Dubious rice export floor prices

A farmer visits her rice paddy field outside Hanoi . Rice prices in Vietnam rose because of loading demand amid low domestic stocks, traders said. (Kham/Reuters photo)

A farmer visits her rice paddy field outside Hanoi . Rice prices in Vietnam rose because of loading demand amid low domestic stocks, traders said. (Kham/Reuters photo)

Rice trading firms have to register rice export prices, which must not be lower than the floor price set by the VFA.The export floor price for rice is stipulated in Decree 109/2011/ND-CP, which is determined under the guidance of the Vietnam Food Association (VFA) based on domestic and global market movements.

The calculation of export floor price is extremely difficult, because the nature of market is always volatile. VFA had to adjust the floor price many times, for example, up to eight times in 2011.

The change of the floor price frequently and unexpectedly in a short period of time can cause anxiety for rice trading businesses. This creates a risky business environment and drives rice trading enterprises to short-term business plans.

In fact, the implementation of this policy still lacks transparency, leading to unfair competition.

During many periods (eg 2-4/2011 – 1-8/2012), 5% and 25% broken rice from Vietnam were exported at the prices that were lower than the floor price set by the VFA, according to FAO statistics.

This makes us suspect that the floor price regulations published by the VFA, in fact, could not regulate transactions, and some businesses could still offer lower export prices than the floor price.

The businesses developing high quality rice varieties may not pay much attention to this issue. However, ambiguous information could lead to ambiguities in competition. Transparency of these issues is an important commitment to equal competition among businesses and, above all, to create stability for investments of enterprises.

Exports of high-quality rice are still low

Decree 109/2011/ND-CP 2011 and then Decision 6139/QD-BCT 2013 stipulate the conditions to become a rice exporting firm, including: (i) having at least one warehouse with a minimum capacity of 5,000 tons of rice and (ii) at least a rice husking factory with a minimum capacity of 10 tons of paddy per hour.

This means that the businesses that have close relations with farmers and produce branded products but do not meet the above criteria will not be exporting rice.

For example, Vien Phu Viet Nam Company, with the Hoa Sua rice brand, cannot actively access the market but have to entrust rice exports to large companies that are eligible to export rice. With a huge effort to build its own brand, this company cannot directly export its products because of the problem of a “license”.

Once a business has the certificate of rice export, to maintain rice export activities, it must meet the criteria of exporting at least 10,000 tons of rice per year, according to Decision 6139/ QD-BTC of the Ministry of Industry and Trade. This represents a focus on volume rather than quality of export rice.

It is more difficult for exporters of high quality rice as they are requested to have large enough material area to satisfy this condition. Exports of low-quality rice are done easily as exporters only need to purchase a sufficient volume of rice from traders.

Rice exports appear to have become a playground of giants able to impose unfavorable conditions on others, especially farmers.

We do not know whether these giants help improve the efficiency of the rice sector because having connections with farmers is not the most important condition.

Overall, Decree 109/2011/ND-CP was issued with the aim of minimizing the number of incompetent rice exporting companies. However, this would make the export of high-quality rice, with a relatively low volume, extremely difficult. Therefore, we believe that there should be a special mechanism for businesses to export branded rice.

Therefore, the regulations on keeping a stable number of rice exporters, with up to 150 enterprises, and the provisions to maintain export volume of 10,000 tons per year in Decision 6139/QD-BCT, should be canceled. The “hard” numbers only make enterprises “shun” the production and export of high-quality rice.

Let’s imagine that the rice sector is “untied” and all companies with their own rice brands are allowed to export their products, there will be more Vietnamese companies exporting high-quality rice to the world market. The credibility and effectiveness of Vietnam’s rice industry will be significantly improved. A market is only healthy when there are more players with different products allowed to join.

“Tying” the output

Not only the problem of “license,” Vietnam’s rice exporting policies also create many other output-related difficulties for private enterprises.

Circular 44/2010/TT-BCT, giving detailed guidance to some articles of Decree 109/2010/ND-CP, says that traders are not allowed to sign rice exporting contracts, or let their buyers re-export rice to the markets that already have government-to-government contracts, unless they are approved by the Ministry of Industry and Trade. Thus, private companies are only permitted to export rice to small or new markets.

According to an analysis of the World Food Organization (FAO) in 200, rice is usually exported to neighboring countries due to the characteristics of taste and transport costs.

Meanwhile, the government to government contracts are signed with major partners in neighboring countries of Vietnam such as the Philippines, Indonesia or Malaysia … That means the export markets of commercial contracts are very “narrow”, thus investments in rice becomes even more risky.

We think that it is time that State-owned enterprises (SOEs) give up the commercial playgrounds for increasingly dynamic private businesses. SOEs should focus on rice stockpiles and ensure food security in the country.

Because private enterprises, with their acumen, will “capture” market signals faster than SOEs. They are also an important link in the chain links with farmers to bring Vietnam’s rice brands to the international arena.

Blowing new vitality into private enterprises, a stable investment environment and policies friendly to the market are the best and most sustainable policy for building Vietnam rice brands.

The uncertainty in the investment climate and institutions has restricted the dynamism of businesses in the process of seeking export markets. Many policy-related issues are hindering Vietnamese businesses in building rice brands and linking farmers and it seems that all problems originate from the obsolete mechanism.

Policy change is an arduous process, but it is time for all parties to make a breakthrough. If the rice sector triggered the first renovation 30 years ago, we believe that the changes in policies and mechanisms to help the industry become more commercial are likely to be the sign for a second renovation. And those who will benefit the most, like in the first renovation, will be the farmers.

Nguyen Quang Thai – Nguyen Khac Giang

(Vietnam Institute for Economic Policy Research)

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