VietNamNet Bridge - When the authorities impose aggressive administrative measures, economic risks become relatively strong, especially when the authorities are in the same interest groups as businesses.

Businesses - agriculture - farmer communities

Since 2003 when the Land Law took effect, the State has not allowed the recovery of land from farmers to be allocated to businesses for implementation of agricultural development projects. This is very good protection policy for farmers in agricultural production. Businesses cannot use administrative mechanisms to grab farmers' land, so they can only cooperate with farmers to have access to land and create benefits for both sides.

The link between businesses and farmers started a long time ago, and it is not a new innovation, but these relations occur only when a business wants to purchase agricultural products for export. Enterprises sign contracts with farmers, under which they pay part of the money in advance to farmers and order the kinds of agricultural products they need and they purchase the products at fixed prices.

However, it is very common that if market prices are higher than prices fixed in the contract, many farmers break the contract and vice versa, and if the market prices are lower than the contracted prices, businesses break the contract.

This is an unsustainable trade link, and trust can be broken at any time by either party, based on their interests. The major cause is that these businesses are just commercial enterprises, which do not invest in agriculture, and are not directly involved in the value chain of agricultural production.

The business - farmer link

In recent years, some agricultural production or agricultural service companies have been directly involved in new-style links with farmers. For example, Hoan Cau JSC, HAI Agrochem Ltd., and An Giang Plant Protection Company have cooperated closely with the farmer community to form large fields in the districts of Tan Chau, Chau Thanh and Thoai Son in An Giang province with a total area of over 34,000 hectares in 2014.

These firms provide farmers with seeds and seedlings, supplies, production processes, and purchase all products produced by farmers while the farmers still work on their fields and earn high profits. Businesses and farmers will benefit in line with the resources they invest, especially the farmers who will benefit much more than before.

A similar model built by Phong Thuy Agricultural Production and Trading Ltd. in the Central Highlands province of Lam Dong has been a big success as the output value earned from one hectare of land has been up to VND1 billion ($48,000).

In 2013, I interviewed the director of Phong Thuy Company about their methodology. The director said: "I only wish to demonstrate to the world that Vietnamese farmers are not inferior to their colleagues in countries with modern agriculture and I have exported Da Lat flowers to the Netherlands.”

“To do this, we must invest in seedlings, clean production processes, high technology, build our own brands and especially broad land. But you should never think of taking land from peasants. Let them work on their land and you have to prove that farmers will benefit more when they cooperate with you. Of course you have to hold technological secrets.”

This answer shows what to do to create a sustainable relationship between enterprises and farmers. The legal element is not the decisive factor but the creation of added value of agricultural products. Farmers have land and businesses have technological know-how, and both sides need each other.

Another model: businesses lease land and hire workers 

Another model involves businesses leasing land from farmers and hiring farmers as workers on the spot to produce agricultural products, using high technology as some foreign enterprises have done in some southern provinces in the early 2000s such as Lam Dong, Long An. Technological know-how was held by foreign firms, but Vietnamese partners in the joint ventures and workers did not know about this.

Under this model, farmers will also earn more money than before. The major risk is the land rent usually increases over time, but the land lease contracts identify fixed prices based on the price of the time of contract signing, while the land leasing period is several decades. Therefore, after several years, farmers incur losses as the land lease rates are lower than the market price.

This shows that the land lease contract should be adjusted. The land rent must be reviewed and changed every 5-year period.

Certainly, re-negotiating the land rent under civil relations can again create more risks for businesses. This is a significant drawback of this model, which can easily damage the connections that need to be sustainable.

In 2013, the People's Committee of Phu Ly City implemented a guiding document of accumulating land in Phu Van commune for An Phu Hung JSC and a Japanese partner to experimentally plant two hectares of a new bean variety, using new technologies and local workers.

The model is considered an initial success. The local authorities have decided to expand this model.

In addition to the risk related to the increase of land rent over time as mentioned above, there is another risk – the intervention of the local government. The authorities call for people to only accumulate land in the model and commit to protect the interests of farmers. This process should be conducted through the local Fatherland Front and Farmers’ Association. No administrative decision should be made in this case in order to avoid turning conflicts of interest between businesses and farmers into administrative conflicts between the government and farmers.

In general, this model can also be expanded because it still retains the principle that land belongs to the farmers, and the interests of farmers are guaranteed from land rent and salaries paid by businesses. During the implementation process, it is necessary to look ahead and avoid the risks mentioned above.

Farmers contribute capital with land-use right 

In this model, farmers contribute capital with land use rights for businesses and businesses hire these farmers as their workers. This model was piloted in Son La province in the early years of this decade, with the participation of the Vietnam Rubber Group and farmers in Son La’s mountainous area.

It is worth noting that the local authority is the principal issuing administrative decisions, including fixing the land rent, the capital contribution policy and the interests of the parties, etc. In other words, this model of joint production is affected by the economic principles of state subsidies.

On June 18, 2014, the Prime Minister issued Decision No. 990/QD-TTg concerning a pilot project that allows farmers to contribute capital with land-use rights to a rubber tree development project in Son La.

Of course, if the intervention of the authorities brings about real economic benefits to the parties, it is good, but this cannot be certain if rubber prices significantly fall on the world market. Farmers may suffer losses when their joint venture incurs losses. Then who will take responsibility for the loss of farmers: the authorities or businesses? This is a very big risk, a risk from the capital contribution policies in which farmers are always in the passive voice.

In addition, there is another risk - the risk of corruption as the farmers have no way to control the net profit earned from the business. The main disadvantage of this model is that it does not guarantee benefits for farmers who contribute their land to the project.

In fact, the project in Son La is still in the stage of seven years of basic construction, and has not yet entered the harvest period. Tragedy can only occur in the harvest period.

According to surveys by the Institute of Policy and Strategy for Agriculture and Rural Development (IPSARD) and Oxfam, this model will not benefit farmers much and it may fail.

When the authorities impose administrative decisions, economic risks can appear, especially when the authorities are in the same interest group with businesses involved in the model.

Prof. Dang Hung Vo