FFTC Agricultural Policy Platform (FFTC-AP)

ABSTRACT

Myanmar, once known as not only “rice basket of Asia” but also “the world’s largest rice exporter” stood as 7^th largest global rice producer in 2014. Successive governments attempted priority on rice sector in any agricultural policies, thus, rice exists as a strategic sector due to wide spread utilization, contribution to country’s GDP, creating income and employment generation in Myanmar. Rice contract farming system was introduced by Rice Specialization Companies in Myanmar at the end of 2008, by encouraging private sector participation for rice sector development. Some companies practice written contracts with individual farmers while others apply written or verbal contracts with group of farmers. Under the rice contract farming system, rice farmers can get seeds, fertilizers, credit and technical support from contracted companies as well as they have stable market access as compared to the traditional system. This study attempts to evaluate the smallholder households' decision to participate into the contract scheme and the contribution of contract participation on smallholders’ rice farm performance in Myanmar, specifically in Danuphyu Township, Ayeyarwaddy Region and Pyay Township, Bago (West) Region. It uses full information maximum likelihood estimation of endogenous switching regression (FIML ESR) model on a total of 403 smallholders (220 contract and 183 non-contract smallholders). The empirical results show that age and education level of household heads, frequencies of production shocks experienced during the last five years, participation into farmer organizations, and frequently contact with extension services are influencing the decision of smallholders to participate in the contract farming scheme. Probability of smallholders' contract participation also differs between two study townships. Overall findings indicate that contract farming has positive and significant impacts on gross margin of paddy production. Contract scheme with individual smallholders along with provision of seeds, fertilizers and credit showed more effective ways to improve smallholder livelihoods rather than group contract arrangement with only fertilizers provision.

Keywords: Rice, contract farming, smallholders, Myanmar, Endogenous switching regression

INTRODUCTION

Myanmar was known as not only “rice basket of Asia” but also “the world’s largest rice exporter” during 1940s. Myanmar’s paddy production stood as 7^th rank among top ten global paddy producing countries and 3^rd largest rice exporter in Southeast Asia in 2014 (FAO, 2014). During 2013-2014, paddy accounted 35% of total crop sown areas, 40% of total gross agricultural output and contributed 13% of gross domestic product (GDP) in Myanmar. Labor engagement rate is also the highest in the rice industry as compared to other crops and approximately three-fourths of farm household income is derived from rice farming and related activities, especially in the main rice producing areas of Ayeyarwaddy, Bago and Sagain Regions (World Bank, 2014). Paddy production has been increasing more than 50% up to 2013-2014, which was two and half decades after market oriented economy was adopted, thus country has sufficient volume for growing population and considerable surplus to export.  Share of rice export value in agricultural export value and total export value were also increased after multi parties’ government era since 2011 (CSO, 2012).

"Rice" as being the staple food as well as a source of employment opportunities and export earnings in national economy, remains as a strategic crop for socioeconomic development of Myanmar. Government therefore reforms and implements various agricultural policies prioritizing the rice sector development which includes encouraging private sector participation. Poor paddy yield, usage of poor quality seeds, mixing large number of varieties which dilutes the quality of pre-processing paddy, limited post-harvest infrastructures, antiquated mills, high production and marketing costs, ambiguous and arbitrary trade policy measures, and high port and export procedure costs are major bottlenecks to smallholder dominated rice farming and rice sector development in Myanmar (Fujii and Satyanarayan, 2015).

Private rice specialization companies (RSCs) introduced the contract farming system along Myanmar’s rice value chain since 2008 monsoon season especially in major rice growing areas of the country. Contract farming system has been considered as one of the potential business models to link smallholders to world export markets along the stable supply chain as well as an institutional solution in the provision of inputs, finance and technical assistance to resource poor smallholders. Rice contract farming scheme in Myanmar is still a new phenomenon and there are limitations in studies and growing literatures. Therefore, an empirical research is essentially and statistically needed to get a better understanding about how this system has been empowered in smallholder rice farming and rice sector development. This study attempts to answer: "which factors are determing the probability of smallholders' participation in rice contract farming? How does rice contract farming influence on rice farm performance of smallholders?" in Myanmar.

Rice contract farming system with Rice Specialization Companies (RSCs)

Gold Delta RSC, Danuphyu township in Ayeyarwaddy region and Khittayar Hinthar RSC, Pyay township in Bago (West) region are purposively selected in this study due to their actively operating contract farming system, wide area of paddy production and large numbers of smallholders under contracts. Basic information and detail specification of contract farming schemes by selected RSCs are illustrated in Table 1.

Gold Delta RSC practices informal contract model, and is working seasonal written contract with individual smallholders and providing certified seeds along with farm inputs including seasonal credit, and product market. Gold RSC has two types of contract farmers who are seed producers and grain producers. There is more input provision, higher purchasing paddy price and strictly control measures in line with following good agricultural practices for contract farmers (seed producers), as compared to provision, purchased price and controls over cultural practices for contract farmers (grain producers). Khittayar Hinthar RSC also uses seasonal written contract with group of farmers by providing fertilizers and output market. It practices intermediary contract model which includes formally contracting with village head/farmer leader who informally contracts with a number of farmers.

Table1. Rice contract farming schemes in study areas

Note: Exchange rate during the survey period (June to December, 2014) is 1 US$ = 987.82 Kyat according to central bank of Myanmar.

Source: Author’s compilation based on interviews of RSCs and their related documents.

ANALYTICAL FRAMEWORK

A total of 220 contract smallholders and 183 independent smallholders from total 9 villages of two selected townships are randomly interviewed with well-structured questionnaires focusing on socioeconomic characteristics of households and detailed data on monsoon paddy farming activities during 2014-2015. Participation into contracts is not only self-selection of smallholders but also non-random selection by RSCs. Thus, participation decision could be influenced by the observed (farm and household characteristics), and unobserved factors (motivation and management skills) of smallholders. Full information maximum likelihood estimation of endogenous switching regression model (FIML ESR) is used by accounting both observed and unobserved selection bias (Lokshin and Sajaia, 2004). It calculates two separate outcome equations for contract and non-contract smallholders simultaneously along with contract selection equation.

where, I_i equals 1 for contract smallholders, and 0 for independent smallholders; Y_1i and Y_2i are outcomes (i.e., gross margin per hectare of monsoon paddy here) for contract and non-contract smallholders; Z_{i ,} X_1i and X_2i are vectors of factors (socioeconomics and institutional characteristics); α,  β₁ and β₂ are the parameters to be estimated; and ε_i,  µ_1i and µ_2i are the error terms. Under assumption of trivariate normal distribution of the error terms with mean zero and covariance matrix,

where,  Ω  =  variance – covariance matrix to control for selection bias,  σ_ε ² , σ _µ1² and σ _µ2² represent variances of the error terms in the equations (1, 2 and 3) respectively. σ _µ1ε and σ _µ2ε represent the covariance between µ_1i and ε_i, and µ_2i and ε_i respectively. The covariance between µ_1i and µ_2i, (σ _{µ1 µ2}) is unobservable as a smallholder cannot simultaneously be a contract and non-contract smallholder, thus σ _{µ1 µ2} cannot be estimated (Maddala, 1986).  As the coefficient α is only estimable up to a scale factor in the selection equation (1), the variance of σ_ε ² is assumed to be 1. According to Fuglie and Bosch (1995), under given assumptions of three error terms structure, the conditional expectation of the truncated error terms [µ_1i | I_i =1] and [µ_2i | I_i = 0] can be expressed as: 

where ,