustment to the contract template, but to do so requires open and fair discussion between parties with appropriate government support.

In nearby Xayaboury district, Xayaboury province, another Chinese investment rents paddyland from farmers after the rice harvest for soybean planting, for refrigerated shipment to China. Soybean has a planting cycle of just four months, after which the investor restores the paddies. Farmers earn rental income, wages for tending and harvesting the crop, and are then able to plant rice during the rainy season in soils that are nitrogen-restored by soybean.

A soybean investor explains the production model in Xayaboury district, Xayaboury province, Laos. (Photo: Rob Cole)

The prospects are certainly attractive, and China’s demand for soy products is in no danger of decline. The main causes for concern are the water requirements of the crop, and that, as is the case for most large-scale agribusiness in Laos, it is transnational investors who gain the largest share of profits.

Asked whether he felt more confident under a contract, a farmer in the cassava scheme explained that it was early days for his family – they sold three tons last year but were only in their second season, and uncertain how stable cassava income would be.

The potential profits were clearer from the investor’s perspective. He aims to buy 1,000 tons of wet cassava from local farmers in 2021 at 380,000 LAK/ton, yielding 400 tons dry weight for sale at 1.5m LAK/ton. This will earn 220 million LAK for the season, minus transport and labour costs. The investor is then targeting a 400% increase in production in 2022.

Railway bridge over the Mekong river at Luang Prabang, Laos. The Kunming-Vientiane railway is due to commence operation in 2021, further connecting Lao farmers to the world’s biggest market. (Photo: Rob Cole)

With the railway connecting northern Laos to China’s Yunnan province soon coming into operation, there could be many more opportunities for farmers and investors to sell agricultural products to China. But a more direct connection to the world’s biggest market also comes with risks.

Farmers need proper contract arrangements to protect them from potentially exploitative investments, investors need assurance that farmers will stay committed to contract obligations, and preventative measures are needed to address environmental consequences of cross-border crop booms.

The field visits were part of provincial consultations by MRLG and its partners to seek feedback on the challenges of implementing legislation on land concessions and potential for developing a new guideline on contract farming. MRLG aims to foster inclusive agribusiness that is mutually beneficial for farmers and investors, while protecting the land base that is vital to rural livelihoods in Laos.

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