Discussion Paper No. 69: Wolz, Axel and Ottfried C. Kirsch: Equitisation of Agribusiness in Vietnam: Options for Small-Scale Farmers with Special Emphasis on Coffee Production in Daklak Province. February 1999
Diskussionsschrift Nr. 69 der Forschungsstelle für Internationale Wirtschafts- und Agrarentwicklung eV (FIA), Heidelberg 1999
This paper is based on a joint research project executed by the Research Centre for International Agrarian and Economic Development, Heidelberg and the Institute of Agricultural Economics, Hanoi. This project is financially supported by the Volkswagen Foundation. Most of the topics discussed in this paper were taken up in a field trip to Daklak Province at the end of October 1998 when the authors were asked by the VINACAFE/GTZ-project "Viet-Duc Coffee Project" to provide their ideas concerning the equitisation of the Viet-Thang Coffee Company. The support of both, Volkswagen Foundation and VINACAFE/GTZ is greatly appreciated.
1 Introduction: Situation and Problem Analysis
2 Role of Tenant Coffee Farmers at Agro-industrial Complexes
3 Linking Agricultural Producers with the Down-Stream Sectors
3.1 Coordination on a Contract Basis
3.1.1 Options for Links Between Farmers and Agribusiness
3.1.2 Payment Modalities
3.2 Linking Farmers through Shares or Bonds
4 Present Stage of the Equitisation Process in Daklak Province
4.1 Equitisation of Non-agricultural Enterprises
4.2 Equitisation of Agro-industrial Complexes
4.3 The Case of Viet-Thang Coffee Company
Starting from 1992, the Government of Vietnam is promoting the equitisation of state-owned enterprises into joint stock companies. The shares are supposed to be more and more allocated among private individuals, including workers, and companies. Since a few years agribusiness units and state farms (i.e. agro-industrial complexes) have been earmarked as well. In this paper the options in this process of the small-scale tenant farmers will be assessed. They are linked to the agribusiness units in various ways: In most cases, they used to be workers of those units. Generally, they are still registered as workers up to now. They have rented the land from the management and they act as suppliers of agricultural raw materials. In line with the equitisation process, they are supposed to become shareholders and, hence, co-owners of the equitised companies. In order to be of benefit for both sides (i.e. the farmers and the equitised companies) in the future, coordination in agricultural production has to be set-up among the farmers themselves (horizontal cooperation) as well as between farmers and the equitised companies (vertical integration). It is argued that these tenant farmers should receive land use rights ("red book") in the same manner as their colleagues of the former agricultural production cooperatives. It is in their best interest to organise themselves in some type of cooperative which will have a double role. On the one side, it will negotiate all types of contracts with the management of the equitised companies. On the other side, it will pool the shares of the farmers and represent their interests in the management boards.
1 Introduction: Situation and Problem Analysis
The equitisation of state-owned enterprises in agribusiness as well as in other sectors has become a political objective in Vietnam in recent years. While many stakeholders are involved in this equitisation process (e.g. besides the farmers as producers of agricultural raw materials, the management, employees and workers of the state farms, the management of the respective state farm holdings and, finally, officials at the various administrative levels and representatives of various mass-organisations), this analysis puts the emphasis on the options of the small-scale tenant farmers. The main objective of this paper is to stimulate the discussion process and not to provide clear-cut solutions, already. It is aimed to de-emotionalise the discussion about the pros and cons of the various options. Evidently, a feasible solution has to be worked out by all groups concerned. It is aimed that this paper will facilitate the process in finding a long-lasting agreement which is acceptable to all sides and will stimulate socio-economic development. While the following discussion mainly refers to equitisation in coffee processing, the findings are similarly valid for other agricultural products and forestry issues in Vietnam.
Since 1992 a process of equitisation is being implemented which allows for the transformation of selected state-owned enterprises (SOE) into joint-stock companies whose sale of shares will go to Vietnamese individuals and organisations. The companies have to be reorganised in such a manner that they are subject to the ordinary company law and the business laws applicable to private companies. This process also includes the surrender by government of its existing control over the enterprises, previously maintained through the right to appoint the management and board members. Similarly, these equitised companies will have to compete for financial services with private ones on equal terms (MEGYERY/SADER: 18). Up to 1998 the number of companies equitised has fallen far short of government targets. Therefore, the government urged all departments, provinces and cities to speed up the equitisation process. With respect to the production, processing and marketing of coffee the state-owned Vietnam National Coffee Corporation (VINACAFE) has been required to equitise several of its 45 sub-units under central management as quickly as possible. One of these units foreseen for equitisation is the Viet-Thang Coffee Company in Krong Ana District, Daklak Province. This coffee estate, like most agro-industrial complexes, comprises agricultural land and agricultural processing units.
Due to very favourable coffee prices coffee production increased very rapidly during the last two decades in Daklak Province (VINACAFE/GTZ; personal communication). While in 1975 the coffee area just covered 6,224 ha it stood at 172,000 ha in 1997. But the actual figure might even come up to about 200,000 ha, already. Other crops, including food crops, are only of minor importance. Coffee production is more or less exclusively dominated by robusta-varieties. Only, recently it has been started to plant coffee of the catimor-variety (i.e. a hybrid between robusta and the high-quality arabica-variety) on some newly established plots. Actually, the farmers have benefited tremendously from the cultivation of coffee. They used to earn and are still making good money. The relatively good conditions of farmers' houses as well as the vast supply of economic activities by the industrial and service sectors, respectively, in the central town of Buon Ma Thuot are indicators of a quite prosperous, if not to say booming region.
With respect to the pushing forces in promoting coffee production a change could be observed within the last two decades. In the late 1970s the state organised the expansion of coffee plots through state farms and employed people mostly from the densely populated Red River Delta as well as members of local ethnic minorities. The state provided a basic infrastructure. Starting from the second half of the 1980s, more and more people from the Red River Delta moved in on their own and took up coffee production. In these days about 50,000 ha are still under the management of coffee estates, either under VINACAFE or under the provincial people's committee. In other words, less than two-thirds of all coffee is produced by independent small holders.
Due to its rapid recent expansion, most coffee farmers regarded coffee production as a quick way to earn money and many wished to go back to their home provinces. Therefore, coffee production has been organised in a way to harvest high quantities quickly, but not to develop a sustainable cropping pattern which ensures high qualities over long periods. Actually, shade trees cannot be seen over vast tracks of coffee plots, anymore. Yields coming up to 2,000 - 3,000 kg of green coffee per hectare, or even higher, are among the highest in the world. As higher qualities were not rewarded by higher prices farmers tried to maximise their short-term profits. Hence, it was no surprise that more and more wanted to participate in the coffee boom. The state lost control over the expansion of coffee production. As one of the consequences the multiplication of coffee seedlings is not always meeting the basic phytosanitary requirements.
First preliminary discussions about the equitisation process of various agro-industrial complexes have started. While at the beginning it was aimed to finalise the equitisation process in Daklak Province by the end of 1998, it has been now agreed to take more time.
2 Role of Tenant Coffee Farmers at Agro-industrial Complexes
The relationship of the tenant farmers to an agro-industrial complex is a multi-faceted one since they depend on each other to some extent. On the one side, the small-scale farmers rent the land, or more exactly, the coffee trees from the management. Contrary to the decollectivisation process of the agricultural production cooperatives, the agro-industrial complexes have kept the land use rights under their jurisdiction. Hence, the management decides on the tenancy contracts. This is quite different to the general rule in Vietnam where the right to assign land use rights to individuals and households is with the people's committee at the district, district capital and city level, respectively. With respect to the tenant farmers this situation requires to show at least some benevolent behaviour in order to ensure that the management does not find any reason to cancel or revoke the lease contract. In praxis, this benevolent behaviour is shown in delivering a certain amount of the coffee grown to the processing unit of the coffee estate for further processing. For the time being, the tenant farmers fulfil this requirement already in paying about 25% of their harvest as rent ("rent in kind").
On the other side, the coffee estate depends on the regular supply of a certain amount of raw material (e.g. coffee beans) in order to run the central processing and marketing unit, economically. Without the quantity delivered by the tenant farmers the coffee estate had to rely on the small volume harvested on its own plantation, only. In that case, the capacities of the processing unit will not be used to its full potential, i.e. processing costs per kg processed coffee will rise and the soon-to-be-equitised agro-industrial complex will lose its competitiveness. The managers must have a strong interest in linking the coffee farmers to the central processing unit. In order to make sense for both sides in the long run, there must be economic incentives for the farmers to cooperate and not e.g. the threat to cancel the tenancy contracts. This requirement becomes even more important since a number of small-scale traders has been recently established who quite effectively compete with the state farm. However, due to their size and processing capacities the coffee estates should always be in a position to offer attractive arrangements (i.e. competitive prices and/or other benefits) to the coffee farmers.
With respect to the equitisation process, tenant farmers will be involved with the central processing unit even in a third dimension. When buying or signing shares of the equitised coffee estate they will become co-owners of the central processing unit. As future shareholders they will have the right in participating in the decision-making process. At this stage, it is still open whether tenant farmers will receive shares as individuals (e.g. name shares) or whether they get shares indirectly through a still-to-be-inaugurated own organisation which will represent the rights and objectives of the farmers in the management board. In any case, then the representatives of the farmers have to push through their own specific interests as well as to work out compromises with the representatives of the other groups involved to ensure the long-lasting viability of the processing unit.
When it comes to the equitisation process it has to be seen whether there are contradictions in their roles as tenants, as suppliers of raw coffee and as future shareholders of the equitised farm.
3 Linking Agricultural Producers with the Down-Stream Sectors
Most farms all over the world are relatively small businesses involved in the market in buying inputs and selling often perishable, bulky and poorly timed and located food and other agricultural raw materials. But they often face relatively good organised up-stream and down-stream sectors. Generally, their market power with respect to processing companies of food and/or other agricultural raw materials is quite limited. In order to redress this imbalance in market power farmers looked for ways to improve their economic position. This requires among others that they coordinate their production and marketing activities more closely not only with other farmers but also with the down-stream sector (KEANE/LUCEY: 236). Success has not been possible without firm commitments in form of contracts. In such contracts farmers have given up some of their decision-making rights in farm production in order to improve their farm income. However, agricultural producers cannot only be linked by contracts alone to a processing unit. In addition, they might become owners of shares or bonds of that respective processing unit and, in this way, much more deeply involved in the economic well-being of that company. In the following chapter the coordination by contract will be discussed first followed by a discussion of the shareholder and bond bearer concept.
3.1 Coordination on a Contract Basis
Coordination in agricultural production can be set-up either among the farmers themselves ("horizontal cooperation") or between farmers and companies of the up-stream and down-stream sectors ("vertical integration"). In general, elements of cooperation and integration can be observed in combination. Specifically, cooperation signifies an entering into contractual commitments among farmers as legally and economically independent enterprises. The contract ties must be strong enough to have an influence on the structure and organisation of the specified farm activities, e.g. common rules for the cultivation and care of crops in order to reach a certain level of quality. Hence such an agreement means a commitment to common strategies. In most cases, cooperation also relates to common marketing, e.g. periodical deliveries of specified quantities and qualities to the market or to a third party, like a processing company, private traders, etc. This last example provides the link to integration. In the case of vertical integration, enterprises dealing with the different stages which an agricultural product has to pass through on its way from producer to consumer coordinate their activities on contract basis, e.g. a number of coffee farmers with a coffee processing company. Actually, the farmers deliberately relinquish part of their decision-making powers to a coordinating centre, e.g. the coffee processing unit stipulating the quantity, quality and timing of coffee deliveries. It becomes evident that vertical integration requires some kind of horizontal cooperation among the farmers to be effective (KIRSCH: 5-8).
3.1.1 Options for Links Between Farmers and Agribusiness
Within this chapter it will be distinguished whether farmers are linked to the processing unit individually or whether they approach the processing unit jointly in form of producer groups, service (marketing) cooperatives or cooperatives for the promotion of agricultural production as well as closed joint stock companies.
(1) Contracts on an individual basis
In principle, the relationship of the agricultural producers with a central processing unit can be established through production and marketing contracts on an individual basis. Typically, this approach requires the conclusion of several hundreds to several thousands contracts. In general, contract farming has become quite popular for those crops where a high degree of control is required in raw material delivery and production processes are highly labour intensive. Thus, crops where there are stringent quality criteria (typically in export markets) and/or which are highly perishable or require intensive husbandry are appropriate for contract farming schemes. In this respect, farmers improve their marketing channels and ensure higher crop prices compared to the situation when acting on their own (POULTON et al.: 50).
On the other side, processing companies have a very strong interest in securing a reliable flow of raw material to maintain profitable capacity utilisation levels particularly in those cases when the company has made considerable investments. Only if it is made use of its full capacity the processing costs can be kept at a minimum.
According to the degree farmers devolve control over various aspects of marketing and/or production to the processing unit, farm contracts can be classified into three broad groups (HOBBS et al.: 155):
1. In the most simple way farmers (i.e. seller) and the processing unit (i.e. buyer) agree that the buyer provides a market for the seller's output (market-specification contracts). The seller transfers some risk and the decisions over when the product is sold and how it is marketed to the buyer. Control over the production process, and the risks associated with it, remains with the seller. The producer is assured of a market for the commodity; the price, or the basis for establishing a price, is detailed in the contract.
2. The farmers can transfer a certain degree of control of the production process to the buyer (production-management contract). In this case, the buyer is responsible for marketing and participates in production management through inspecting production processes and specifying output usage. This will be important when specific quality characteristics of the output are of importance to the buyer and can be influenced by production practices.
3. Finally, the farmers can transfer the full control over the production process to the buyer (resource-providing contracts). In this case the buyer provides a market outlet for the product, supervises its production and supplies key inputs. Often the buyer owns the product, with the seller paid by volume of output. This is the closest contractual arrangement to full vertical integration. In short, the processing unit assumes all the production risk and keeps a tight control on production methods.
Hence, the contract agreements can relate to (KIRSCH: 19):
- the duration of the contract in which at least one period of production should be involved,
- delivery dates, where delivery can be effected on demand (e.g. where goods can be kept in storage), by prior notification, or according to fixed dates (with possible price adjustment if early or late deliveries are made),
- pricing and fees for fixed price services rendered, graduated according to quality or quantity, are common, as are premiums for large lots and for early and late deliveries, prices calculated according to the state of the market (in between the market price and a basic price, average prices over a period of time, pooling prices), prices taken from current market prices (e.g. fixed difference to market prices, market prices limited to a fixed latitude between maximum and minimum fixed prices, average prices taken from several quotations),
- production technique and the utilisation of certain means of production, possibly restricting free choice when buying.
Very often contract farming is associated with the provision of short-term credit to overcome seasonal finance constraints facing small-scale farmers. In order to ensure the strict quality requirements of the final output, extension advice is commonly supplied. However, contract farming schemes have to face problems with opportunistic smallholders. Farmers might get offered better prices by third parties so they might be tempted to sell to them and not to the contracting partner. Similarly, in case farmers have received credit they may avoid repayment of these loans. If default occurs too often from the side of the farmers, the processing company will make losses. If losses become too high it might have to close down and the whole scheme collapses.
Contracts have to cover particular sets of risks. Besides making sure that the farmers are finally selling their products to the processing unit, it has to be ensured that farmers adopt to the production methods stipulated in the contract. Hence, the monitoring costs of contract farming can be particularly high. On the other side, farmers might face the risk that the buyer will act opportunistically and renege on the contractual agreement due to various reasons, e.g. it might make a loss if the product is purchased at the pre-agreed price, or just to increase its profits at the expense of the vulnerable small-scale farmer. With respect to some crops, these risks are not that significant due to their heavy weight and the fact that there is no market if they are still in an unprocessed stage, e.g. sugar cane, sugar beets or tea ("heavy cash crops"). Once farmers and the processing company have committed themselves it is not economic due to high transportation costs neither for the farmers to sell to other processing companies nor for the processing company to buy from other farmers further away. With respect to dried coffee beans, farmers do have a limited option to sell elsewhere.
Therefore, the contracts must include incentives for both sides so that all partners have an interest in its continuous implementation. Experience all over the world has shown that contracts without an appropriate incentive structure will fail to generate products of the desired qualities and will impede the development of a modern, efficient agri-food chain. Fundamental to the use of contracts, however, is also an effective system of commercial law for the establishment and enforcement of contracts.
(2) Contracts on a group basis
In praxis, in most cases it is not feasible for a processing unit to conclude contracts with a large number of small-scale farmers on an individual basis. The costs of concluding, monitoring and enforcing the contracts, in short the transaction costs, are simply too high. Therefore, cost cutting solutions are looked for. From the perspective of the processing company it is much more effective if a contract is concluded with a group of farmers. On the other side, also the farmers might be reluctant to conclude contracts with the management of the processing unit due to lack of bargaining strength and lack of knowledge how to do it ("social distance"). This disadvantage has been overcome in many countries if farmers organise themselves in groups, i.e. setting-up or joining either agricultural producer groups, service (marketing) cooperatives, cooperatives for the promotion of agricultural production (horizontal cooperation) or closed joint stock companies.
When joining such a group, farmers are required either because of statutory rules or additional sub-contracts as members to deliver their agricultural products to the specified processing company. It is important to note that all these groups have in common that they are no more informally organised but are formally registered as legal entities. With the help of such voluntary intermediary groups individual agricultural producers realised a way to avoid or, at least, reduce a possible (one-sided) dependence from the up-stream and down-stream sectors, like e.g. from the agricultural processing companies.
As members they have a deep interest in the success of their own groups. Besides signing their membership agreement farmers in most cases conclude a contract with it specifying marketing and/or production aspects. The group functions as an intermediary broker on behalf of its members; the farmers sign a contract with their group while the group is concluding a contract with the processing unit, i.e. horizontal cooperation is linked with vertical integration. In this way it is aimed at reducing transaction costs for both sides, the farmers and the processing company by providing market price information, providing information about the product characteristics demanded by the markets, reducing negotiation costs through economies of scale in negotiating and reducing monitoring costs through collective bargaining agreements. This cost reduction generally encourages processing companies to invest in the improvement of storage and handling of products (KIRSCH: 15-16; HOBBS et al.: 164). With respect to the content of the contracts all what has been discussed above applies as well.
Producer groups (producer associations)
In Germany and other European countries producer groups have become quite popular among agricultural producers as a form of organising themselves without having to refer to the more complicated rules of setting up and running service cooperatives. Actually, this model has been promoted with the adoption of the Law to Improve Market Structure by the European Union in 1969. In general, producer groups adopt as legal persons the form of registered societies according to German law, implying that it is run as a non-profit organisation. To stress the formal organisational character these groups are often labelled as producer associations. Producer groups can be defined as a union of agricultural producers for the purpose of jointly adapting their agricultural production to the requirements of the market. Their activities are mainly carried out in the sphere of marketing. In general, they restrict their purpose to one crop, only. Like cooperatives, they are voluntary associations of farmers with a common commercial objective, but their membership is restricted. The restriction of membership refers to a minimum size, e.g. cultivation area or production volume. In addition, members must agree to adhere to specified production methods such as common fertilising practices, i.e. there are binding rules governing production and quality. Similarly, member farmers must agree to sell their products to a specific processing company with whom the producer groups are linked by (framework) contracts, i.e. there is a full delivery service for the specified products. In this way, the processing company has control over product quality required to order to be competitive on the market (HOBBS et al.: 163; KIRSCH: 42). A simplified model of the approach with producer groups is shown in Figure 1: Model of Producer Groups.
As shown above, the relationship between agricultural producers, the producer group and the processing company can be pictured as a triangle (WWG a; WWG b). Referring to the case of a grape production group and wine processing companies in Southern Germany the picture looks as follows: A group of agricultural producers voluntarily forms the producer group. The farmers commit themselves to sell all their grapes or, at least, a specified quantity through the producer group. Since the set-up of producer groups only makes sense if they run on a long-term basis members have to observe long periods of notice before they can revoke their membership. During the first five years members are not allowed to cancel their membership and, only, from then on they can do so. However, they must give at least one year notice, but more often these periods may last up to 2-3 years. In this way, it is ensured that the producer group can fulfil its own contracts with the processing companies.
Like cooperatives, a producer group is set-up by the general assembly, a managing board (obligatory) and a supervisory board (optional). The producer group is represented by its chair person. However, a managing director responsible for the day-to-day business may be employed. Depending on its size s/he can be employed on a part-time or full-time basis. S/he is responsible in supporting and supervising the members to produce the goods of the stipulated quality and quantity. Staff and all other costs involved in running the producer group have to be covered by the membership fees on which it has to be decided by the general assembly.
The contract regarding the marketing of agricultural products is negotiated and finally concluded between the producer group and one or several processing companies. In this framework contract the general rules and regulations of the supply of grapes by the agricultural producers and the acceptance by the processing companies are written down. Various details, like e.g. the payment modalities have to be settled by the representatives of the producer group and the processing company in separate documents which might be revised on a yearly basis. Again, once farmers sign the contract they have to adhere to it for at least five years and, only, from then on they might cancel their delivery commitments with at least one year notice. A farmer wishing to participate in this scheme has to agree to the general contract between the producer group and the processing company. In addition, he has to specify the size of his area under grape cultivation besides its location and the wine varieties grown which are very important in wine marketing. Based on the more general contract between the producer group and the processing company the farmers commit themselves in writing to supply a certain quantity of the product to the company. A representative of the processing company countersigns this commitment ensuring that the product will be purchased by them. The farmers are directly paid by the processing company. In general, there is a down payment and the rest is paid over the next few months in instalments.
Service (marketing) cooperatives
An alternative to producer groups are service cooperatives. Cooperatives are voluntary associations of (agricultural) producers with a common commercial objective. Cooperatives operate on a number of principles which generally include: (i) open membership (any producer can join, or leave); (ii) equal decision-making rights for all members ("one member - one vote") regardless of the degree to which a member uses the cooperative; and (iii) the interest on a member's share and loan capital is limited and any profits which are surplus to requirements are distributed among the members.
Service cooperatives might follow a broad-based agenda. It is their objective to (i) improve bargaining power in purchasing farm supplies and selling farm products; (ii) reduce costs of marketing farm products; (iii) obtain products or services which are either costly or not otherwise available; (iv) obtain better market access for cooperative members; (v) improve product and service quality in both farm inputs purchased or commodities marketed; (vi) increase farmers' incomes, and (vii) provide information and education to increase agricultural production efficiency and to enhance quality of life in rural areas (FARRIS: 148). In line with the Cooperative Law, effective from 1 January 1997, they are profit-oriented organisations with an open membership which have to compete with other business entities. Although the management board still has the right to admit or reject new members the preconditions of joining are not that strong as with producer groups.
Marketing cooperatives can be highly specific. They focus on agricultural outputs, with farmers cooperating to improve the marketing of their produce. A primary aim of marketing cooperatives is to increase the bargaining power of their members vis-à-vis the down-stream sector and to reduce the costs of marketing by exploiting economies of scale. Besides just simply performing marketing functions such as providing market information, locating and negotiating with buyers, etc. marketing cooperatives might be vertically integrated down-stream in the marketing chain, undertaking processing, packing and distribution of agricultural outputs (HOBBS et al.: 162). A simplified model of the approach with marketing cooperatives is shown in Figure 2: Model of Service (Marketing) Cooperative (N.N. a; N.N. b).
Depending on the specific by-laws of the respective marketing cooperative the agricultural producers are required either by statutory commitments or through individual contracts to supply the quantity and quality of specific products. In general, the marketing is done through the cooperative, meaning that the cooperative is negotiating the supply contracts with the processing companies. It is paid by it and upon its payment the cooperative pays the agricultural producers. The processing companies provide a down-payment which is passed on to the respective producers (i.e. members). In this respect, the agricultural producers are only indirectly connected with the processing company.
The open membership can be seen as a weakness of the marketing cooperatives. It has little control over the supply of the product because membership is open to any producer and members are often not obliged to sell all of their produce through the cooperative. Fluctuations in the supply of products through the cooperative occur if farmers perceive that the open market temporarily offers them a better return (HOBBS et al.: 162). However, cooperatives try to counter this effect in trying to be competitive (i.e. to offer attractive prices), in imposing statutory delivery commitments and/or in imposing long periods in their bylaws for members to cancel their membership (N.N. c: §7, 8, 12).
Cooperatives for the promotion of agricultural production
When joining a service (marketing) cooperative farmers, in general, keep their decision-making powers with respect to agricultural production. In the field of cooperative marketing they just transfer the decision regarding to whom, at what time and at what price the product is sold to the management of the cooperative. Nevertheless, their small farm size, lack of credit and lack of know-how leading to inappropriate use of inputs hamper farmers' efforts to increase their production. Very often, small-scale farmers seem to follow their very own cultivation practices. In the case of commodities meant for industrial processing (e.g. coffee), the heterogeneity of varieties, fertilisation, plant protection, soil cultivation practices and subsequently product quality creates both manufacturing and marketing problems, especially when these products are designated for export (SCHILLER: 49).
The advantages of inter-farm cooperation to counterbalance these deficiencies have long been recognised. If farmers join a cooperative for the promotion of agricultural production they must be ready to leave the decision regarding the variety of seeds or the kind of fertiliser, etc., to be used to the management although they operate their holding on their own responsibility. Similarly, while most farm operations are performed individually, i.e. by each member on his land, they may also be carried out by the cooperative, e.g. machinery use or plant protection. However, it has been stressed that harvesting has to be done in all cases on a family basis, to maintain the private incentive through individual rewards for personal initiative.
It has been pointed out that this scheme of promoting agricultural production facilitates the supervision of agricultural credit, since the uniformity of agricultural production enables standardised credit packages to be used. In addition, this approach is often combined with a special type of vertical integration via contract arrangements with processing companies. It has been especially applied in connection with capital intensive production and the production of agricultural raw materials requiring immediate processing, e.g. with "heavy cash crops".
During the last decades cooperatives for the promotion of agricultural production have not only been integrated into land reform, land reclamation or resettlement programmes, but have also been adopted as a group approach by many agricultural extension services for making farm families familiar with modern production techniques and hitherto unknown crops. A typical example are the farmers' associations in Japan, Taiwan and lateron Thailand where agricultural extension and production planning are integrated as a special service (WÖRZ/ KIRSCH: 732-736).
This model has been successfully adopted as a means of vertical integration between agricultural producers and the processing industry in the Turkish sugar industry. Here, cooperatives of the producers - based on the village level - are organised for the promotion of agricultural production of the members (i.e. in this case sugar beets) under the guidance of the sugar factories. In particular, the necessity to organise joint use of machinery led to larger blocks of sugar beets being made up of adjacent individual plots, on the basis of the unified crop rotation. The basic function of the cooperatives is that of acting as a mediator between the various sugar processing factories under the Turkish Sugar Factory Company and the producers. Each sugar factory issues cultivation quotas in accordance with its capacity. The beet growing area is determined for each village. The agricultural inspectors employed by the sugar factories work out a crop rotation plan, with a village plan divided into four sections (= reserved areas for a specific crops). Strict attention is paid to ensure that, in any given year, sugar beet is cultivated in one section of the village, only, to meet the processing capacity of the respective sugar factory and to avoid plant diseases. In this way, large blocks of land under sugar beet are achieved, which are suitable for mechanisation. These blocks are sown with seed-drill machine made available by the sugar factory (KIRSCH: 83-87).
Closed joint stock companies
Non-business organisations or interest groups on the one side and closed joint stock companies as well as combination of both are alternatives in cases were cooperative societies, even as service or auxiliary organisations, are not considered to be trustworthy organisations for the farmers due to the misuse of cooperative organisational structures as collective economy organisations in the past. In fact, a (closed) joint stock company and a shareholding cooperative society have many things in common, such as the organisational structures and organs like general assembly, managing board, supervisory board etc. The main difference is just that voting in a cooperative is following the principle "one member - one vote", whereas the closed joint stock company follows the principle "one share - one vote". The cooperative principle follows a basic democratic principle, quite common in rural as well as tribal groups and societies, whereas the joint stock company suits very much structures which demand high capital investment, such as large storage capacities or, even, first processing activities.
3.1.2 Payment Modalities
One major impediment of contract farming in general is the issue of agreeing to a payment modus which is balanced and fair to both partners. Most agricultural products produced by farmers have to be processed first to become a marketable good, e.g. coffee. The prices of the processed goods are to a large extent determined on the world market which the respective processing company cannot influence at all. In this respect the world market prices of coffee can be influenced neither by a single Vietnamese coffee company nor by all Vietnamese companies together. Therefore, the management does not know at the beginning of the coffee harvest season what the coffee prices will be at the time when the processed coffee will be sold. The price fluctuations of the past might serve as a yard-stick for the future. Nevertheless there is the risk that prices might decline next time. Hence, the processing company will be reluctant to fix the prices for the raw products in advance. They prefer to shift the risk of price fluctuations to the agricultural producers as far as possible. Only at the end of the harvesting season when the processing company has made contracts for selling the processed good it can finally deduce the price of the raw product which it can pay to the farmers without making losses itself. Similarly, the processing company will pay higher prices to the farmers if the world market prices increase after harvest.
On the other side, the farmers prefer to get paid straight away, in cash if possible, when delivering their products to the processing company. They want to know the price for their products as early as possible. Depending on the price they plan and execute their farm activities or might give up this production activity (i.e. crop) altogether. They prefer to have no price risks at all. In case other traders or companies are inclined to pay the general market price at the time of harvest which is higher than the one offered by the processing company at that stage, farmers might be willing to deliver their products to those. Evidently, they do not benefit of any price increases in the following months.
Therefore, the statements about prices have to be formulated in such a way that both sides, i.e. the processing companies and the farmers, share the risks equally. This can only be achieved if the contracts are on a long-term basis and a certain degree of trust will be developed over time. This trust will be increased if the farmers also become shareholders of the processing company, since in this case they have a certain control over the management board.
An example in this respect is the Southern German Sugar Company (ZELLER et al.: 1-12); an open joint-stock company whereby more than 60 percent of the shares are in the hand of the farmers and their representatives. Farmers are not shareholders as individuals but through their associations and cooperatives. In becoming member of one of these associations, farmers contribute a certain sum to buy up shares. Now, they are not only sure of getting dividends on their contributions but they also have the right to deliver a specified amount of the raw product, i.e. in this case sugar beets, to the sugar processing factories (i.e. established quota). The area cultivated with sugar beets and hence the quantity of sugar beets to be delivered by each farmer is fixed by contract at the beginning of the respective cropping season.
Farmers are paid in three instalments: The first instalment is paid right after harvest, in general about 50% of the anticipated final price. The second instalment is paid about 4-8 weeks after the end of the harvesting season, in general it comes up to about another 25% of the anticipated final price. The third instalment and final payment is paid about 4-5 months after the end of the harvesting season. In case prices have gone up rapidly farmers might get a bonus. Evidently, the company has earned higher profits which automatically translate into higher dividends for the farmers as (indirect) shareholders. In case, prices decline the third instalment might be quite small. Dividends will be small as well or might even be cancelled for that year.
In concluding this chapter, it has to be stressed that with all types of contracts the opportunities for opportunistic behaviour, deceiving and shirking on both sides have to be reduced as much as possible. While this objective cannot be reached totally, it has to be made sure that there is a great degree of transparency on all aspects which are relevant for the contracts, like e.g. the setting of quality criteria, payment modalities, price setting etc. Coffee farmers and the processing company depend on each other but they have to establish mutual trust. In any case, experience from all over the world has shown that contracts will be only successful as long they provide economic benefit to both sides. Otherwise they quickly collapse.
3.2 Linking Farmers through Shares or Bonds
In many countries companies of the up-stream and down-stream sectors (agribusiness) try to tie agricultural producers more strongly to their companies than just by delivering and/or purchasing contracts. They either offer bonds with attractive interest rates and/or they hand out shares to the farmers. However, these arrangements make only sense in connection with delivering or purchasing contracts. They cannot be used as a substitute. Without contracts the companies should approach the general public as such.
In Vietnam, quite a number of agro-industrial complexes which, in general, comprise agricultural processing units and large land areas have been earmarked for the equitisation process. There is strong political pressure to include the tenant farmers in the equitisation process. Besides this pressure, there are several advantages for the processing company in offering shares and/or bonds. In the following discussion emphasis is laid on agricultural processing units.
(a) In order to stay competitive in the long run processing companies are required to permanent investments to improve their efficiency. The offer of shares and/or bonds to tenant farmers might be an attractive alternative for borrowing money from the banks. The interest on bonds and the dividends on shares should be lower than the interest rates for borrowing money. In this respect, they are a relatively cheap source of capital. However, from the point of view of the farmers they have to be higher than the interest rates on saving accounts to become attractive. The dividends on shares might be somewhat lower for some time since the shareholders also gain co-determination rights as the share represents an ownership title of the processing company.
While this is an attractive concept in mobilising fresh capital, it can be assumed that the tenant farmers will not rely on that much savings in order to pay up for their shares and/or bonds, straight away. One option could be that the shares and/or bonds will be distributed first and farmers will pay up the amount in retained (future) dividends later. The amount to be paid or a percentage of the income made by the regularly delivered agricultural products which will be retained has to be agreed upon in advance. Over a certain number of years, farmers will fully own their shares and/or bonds.
(b) While theoretically the mobilisation of fresh capital can refer to the general public as well, most processing companies have a strong interest in being more intimately connected with the agricultural producers. It is the main objective of the processing centre to secure a regular supply of raw material. In linking farmers as shareholders or bond-bearers they may develop a deeper interest in the economic well-being of the processing company than just as a partner in contract farming. Now farmers themselves have an economic interest in the well-being of the processing company which to some extent they can influence. Any advantages which the processing company might gain from the intensive commitments of the agricultural producers is also to the advantage of the agricultural partner. In this respect, farmers will be more committed to adhering to the farm contracts (as could be observed among sugar beet farmers in Turkey or in Southern Germany).
From the farmers' point of view it also makes sense to become shareholder of the processing company. In this way, they become co-owners of it and they, or their representatives, have the right in participating in the decision-making process ("co-determination rights"). The more rigid the contractual agreements are, the greater is the extent to which they have to relinquish their individual decision-making powers to the management of the processing unit. The relinquishing of individual decision-making powers in one's own farm can be compensated for with the right to a say in the planning of the processing company. Actually, they are cooperating with a processing company which is, at least partly, owned by the farmers themselves.
With respect to bonds farmers' commitment to the processing company will be not that strong. In this situation the interest rate on the bonds might be the most important reason for them to buy.
Shares and bonds can be sold either to individuals or to groups. The repercussions will be discussed below.
(1) On an individual basis
Shares as well as bonds are in general sold to individual persons. In this way, the farmers are directly linked to the processing company as individuals. Shares can be sold as name shares which are not openly traded. In general, shares are bought and sold among any person interested. In first case, the management can be sure that the shares will stay with the intended target group, e.g. the tenant coffee farmers. However, farmers must be sure that they receive a certain dividend or bonus in order to become interested. Similarly, farmers are not used to participate in the decision-making process. In general, they will have to identify their representatives who will act on their behalf. Since the purchase of bonds is not connected with ownership rights on the processing company it has to ensure an attractive interest rate.
Right after equitisation, the shares might not be traded openly. With the provision of name shares farmers can just resale their shares to the company in case of need of cash. In case the dividends are attractive there might come up an informal market for them. In the long run, shares should be traded openly at least among the farmers, and, maybe at a later stage, among the general public, or even at the soon-to-be-established stock exchange (i.e. among anyone willing to sell or to buy).
(2) Jointly on a group basis
In many cases, it makes sense to distribute or sell the shares on a group basis. Farmers have to speak in a common voice in order to make their position heard. Otherwise the ownership of shares is just another tax or fee for them and they do not feel committed to their own processing company. But in order to participate in the decision-making process effectively, farmers have to organise themselves first. They either pool their individual shares as a group or their cooperative or (closed) joint stock company will become the legal owner of the shares. In the second case, farmers are only indirectly owners of the equitised company. In many countries service cooperatives (marketing cooperatives as well as cooperatives for the promotion of agricultural production) have become economically that successful that the cooperative, as an independent legal entity, has bought up shares in those companies which were of direct importance to the agricultural producers in the up-stream and down-stream sectors. In other cases, several service cooperatives have set-up their own companies in the up-stream and down-stream sectors, in most cases as joint-stock companies. Sometimes, even competitors from the private sectors were asked to invest in a joint venture company.
To be of a lasting manner, agricultural producers should no more be directly involved as shareholders, but only indirectly through their cooperatives. The cooperatives own the shares and participate in decision-making on behalf of their members; they represent the interests of the farmers in the managing boards. Farmers as individuals are overburdened to make use of their shareholder rights effectively. Within the cooperative some members can develop the necessary skills and know-how to present their members' interests in the management boards.
The distribution or sale of bonds to groups, like cooperatives, is not very effective. For the cooperative, this is just an option among various other ones to invest any surplus funds. Since there are no ownership rights involved, this type of investment does not seem to be very attractive for the cooperatives or other farmers' groups.
In concluding this chapter, it has to be emphasised again that both options, i.e. shares and bonds, are only feasible if the tenant farmers realise an economic or any other benefit in acquiring them. The question to be answered is the following one: Under what conditions are the tenant farmers inclined to invest their money in a soon-to-be-equitised processing company? How can they be convinced or motivated to do so? One precondition is that a realistic value of the shares has to be assessed. Similarly, it has to be thought over what would be the regulations if the equitised company might default.
4 Present Stage of the Equitisation Process in Daklak Province
4.1 Equitisation of Non-agricultural Enterprises
The equitisation of SOEs within VINACAFE has long been discussed but not until 1998 it was actually developed for implementation.
On 1 August 1998 the Prime Minister approved a list of SOEs to be equitised by the end of 1998, of which four units are under the authority of VINACAFE. These are four agricultural machinery, communication and hydraulic construction companies. The aforementioned companies or enterprises are semi-autonomous. While they had been part of VINACAFE the management was quite independent in their day-to-day decision-making. However, most of the contracts were provided through VINACAFE. During the last years the companies could broaden their capital base far beyond the amounts invested by the state.
For the equitisation of these enterprises the management is discussing mainly two options:
Option 1: 30% of the shares will be held by the state respectively VINACAFE, 60% will be held by the members of the working collective and 10% will be sold to outsiders (clients).
Option 2: 40% of the shares will be held by VINACAFE whereas the workers get the remaining 60% of the shares.
All options are giving privileges to the members of the working collectives allowing them to purchase preference shares with a discount of up to 30%, taking into consideration the duration of their working contracts with the company. No distinction is being made between the actual workers and the management.
Each member of the working collective is entitled to buy ten shares for each year of his service for the enterprise. The share price is fixed at 100,000 VND each. Labourers with low income can buy shares on instalments over ten years without interest with a grace period of three years; still they will enjoy dividends. The management of the firms to be equitised is also discussing to distribute the social funds of the company to the members of the working collective, thus supporting them to purchase shares.
It is assumed that not all workers will buy all the shares to which they are entitled. These shares can be bought by the other workers. However, these shares cannot be bought with a discount. The share price has to be fully paid. At the beginning, VINACAFE will retain about 30% - 40% of the shares. This does not mean that VINACAFE wants to take hold of the control of the equitised company, but to stabilise the market. In the long run, VINACAFE might sell its shares to outsiders.
After equitisation it is planned that three of the eight board members of the new company should represent the interest of VINACAFE as a representative of the state and five should represent the working collective or other shareholders. To be nominated for elections to the board, the nominee should hold at least 1% of the shares. To be elected, at least 10% of the votes should be in favour of the candidate.
4.2 Equitisation of Agro-industrial Complexes
The aforementioned enterprises are examples of equitisation of companies not engaged in agricultural production. Hence, it has been relatively easy to assess their value. State farms of agro-industrial complexes as coffee companies are expected to face a wider range of problems.
During the doi moi period state farms (sovchos type) as well as the then collective farms or agricultural cooperatives (kolchos type) had to introduce the household responsibility system to overcome stagnation in agricultural production. In both types of collective economy enterprises, the former labourers or their households started to cultivate the land on a contract basis. As mentioned above, whereas in the former collective farms the responsibility for the land distribution was consequently shifted to the people's committees and long-term land use rights were given to the individual farm families, the state farms maintained the full control of the contracts. In these cases the state farms received the long-term land use rights while the workers became tenant farmers and were still regarded as workers.
For the Department of Agriculture and Rural Development in the province, responsible among others for the transformation of agricultural cooperatives and policy issues, the solution seems to be quite clear: As it is the case with the former collective agricultural cooperatives, along with a restructuring towards equitised cooperatives, which are expected to become voluntary service cooperatives, the state farms are expected to fully transfer the agricultural land to the contracting households or farmers, whereas the industrial units of the agro-industrial complex should be converted into a service and processing enterprise, preferably in the form of joint stock companies via equitisation. A main problem is the valuation of the assets. Whereas the state is interested to get the real value, the former labourers or the now contract farmers would be discriminated if they should buy shares either of the enterprise or if they should pay compensation for the coffee trees considered to be the ownership of the state farm complex according to the market value. Actually, the increased value of the trees is mainly due to the labour input and care of the contract farmers. For them, the book value would be a fair valuation.
Other questions nowadays discussed, amongst others, particular by the authorities and committees responsible for the equitisation of the coffee estates owned by the province are the option to maintain the state farm as an indivisible unit during the equitisation process. Name shares combined with the right to cultivate a certain area of coffee land as contractor should be issued besides the common shares. Thus, the coffee farmers with contracts would not become holder of "red books" (full transferable land use right) but part owners of the coffee estate with contracting rights for coffee gardens. With this equitisation model the value of the equitised company would be much higher since the value of the land including coffee trees forms part of the overall value. In addition, and this point seems to be more important for the management, it is ensured that the tenant coffee farmers and future shareholders will go on to deliver their coffee to the processing unit. In general, the (present) tenancy agreements include the obligation to sell all the equivalent green coffee (or fresh coffee cherries) to the processing centre. However, in many cases that obligation cannot be rigorously enforced so that farmers have the option to sell to whomever pays the highest price. Once the farmers themselves have the long-term land use rights, they will be free to look for the highest bidder.
One reason for the option not to give the "red books" to all the contracting households is the ethnic problem related with the minorities. These ethnic minorities are less dynamic and business minded than the dominating Kin ethnic groups. The minorities are considering agriculture mainly as subsistence agriculture. If they are getting a high offer of a Kin farmer for the developed coffee farms they are ready to sell this land and go back to mountainous areas to start their traditional subsistence agriculture again. Due to the increased density of the agricultural population, this will automatically lead to land degradation and ultimately to the impoverishment of the minorities.
Due to the rapid increase of coffee plantations as monoculture, without any shadow trees, ecological problems are expected to endanger the coffee production. Infection by nematodes are increasingly observed. There is an urgent need for a controlled production and propagation of disease-free planting material and an urgent need for an agricultural extension service propagating sustainable cultivation methods (mixed cropping etc.). In order to improve production methods, any future system must provide long-term perspectives to the farmers.
4.3 The Case of Viet-Thang Coffee Company
One of the state farms under supervision of VINACAFE in Daklak province is the Viet-Thang Coffee Company (VTC, former Eachukap Coffee State Farm) which is a state-owned company having its own legal status and self-supporting cost accounting. It is under the direct supervision of VINACAFE.
The VTC started as an agro-industrial complex or combinate in the late 1970s working as a state farm with farm labourers. Since doi moi, the former labourers or employees cultivated the land of the state farm under the household contract system. They continued to get a basic salary to ensure them social insurance etc. In addition to these employees, in particular in more remote areas developed in coffee plantations more recently, non-employees were contracted exclusively under the household contracting system, i.e. as pure tenants. At the moment, there are some 700 employees contracting an average of 0.7 ha and another 400 families working as contract farmers cultivating roughly the similar size. In both types, the actual coffee trees still belong to the company, although - as will be shown below - amortisation costs of the trees are included in the annual tenancy fees.
The total area of VTC is 1,342 ha of which some 770 ha are cultivated with coffee. Another 175 ha are classified as residential areas of which at least 100 ha are planted with coffee as well. This reflects the good income perspectives during the two decades that most of the former vegetable gardens (home plots) attached to the residential area are cultivated with coffee, too. The farmers have a keen interest to cultivate cash crops instead of food crops.
The state farm is sub-divided into seven production brigades; the brigade or team leaders are supervisors of the company responsible for co-ordination of production, calculation of the annual contract value and quality control.
According to the lease contracts, the state farms collect quite a number of fees differentiated as the "hard portion" and amortisation costs of the invested capital. The hard portion comprises the depreciation costs of assets, taxes, management expenses and expenses related to irrigation, communication and security, and income tax, etc. In case of lease contracts with employees, the hard portion of the contract should cover all the invested inputs of the company into the coffee gardens including the expenditures for salaries, social and health insurance, annual leaves etc.
The lease contract of tenant farmers, on average, is about 12% lower than the value of the lease contract of employees, who are having the advantage of receiving a small salary to be considered as an advance "cash payment". The contract of the leaseholders has to be paid in equivalent green coffee to the company, i.e. payment in kind (On average, 4.5 kg of fresh coffee cherries can be converted into 1 kg of green coffee). In addition, depending on the number and size of services provided by the coffee estate and used by the farmers, the total tenancy fee for employees and independent tenancy farmers fluctuates between 500 - 2,000 kg of equivalent green coffee per hectare. This implies that about 1,000 - 2,000 kg of equivalent green coffee per hectare (of matured trees) remain with the coffee farmers which could be sold to the processing centre for about 1.50 US$ per kg in Autumn 1998.
The management of Viet-Thang Coffee Company is preparing for equitisation whereby giving preference to the following model:
The VTC is a 100% state-owned enterprise. According to the management, the state or VINACAFE is not interested in keeping part of the shares after equitisation. Actually, VINACAFE is eager to get a pay-back as quickly as possible since it intends to expand coffee production elsewhere in Vietnam. The management of the estate farm intends to get a transfer of all assets including the long-term land use rights and the coffee trees from VINACAFE as part of the equitisation process. As the coffee trees were planted under the supervision and witè inputs of the company, the coffee trees actually belong to the state-owned enterprise. Then, the management prefers to fully transfer the land use rights and coffee trees to the individual farmers. For these transfers, the (equitised) company has to compensate VINACAFE and, finally, the farmers the company. Hence, the farmers are supposed to pay for two separate items; first a compensation for the ownership of the coffee trees and, then, for shares of the equitised company. The assessment of the value of coffee trees is a difficult issue. While the state has made the initial investments, the farmers invested their own labour and capital to increase the value of the trees. In addition, they already pay amortisation costs for the initial investments as part of their annual rent.
The management is trying to convince the state to equitise the enterprise on the basis of a valuation according to the book value whereas VINACAFE prefers the higher real value. As the management plans to directly transfer the ownership of the coffee trees to the contracting households, it is sure that farmers will pay only if the price is attractive to them. Then, it is expected, that the contracting households will purchase shares of the remaining agro-industrial complex, which still will own the infrastructure (irrigation facilities) and the processing units. The management wants to follow this approach but they emphasise that, at the same time, farmers will have to conclude exclusive delivery contracts with the equitised company as they will get the coffee trees at a relatively cheap price. The managers are confident that the farmers will be loyal to their company. The former contracting households, after becoming shareholders, will continue to contract with the equitised enterprise for processing and marketing of their coffee. Most probably, the contracts will include deductions of the proceeds for coffee cherries for the ownership transfer of the coffee trees to the farmers, taxes and compensation for infrastructure and irrigation. Therefore, delivery contracts will be signed with the farmers.
The management expects the farmers to be keen to purchase shares. The farmers should have the right to purchase the shares in instalments. The management considers the future dividend paid on shares as an incentive for quality management starting already at the farms of the contracting households / shareholders. The value of one share will come up to 100,000 VND. At least at the beginning, it is planned to keep all shares within the group of employees and tenant farmers.
Through the eyes of the tenant farmers, the issue of bonds can be only seen as a second best solution. They might consider to buy bonds if they have surplus funds and their interest rate is very attractive. The issue of shares will increase their commitment to the processing company if they get the co-determination rights. Nevertheless, it has to be emphasised that a high degree of transparency in the whole equitisation process has to be ensured. Otherwise tenant farmers will show no interest at all. For them, the most important point is the assurance of high prices for their agricultural products.
Therefore, it can be doubted at this stage whether the tenant farmers will quickly develop a sense of ownership and responsibility for an agribusiness company once it will be equitised. Up to now, their relation to it concerns the tenancy contract and the supply of agricultural products or still the work contract. They will regard themselves as farmers or workers first. The idea of owning a part of the equitised company either as an individual or as a group seems to be strange to them for the time being. They have to be prepared for this role, since the co-ownership of the central processing unit involves opportunities and risks. On the one side, they should not be totally passive when it comes to discuss and finally take decisions concerning the management of the equitised companies. On the other side, they must develop a certain kind of responsibility for the long-term economic viability of it, e.g. not to decrease the capital base in form of unrealistic high prices for their supplied products or high dividends (as both types of payment will increase their individual farm income in the short run). Actually, once an agribusiness company will be equitised the tenant farmers will conclude contracts with their own representatives with respect to the price, quality, delivering date, etc. of the raw products. This aspect might open doors for an opportunistic behaviour which has to be kept in mind. This risk can be reduced if other groups of stake holders are involved in the decision-making which act as check and balances (which might as well act opportunistically if not unchecked by farmers' representatives).
Joint stock companies, most probably organised as closed joint stock companies in the beginning to allow issuing name shares and preference shares for the small-scale agricultural producers to be integrated into the agro-industrial complex as partners, seems to be the most suitable model. The observations made above, describing the ongoing discussion and preparation for equitisation of enterprises belonging to VINACAFE and coffee plantations under the control of the province indicate that name shares will allow a fair participation of farmers in the processing industry.
In this respect, the following recommendations will be made:
(1) Lease holders / farm labourers previously working in state-owned enterprises (sovchos type) should be treated as the members / farm labourers of former agricultural co-operatives (kolchos type). They should get the full land use right ("red books"), too
(2) The coffee trees grown on the plots of the lease holders should be sold to these farmers on a preference basis as the present value is due to their own invested work and capital.
(3) The valuation of assets of the agro-industrial complex including the coffee trees should be done according to the book value to give a fair chance to the working collective to purchase shares and assets. In addition, it has to be taken into account that part of the value has already been paid as amortisation fees as part of tenancy fees.
(4) The now tenant farmer with lease contract should get name shares. To make the name shares attractive to the farmers, they should be linked with the right to sell coffee cherries at preferential prices lightly above the market price. This difference can be considered as an advance payment to the expected dividend.
(5) The former lease contract should be converted into a cultivation contract. The contracting coffee farmer will be charged for the inputs provided by the enterprise (irrigation, extension service etc.), and with the instalment for the transfer of ownership of the coffee trees to the respective farmers. These charges have to be paid in kind (fresh coffee cherries) to the enterprise.
(6) To strengthen the bargaining power of the coffee farmers and to ease the co-ordination and extension work, the brigades can be changed to informal or formal producer groups, either as registered societies ("pre-cooperatives"), as agricultural cooperatives or as closed joint stock companies. There is an urgent need for more participatory models of extension services, as ecological problems will increase and propagation of planting material needs to be controlled more strictly to avoid the uncontrolled spread of nematodes.
(7) The processing company should negotiate with all farmers who are, at the same time, shareholders a differentiated price payment system well before the beginning of the harvesting season. This system has to address the price risks. Farmers should be paid on an instalment basis. The management has to look for high coffee prices and not for high dividends as farmers, at least in the coming years, will compare the prices with those offered by other traders and companies. Farmers will not understand high dividends as part of their coffee income and might switch to other marketing channels if they see prices offered as too low. Outside farmers, i.e. those who are not shareholders, might be offered a flat price at harvest time.
(8) In addition, the set-up of people's credit funds (PCFs) should be promoted and established. The PCFs will not only improve saving and credit services among the coffee farmers, but should develop new fields of activities. These formalised organisations could support the farmers / future shareholders of the agro-industrial complex to represent them in the general meetings of the new joint stock company and in the board (if no other type of farmers' organisation has been set-up). In this way, a large group of individualised small shareholders will speak with one voice and farmers will have a strong influence in the decision-making process. Furthermore, these people's credit funds can assist both, the farmers as well as the equitised joint stock company in selling the name shares.
(9) In case of ethnic minorities, instead of issuing the "red books" to the tenant farmers, for a time being name shares can be issued to the lease holders making them part owners of the whole agricultural agro-industrial complex, combined with the right to cultivate a certain area of the equitised estate. The lease contracts can continue as usual.
(10) To protect the minorities, other measures may be considered as restricted rights for land use transfer, preference zones or sections reserved for minorities etc. In some of these zones, special land use patterns (alley cropping, inter cropping, mixed tree crops, shadow tree patterns etc.) should be tested.
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