Study on smallholder rice farmers - Feb 2014

1. On poverty for smallholder Filipino rice farmers February 2014 Chris Tang, MBA 2014 | Zech Lung, MSMS 2014

2. Christopher Tang, Hong Kong 2014 MBA Candidate, MIT Sloan MicroBinance, Hospitality, Debt capital markets Email: chris.tang@sloan.mit.edu About us Zech Lung, Singapore 2014 MSMS Candidate, MIT Sloan Engineering, Infrastructure, Project management Email: zech.lung@sloan.mit.edu 2

3. Agenda 1.  Executive summary 2.  Our approach 3.  Overview of the rice industry and value chain 4.  Why are smallholder rice farmers poor? 5.  Our recommendation: An integrated premium rice producer 3

4. Executive Summary 1) Why are smallholder rice farmers poor? •  Rice is a difBicult crop to make a living on •  Less credit is available for the agriculture sector •  Lack of organization is a problem 2) Our recommendation -‐ An integrated premium rice producer with: •  A premium rice brand •  Supportive contract farming •  Integrated value chain 4

5. Our approach Methodology •  Research about the rice industry, agriculture, and poverty in the Philippines •  Visits to industry participants at different stages of the value chain •  Over 20 interviews across the private, public, academic, and nonproBit sector Limitations •  Not a geographically comprehensive study •  Interviews were with rice industry participants across different regions •  We are not agricultural experts 5

6. Where we went Jan 5 – 28, 2014 Science City of Muñoz, Nueva Ecija •  PhilRice •  Tilah Seeds •  Gratia Plena Angat, Bulacan •  Gawad Kalinga Enchanted Farm •  Reysan Trading Rice Mill •  Bagong Buhai Ng Mabini Rice Multi-‐ Purpose Cooperative Metro Manila •  Marikina Market Los Baños, Laguna •  IRRI •  Banca Banca Multi-‐Purpose Cooperative Source: IRRI 6

7. 0 2 4 6 8 10 12 14 16 2003 2005 2007 2009 2011 2013 Million MT •  “Philippines is a nation of rice-‐ eaters. Demand will always be high.” -‐ Joseph the rice trader Philippine Rice Industry Overview Strong and stable demand Philippines domes-c rice consump-on in 2013 was almost 13 million MT Source: USDA Filipinos consume just over 120kg of rice annually 0 50 100 150 200 250 China India Indonesia Philippines Thailand Vietnam Per capita consump2on (kg) 18.0 22.4 29.4 32.1 0 5 10 15 20 25 30 35 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 PHP / kg Prices have climbed 79 percent over the past 10 years, most notably during the 2008 rice crisis Sources: USDA, CIA World Factbook 7

8. Philippine Rice Industry Overview Imports to supplement low local production Philippines’ rice yields have trailed behind Vietnam and Indonesia 6.3 2.9 4.4 3.1 2.6 4.2 6.6 3.0 5.0 3.6 2.9 5.2 0 2 4 6 8 China India Indonesia Philippines Thailand Vietnam MT / ha 2000 2009 Source: PhilRice •  Philippines imports about 10 percent of its rice annually. The top importing countries are: –  Vietnam –  Australia –  Cambodia –  India –  Thailand 0 2 4 6 8 10 12 14 16 2003 2005 2007 2009 2011 2013 Million MT / ha DomesLc producLon Imports (2013) 9.3% imported Philippines domes-c rice supply in 2013 was almost 11.6 million MT, with 9 percent imports Source: USDA 29.9 44.1 12.9 4.5 11.0 7.4 0 10 20 30 40 50 China India Indonesia Philippines Thailand Vietnam Million ha Philippines has the smallest rice harves-ng area compared to other major rice-‐producing Asian countries 8

9. Philippine Domestic Rice Industry Challenges •  NFA provides subsidies for imported and domestic rice, presenting a lower-‐cost alternative to rice from domestic commercial producers •  Rice smuggling, owing to the large difference between world and domestic prices of rice •  ASEAN Economic Community 2015 will lower the tariffs on rice imported from neighboring countries and challenge the local industry 28 33 20 25 30 35 40 NFA Commercial rice PHP/ kg The retail price of NFA rice is around 15 percent lower than that of commercial rice Sources: USDA, PhilRice ‘Domestic price of rice had been higher as much as 75 percent than the world price since 2000. Although the gap closed in 2008, price differential widened again to 30 percent in 2012.’ -‐ Dr. Flordeliza Bordey and Aileen Litonjua, PhilRice economists 15% 9

10. Philippines rice value chain Sources: E. Limon (1) -‐ the trader-‐coop-‐ﬁnancier can also provide inputs to the farmer as well (1) 10

11. Why are smallholder farmers poor? Rice is a difIicult crop to make a living on •  Rice farmers generally earn very little with the size of their income depending on their farm yield and costs of labor and inputs •  Labor is often the biggest expense, as a lot of land preparation and harvesting is done manually •  Rice farmers often have other jobs as carpenters, welders, tricycle drivers Sources: PhilRice, Smart Agriculture book (N. Perlas), Interviews (1)  PhP 15 kg for 4 MT of palay (2)  Assumes 2 hectares of land 6,039 2,398 2,147 1,699 1,131 0 1000 2000 3000 4000 5000 6000 7000 Pineapple Mango Cassava Rice Coﬀee USD Rice famers earn less than other single-‐cropping per year crops Revenues USD*/*ha % Revenue&(1) 1,364&&&&& 100% Costs Labor 262&&&&&&&&& 19% Pesticides 107&&&&&&&&& 8% Rentals&of&machines,&tools,&and&animals 66&&&&&&&&&&& 5% Interest&payment&on&crop&loan 49&&&&&&&&&&& 4% Seeds,&fertilizer,&and&soil&ameliorants 43&&&&&&&&&&& 3% Other&(fuel,&trasport) 38&&&&&&&&&&& 3% Irrigation 15&&&&&&&&&&& 1% Total*cost 581********* 43% Net*income 782********* 57% Rice farmers can typically earn ~USD 780 / yr / ha (2) 11

12. Why are smallholder farmers poor? Credit is less available for the ag sector •  Credit is not available for the agriculture sector. In 2010, there was a PHP 252 billion (USD 5.7 billion) credit shortfall for agricultural and Bisheries •  Banks were mandated by law to allocate 25% of their portfolio to agriculture, but instead opted to pay penalties given the ‘high-‐risk, high-‐cost’ nature of agriculture loans Sources: Oxfam 9.2% 3.2% 0% 5% 10% 15% 20% 1980 2006 The propor-on of agricultural loans to total loans has shrunk by 65 percent over the last two decades 7.0% 0.9% 0% 5% 10% 15% 20% 1990 2006 The propor-on of agricultural produc-on loans to total loans has also declined by 87 percent -‐ 65% -‐ 87% 12

13. Why are smallholder farmers poor? Lack of organization is a problem •  Lack of organization among farmers prohibits them from realizing economies of scale and stronger bargaining power •  Agrarian reform policy has distributed small parcels of land to farmers but with limited other support such as credit, knowledge, and market access Sources: FAO, BAS data, Interview with agriculture experts 1 0.76 0 0.2 0.4 0.6 0.8 1 1.2 1985 2004 The average farm size has shrunk to 0.76 ha ‘85 percent of all Filipino farms are no more than 5 hectares…’ -‐ FAO country pro5ile 13

14. Our Recommendation* Integrated Premium Rice Producer I. Premium rice brand III. Integrated value chain II. Supportive contract farming * Inspired by SL Agritech CorporaLon’s Doña Maria Premium Rice 14

15. I. Premium rice brand Rationale •  Premium rice domestically earns around 80 percent higher than popular medium-‐quality rice. This product can earn even more as an export product. •  The higher price point allows higher rewards to the Filipino farmer. Our example company awards 24 percent higher prices than regular traders. •  Premium rice insulates the company from the cannibalizing effects of subsidized NFA rice (PHP 28/kg), which affects sales of low to medium-‐quality commercial rice (PHP 30 – 38/kg) ‘Fancy rice commands a higher price in the [export] market that can reach $1000 per ton, two or three times more than regular rice’s $300 to 500 per ton price.’ – SL Agritech Corp newsletter 17 21 0 5 10 15 20 25 Regular traders SL Agritech PHP/ kg SL Agritech is able to award 24 percent higher prices to farmers for their wet palay Sources: Interviews, Gintong Bu2l Jul-‐Aug 2013 published by SL Agritech CorporaLon +24% 15

16. I. Premium rice brand Action plan •  Partner with academia to conduct R&D on breeding more premium varieties of rice •  Increase modes for the public to sample your rice, such as offering ready-‐made rice or in-‐ kind sponsoring at events •  Create a unique packaging for the product, indicating its premium value China’s Professor Yuan Long Ping, the “father” of hybrid rice Ready-‐made rice which allows for easy sampling This premium rice from Mauri-us oﬀers a good example of higher-‐end packaging 16

17. II. Supportive contract farming Rationale •  Promotes specialization, allowing farmers to do what they are most efBicient at doing and what they want to do •  Realizes increased buyer power through bulk purchasing of fertilizer and other agricultural inputs •  Consolidators impose structure on what is a fragmented group of land holdings, delivering inputs and picking up palay from a mix of farmer cooperatives and individual smallholder farmers ‘Why would I want to dry my rice? I’m happy just selling my wet palay to the trader. It’s less trouble.’ -‐ Mr. Casiano Estrella, rice farmer with 0.5 hectares of land 17

18. II. Supportive contract farming Action plan •  Recruit and train local trusted community members as consolidators •  Provide inputs and train farmers in more effective agricultural techniques and construct demo farms for showcasing your value to overcome farmers’ skepticism •  Guarantee buyback of farmer’s rice, removing market risk for the smallholder farmer Consolidators would be respected and trusted ﬁgures in their farming community and train farmers PhilRice has demo farms to show the possibility of achieving higher yields with lower costs. The 10-‐5 Challenge refers to a yield of 10 MT with less than PHP 5 / kg cost of palay 18

19. III. Integrated value chain Rationale •  An integrated value chain chain ensures strict quality control of the product •  An integrated chain allows better planning along the different links of the value chain, leading to improved utilization of equipment and less wastage •  An integrated value chain ensures less erosion of value for the company by cutting out the middlemen and other operators e.g. mills along the value chain 19 The integrated value chain would cons-tute input provision, rice trading, milling, and wholesale Input Provider Farmer Rice Trader Mill Wholesaler Retail

20. III. Integrated value chain Action plan •  Purchase assets along the value chain e.g. dryer, mill, and warehouse. Such assets and funding may be applied for through government programs from the Department of Agrarian Reform and the Department of Agriculture •  Integrate management information systems to coordinate all links of the supply chain This rice dryer (background) was donated by the Department of Agriculture to an organic rice producer 20

21. Our Recommendation* Integrated Premium Rice Producer I. Premium rice brand III. Integrated value chain II. Supportive contract farming * Inspired by SL Agritech CorporaLon’s Doña Maria Premium Rice 21

22. Questions? 22

23. Appendices

24. Input Provider Farmer Rice Trader Mill Wholesaler Retailer Appendix IA: Input provider, Nueva Ecija Tilah Seed Center Source: Interview INSERT PHOTO HERE •  Sells more Registered and Certified seeds (90%) vs. Hybrid seeds (10%) as the latter can only be used for one planting and requires expensive inputs to reap full higher-‐yielding potential •  Transplanting needs 40 – 80kg of seeds vs. direct seeding (120-‐160kg) per hectare LocaLon: Muñoz, Nueva Ecija Established: 1995 (started because of dearth of supply in seeds e.g. in 1980s there were only 18 seed growers) Company: Family-‐owned Customers: Over 5,000 customers Value Prop.: Sells seeds (80% rev) and ferLlizers (20% rev) Key partners: Has 100 contract seed growers and provides them with seeds, ferLlizer, and credit. Key acLviLes: Has a demonstraLon farm to showcase their latest seeds Pesos%/%kg USD%/%kg Foundation 80 1.82 Registered 40 0.91 Certified 30 0.68 Prices for inbred seeds 24

25. Appendix IB: Rice Farmer, Laguna Mr. Casiano Estrella Input Provider Farmer Rice Trader Mill Wholesaler Retailer Source: Interview PosiLon: Chairman, Banca Banca MulL-‐Purpose CooperaLve Age: 70 years old Farm area: 0.5 hectares LocaLon: Victoria, Laguna •  Very content just to sell his wet palay to the trader at PHP 13-‐17 / kg •  Coop does not have land for a dryer •  Smallholder farmers can make a decent living, with adequate credit support from the cooperative and agricultural techniques imparted by IRRI Palay price (PHP / kg) Dry season 15 Wet season 13 Palay prices in Los Baños 25

26. Appendix IC: Farmer Cooperative, Nueva Ecija Bagong Buhai Ng Mabini Rice MPC Input Provider Farmer Rice Trader Mill Wholesaler Retailer Name: Mr. Florencio Sudoy, CooperaLve Chairman CooperaLve: Bagong Buhai Ng Mabini Rice MulL-‐Purpose CooperaLve (Est. 2005, 365 members) LocaLon: Muñoz, Nueva Ecija Total area: 675 ha (average plot = 1.8 ha) FuncLon: Distributes and finances inputs of members Dries rice of members (30 MT / 8 hr) Stores rice (20,000 bag capacity) Mills rice internally for personal consumpLon Buys rice from non-‐members Assets: Dryer, mill, warehouse, 2.5 ha plot Other notes: Profits are either distributed to individual farmers or ploughed back to the cooperaLve for collecLve benefit, such as educaLon, community development aher disasters •  Farmers have higher yields in the dry season over the wet season •  Loan size for members is typically PHP 9,000 (USD 205) with a 8-‐10% interest rate per cropping and 4-‐5 month payback period Source: Interview 26

27. Input Provider Farmer Rice Trader Mill Wholesaler Retailer •  Village mill earns more revenue on mill by-‐products e.g. rice bran, hull, so has no incentive to increase milling efBiciency •  Earns a decent but equitable profit •  Challenges: –  Two other mills nearby –  Thin margins (commodity service) Appendix ID: Small mill, Bulacan Reysan Mill Revenue PHP/kg kg+/+day PHP+/+day Milling&fee 0.4 4,000&&&&&&&&&&&& 1,600&&&&&&&&&& Sale&of&rice&hull 4 800&&&&&&&&&&&&&&& 3,200&&&&&&&&&& Sale&of&rice&bran 6 400&&&&&&&&&&&&&&& 2,400&&&&&&&&&& Sale&of&rice&brokens 10 320&&&&&&&&&&&&&&& 3,200&&&&&&&&&& TOTAL 10,400++++++++ Expenses PHP/kg kg+/+day PHP+/+day Operators&salary&(2&pax) 0.4 4,000&&&&&&&&&&&& 1,600&&&&&&&&&& Diesel 0.5 4,000&&&&&&&&&&&& 2,000&&&&&&&&&& TOTAL 3,600++++++++++ Gross+Profit: 6,800++++++++++ The miller earns up to double the revenue on mill by-‐products than for milling fees LocaLon: Angat, Bulacan Owner: A wealthy farmer Customers: Individual rice farmers, ohen selling rice for personal consumpLon Value Prop.: Mills rice, sells mill by-‐ products that include bran and hull Source: Interview 27

28. Angelica) (Bago) Sinandomeng Sinandomeng) (Laon) Premium) (Dinorado)from) Mindoro) Revenue&/&kg 37 34 32 46 Cost 35 31.6 30 44 Profit 2 2.4 2 2 Gross)Margin 5.4% 7.1% 6.3% 4.3% Appendix IE: Rice retailer, Manila Vanity’s Rice Store, Marikina Market Input Provider Farmer Rice Trader Mill Wholesaler Retailer •  Thin gross margins (4-‐7 percent) •  Typically sells 250kg per day (PHP 500 gross proBit per day) •  Has five regular suppliers across the different types of rice •  Keeps good relations with regular customers and also delivers to restaurants Thin gross margins of 4 – 7 percent Name: CrisLna Pina LocaLon: Markina Market, Manila Customers: Individuals, restaurants Source: Interview 28

29. Appendix IF: Rice retailer, Nueva Ecija Norman Trading Input Provider Farmer Rice Trader Mill Wholesaler Retailer •  Owner is required to sell NFA rice at PHP 28/kg, which is less than commercial rice (PHP 33). The cost for NFA rice is PHP 26/kg plus an additional ~PHP 1 for the transportation to the NFA rice dispensary •  Her biggest concern is not securing a supply of rice •  The rice mills deliver rice to her shop Name: Myra LocaLon: Muñoz, Nueva Ecija Established: 1981 Customers: Individuals, restaurants Source: Interview 29

30. Appendix IG: Integrated rice producer SL Agritech Corporation Input Provider Farmer Rice Trader Mill Wholesaler Retailer •  Premium brand has the potential to help the smallholder rice farmer •  Has exported premium rice to Dubai, LA, Netherlands, Hong Kong, and Indonesia •  An integrated value chain allows for strict quality control •  This company formed the basis of our recommendation Name: SL Agritech CorporaLon Established: 1998 Company: Family-‐owned ObjecLve: Promote the development, commercializaLon and growth of hybrid rice technology Products: Doña Maria Premium Quality Rice (5 variants) SL-‐8H high-‐yielding seeds, bactericide, insecLcide, plant energizer Source: Interview, company website 30

31. Appendix II: Higher yielding rice Another potential solution for raising incomes Revenues Inbred SL-8H Yield&(kg&/&ha) 4,500&&&& 8,000&&&&&& Price 0.36&&&&&& 0.36&&&&&&&& Total5revenue 1,6365555 2,909555555 Costs Seeds 55&&&&&&&&&& 109&&&&&&&&&& Fertilizer 335&&&&&&& 365&&&&&&&&&& Pesticides 71&&&&&&&&&& 71&&&&&&&&&&&& Labor&(incl.&harvest&+&irrigation) 636&&&&&&& 778&&&&&&&&&& Total5cost 1,0975555 1,323555555 Net5income 5395555555 1,586555555 Source: SL Agritech presentaLon •  Higher yielding rice of 10 – 17 MT / ha will increase revenue for farmers •  While the costs of inputs are higher, the net income is higher because of higher yields •  However, this is only an incremental improvement as traditional traders are still in control of the value chain Farmers can almost triple their income on a single harvest using high-‐yielding hybrid seeds SL Agritech’s SL-‐8H high-‐yielding hybrid seeds 31

32. Appendix III: Diversifying rice production Crops with potential for supplementing incomes Source: PhilRice, Interviews •  Corn •  Mungbean •  Mushrooms •  Vermicast (the end-‐product of the breakdown of organic matter by an earthworm) •  Ducks •  Fish e.g. tilapia 32

33. Why not our original solution? Selling rice dryers/storage did not suit the Philippines • Government distributes these devices for free through DA/DAR • Farmers are often happy not to dry their palay as it is troublesome and may not be proBitable • Farmers may not have their own transportation • Economies of scale and lower buyer costs cannot be reached this way Selling dryers & storage bags on credit Training on dryer operation & maintenance Connection to global markets 33

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