Cashew nuts supply chains in Viet nam A case study in DaK Nong and Binh Phuoc

1 Cashew nuts supply chains in Vietnam: A case study in Dak Nong and Binh Phuoc provinces, Vietnam Case study in Vietnam prepared for SEANAFE’s 2nd Regional Workshop on ‘Markets for Agroforestry Tree Products’ 15-18 August, 2006 in Chiang Mai, Thailand Ms. Le Thanh Loan1, Mr. Dang Hai Phuong2, Dr. Vo Hung3 ABSTRACT Derived from the hedonic pricing model under households’ perspective, this study analyzes factors affecting cashew nut’s farmgate price variation in Binh Phuoc and Dak Nong provinces in 2006. The estimation model indicates that increase in quality or price information attainment helps to improve farmgate price. Farmers in indebtedness circumstance and/or having a few choices of buyers receive lower farmgate price than those without any selling obligation. Infrastructure creates a positive impact on farmgate price. More educated farmers receive higher price for their more adaptation to market and advanced technique in production. While there has remained a lack of formal sources of market information, transactions under non-competitive relationship; an improvement of farmgate price and efficiency in agricultural market have required the government, related institutions, processing enterprises and farmers’ participation to take into account some issues of infrastructure and purchasing service, more effectively accessible sources of market price information, the coincidence between technical support and marketing consultation under a package of the government’s strategic policies. The analysis of value added in the supply chain of cashew nut bean has proved that the monthly farmers’ earnings are lowest among stakeholders. There has a concern that a high vulnerability in cultivation has however obtained a moderately low gain compared to other stakeholders in the cashew nut supply chain. However, by performing post-harvest activities for their own processing business, farmers can gain a profit of 10% in selling price of cashew nut kernel in addition to 5% of labor cost arriving either to their own pocket or to hired labor. 1 Faculty of Economics, Nong Lam University, HCM city, Vietnam 2 Faculty of Forestry, Nong Lam University, HCM city, Vietnam 3 Faculty of Agriculture and Forestry, Tay Nguyen University Southeast Asian Network for Agroforestry Education 2 CONTENTS 1. INTRODUCTION .................................................................................................................................. 4 1.1 PROBLEM STATEMENT ..........................................................................................................4 1. 2 RESEARCH QUESTION ..........................................................................................................5 1. 3 RESEARCH HYPOTHESES ....................................................................................................5 1. 4 DATA COLLECTION AND METHODOLOGY...........................................................................6 1. 5 STRUCTURE OF THE PAPER.................................................................................................6 2. LITERATURE REVIEW......................................................................................................................... 7 2.1 BASIC CONCEPTS ...................................................................................................................7 2.2 LITERATURE REVIEW ON HEDONIC PRICE MODEL ............................................................8 2.3 LITERATURE REVIEW ON SUPPLY CHAIN ..........................................................................10 3. CASHEW NUT INDUSTRY IN VIETNAM ............................................................................................. 12 3.1 SAMPLE DESCRIPTION.........................................................................................................12 3.2 POLICIES AND INSTITUTIONAL FACTORS..........................................................................14 3.3 ORGANIZATION OF COMMODITY CHAINS..........................................................................18 4. SURVEY RESULTS............................................................................................................................ 21 4.1 VALUE ADDED IN THE SUPPLY CHAINS..............................................................................21 4.2 POST-HARVEST PROCESSING AT HOUSEHOLD SCALE ..................................................24 4.3 DESCRIPTIVE ANALYSIS ON HOUSEHOLD SURVEY.........................................................26 4.3 DESCRIPTIVE ANALYSIS ON HOUSEHOLD SURVEY.........................................................26 4.3.1 The role of cashew nut in household’s income.................................................................26 4.3.2 Characteristics of households and cashew nut sale-decisive person ..............................26 4.3.3 Seasonal impacts on cashew nut’s farmgate price ..........................................................27 4.3.4 Product .............................................................................................................................27 4.3.5 Household’s bargaining position.......................................................................................28 4.3.6 Market price information...................................................................................................29 4.4 MODEL RESULT.....................................................................................................................30 4.4.1 Analytical framework and model specification..................................................................30 4.4.2 Regression result of cashew nut’s farmgate price in Binh Phuoc and DakNong provinces in 2006.......................................................................................................................................30 4.4.3 Diagnostic tests ................................................................................................................31 4.4.4 Economic meanings of the estimation result ....................................................................31 4.5 RECOMMENDATION..............................................................................................................33 Change in the role of cashew plantation ...................................................................................33 Long cashew plantation under lack of investment.....................................................................34 More favor to ethnic minorities in conducting supportive policies..............................................34 Substance for an improvement of farmgate price......................................................................34 More efficient location and operation of processing units..........................................................35 Farming contract to purchase cashew nut from farmers ...........................................................36 Encouragement of post-harvest activities..................................................................................36 Other related policies.................................................................................................................36 5. CONCLUSION ................................................................................................................................... 37 APPENDIX ............................................................................................................................................ 38 REFERENCES ...................................................................................................................................... 63 3 List of Tables Table 01. The disturbance variation in farm-gate price of cashew nut...............................................7 Table 02. Cashew plantation, output and export in Vietnam 1999-2005..........................................13 Table 03. Production capacity of cashew nut processing companies ..............................................19 in Binh Phuoc province and Dak RLap district Table 4.1 Distribution of costs and profits in cashew nut value chains ............................................21 Table 4.2 Distribution of costs and profits in cashew nut value chains (%)......................................22 Table 05. Estimation of participants’ monthly earnings in distribution chains ..................................23 Table 06. Analysis of cost and benefit of peeling - Farmer’s own establishment.............................24 Table 07. Analysis of cost and benefit of peeling - Farmer working in a peeling establishment ......25 Table 08. Market price information source .......................................................................................29 Table 09. Explanatory variables and expected signs in estimation model .......................................30 Table 10. Regression result .............................................................................................................30 a. Normality test..............................................................................................................60 b. Specification model test..............................................................................................60 c. Hetereoscedaticity test................................................................................................61 List of Figures Figure 01. Sub-sector map...........................................................................................................................17 Figure 02. Cashew nut chain in Binh Phuoc and DakNong .....................................................................18 4 1. INTRODUCTION 1.1 PROBLEM STATEMENT Dak Nong and Binh Phuoc provinces are typical upland in Vietnam. There are approximately 20% and 40% ethnic minorities in corresponding Binh Phuoc and Dak Nong provinces (Binh Phuoc GSO, 2006; DaK Nong, GSO, 2006). The provinces have encountered several upland matters including poor infrastructure, relatively low educational level, poor information on advanced technologies, poor access to market and instable crop harvest. Especially, the poor access to market resulting from poor infrastructure, a lack of marketable supports, household’s inadequate bargaining position has become a growing concern. The people’s livelihoods in the provinces, especially the poor and the native people largely depend on forest-based activities and AFTPs. As farming systems is gradually changed from shifting cultivation to settle agriculture with more agroforestry oriented, cashew nut tree is the suitable tree to the ecology condition in the provinces besides other industrial crops including pepper, cashew, coffee and rubber. Among these industrial plants, cashew nut becomes one of the most important sources of households’ livelihood, especially the poor and/or ethnic minorities for its popular plant with stable price, low investment cost and simple cultivation requirement. As a plant under the government’s 327 program for the green cover for virginal upland and hills, cashew nut has played an important socioeconomic role and been an essential source of food security and cash income in the area with nearly 25 percent4 Binh Phuoc local households’ cultivation, especially to the ethnic minority people in the improvement of living conditions (GSO, 2002; DoTT, 2001). For farmers, income is derived and strongly affected by their produce’s farmgate price. Unfortunately, farmgate price of cashew nut is inadequate, as it does not correspond to its appropriate market value due to the above-mentioned constraints. In perspective of households, the local market limitations’ growing concerns have been revealed as follows: • Infrastructure development and availability of purchasing services have affected farmgate price; • Restriction on information has made farmers unable to reach the market price; • Some constraints on crop finance cost, working capital and certain non-competitive relation induce farmers to lose out on competitive price for their indebtedness. • Lack of the linkage among the producers with the participation of community-based organization in the supply chain have excluded small farmers and ethnic minority to access a shorter chain in their cashew nut supply; • Post-harvest activities at household level to increase value added Objective of the study As an efficient agricultural market is getting more essential strategies for transforming land and other assets into the livelihood outcome, the research of affecting factors of farmgate price is found crucial for more profitable participation of farmer into the market and obviously then for agriculture and rural development. Once the underlying factors are significantly detected, the more actionable supports need attention to such impacts regarding the government’s policies. In view of current constraints on farmers’ access to cashew nut market in Dak Nong and Binh Phuoc provinces, the research focuses on the determinants of farmgate price under households’ perspective. These are directly involved to their cashew nut transaction including product, size of 5 transaction; infrastructure and availability of purchasing services; purchaser who makes transaction with households, households’ characteristics and their follow-up of market information. This study leaves out for further research on related macro-variables; the other indirect market factors as well as the cashew nut’s economic value allocation among market participants. Such a research would be able to cover the whole feature of cashew nut market system. Concerning the differences in production scale, market favorableness, ethnic groups and value added in the supply chain, an analysis of cost and benefit in the supply chain of cashew nut bean and cashew nut kernel and a comparison among different supply chains are examined in order to get insights of farmers’ selling practices and their preference of marketing outlets. For this, in-depth interviews of various stakeholders along the different supply chains have been implemented, with a special focus on constraints and opportunities as regards the different existing value chains, relationships between buyers and purchasers as regards distribution of information, commitments, risk sharing, input and service supply; advantages and drawbacks of farmers; quality control; costs and benefits; prospects. In short, the study focuses on the two main objectives: exploring the affecting factors of cashew nut farmgate price in households’ transaction and analysis of value added in the supply chain to assess marketing performance of different farmer groups in Binh Phuoc and Dak Nong provinces. 1. 2 RESEARCH QUESTION General research question • What are determinants of cashew nut’s farmgate price in Binh Phuoc and Dak Nong provinces from households’ perspective and how to increase cashew nut’s farmgate price? Specific research questions • Among factors including cashew’s quality and quantity (or transaction size), season (time of selling), distance, buying competitiveness, household’s characteristics and bargaining position, infrastructure and information; which variable is statistically significant to farmgate price? • What are the linkages amongst stakeholders in the cashew nut value chain including costs, margins and benefits occurring along the value chain at each stage of the plantation and processing? • Which supports do households expect from the government to improve their cashew nut‘s farmgate price? 1. 3 RESEARCH HYPOTHESES • Factors including quality and quantity of cashew, season, distance, buying competitiveness, household’s bargaining position, and infrastructure are all statistically significant to farmgate price. • While the ethnicity variable does negatively impact on the farmgate price, the educational level and the female sex of selling person creates the positive ones. • Households with more information will obtain higher farmgate price. • The fewer middlemen appear in transaction, the higher price farmers expectedly obtain. • The ethnic minorities, small-scale farmers are expectedly excluded from directly – selling practices for their small transaction and unfavorable market infrastructure. 6 1. 4 DATA COLLECTION AND METHODOLOGY A linear regression is applied in this study to find out the determinants of the cashew nut farmgate price. Dependent variable is cashew nut’s farmgate price received by household during the studied year 2005 and explanatory variables are infrastructure, buyer, product, household characteristics, seasonal effects and information. In-depth interviews of various stakeholders along the market chain in each particular farmer group is implemented to get insights of farmers’ transaction and to assess their cashew nut marketing performance. A qualitative description is to demonstrate alternative cashew nut supply chains and their characteristics in the marketing performance of different groups in the two provinces. Data sources Secondary data are collected from Department of Statistics, the DARD, DoTT, districts and commune officers in Binh Phuoc and DakNong provinces. Primary data will be obtained from the household survey and the in-depth interviews. Study site and interview areas DakR’ Tih commune, Dak R'Lap district is the study site in Dak Nong Province for its populousness of ethnic minorities (80% of total population in the commune). In Binh Phuoc province, Bu Dang, Phuoc Long and Dong Phu are three selected districts in view of the largest crop volume and highest plantation households in the whole province, the high percentage of ethnic minority farmers in Bu Dang, the high market infrastructure in Dong Phu and the high production scale in Phuoc Long Questionnaire and sample size The questionnaires are designed to interview all stakeholders in the value chain of cashew nut including farmers, traders and manufacturing companies. For farmers, it is to explore three main areas namely, general households’ information, transaction behaviors and factors determining farmgate price under the hedonic pricing approach. The interviewees are persons who take responsibility of household‘s cashew nut sale, commonly household’s head. The sample size is 100 households under cashew plantation at least three years old. There are possibly two to five different cashew nuts’ farmgate prices for all transactions during the study year. Totally, 253 observations/transactions conducted by these 100 households entered into the estimation. For traders and processing company, a semi-structure questionnaire will be utilized in the in-dept interviews with stakeholders in alternative cashew nut supply chains. These questionnaires aim to analyze cost and benefit in their cashew nut business, their trading relationship. There are 18 samples of traders including purchasing station level 01, purchasing station level 02, and dealers in the two provinces. As in DakNong province there is not any purchasing station level 01, trader interviewees are only dealers and purchasing station level 02. There are also two samples of processing companies, one in Binh Phuoc province and one in DakNong province. 1. 5 STRUCTURE OF THE PAPER The paper is structured in five sections. Following this introduction we provide a brief literature. Section three introduces the cashew nut industry in Vietnam. Section four explores the main research results including value added analysis, descriptive analysis of affecting factors on farmgate price and regression model. The final section draws together the main conclusions. 7 2. LITERATURE REVIEW 2.1 BASIC CONCEPTS Price and agricultural prices Generally, as defined in Macmillan Dictionary of Modern Economics (Pearce, 1992: 340), “The price of a good or input shows what has to be given up in order to obtain a good or service. It is usually denoted in money terms although payment need not be in a monetary form.” Agricultural product prices have some specific characteristics. According to Tomek and Robinson (1990), how agricultural prices are determined depends on government regulations and market conditions. In addition, prices of agricultural products are more volatile than those of non- agricultural ones. The level of farm incomes is strongly influenced by agricultural product prices. Farm-gate price Farm-gate price is simply defined as the price that has farm-gate to be the pricing point. Farm-gate has certainly been understood as the geographical site or the object who receives the price. Our interest is the latter one. The term farm-gate price in this study reflects the one that farmers receive although farmers sell their products at farm, at home or any other places. Farm-gate price determination Evidently, price is determined by the supply and demand in the market. More particularly for the case study of cashew nut, on the basis of the price of processed cashew nut in the market either domestic or international, the processing companies firstly determine the purchasing price of cashew nut bean to their level 01 purchasing stations5. These stations accordingly decide the price to their sellers who are purchasing stations level 02, dealers or farmers. Purchasing station level 02 and dealers in turn point out the farm-gate price of cashew nut bean to farmers. These operations do work under a marketable manner. As most of cashew nut bean in Binh Phuoc province are exported from processing companies; the main market factors are the exporting price of processed cashew nut in the international market that the Vietnamese processing companies can obtain in the international market and the volume of cashew nut bean supplied from farmers in each annual crop and others macro factors. Apart from these aspects, there have appeared differences in farm-gate price among farmers within a range of change in price in each annual crop. The study focuses on this disturbance variation in farm-gate price of cashew nut among farmers during the annual cashew nut crop. To understand influencing factors that contribute to farm-gate price, one of popularly used methods is Hedonic price model. Thus theories forming the environment for hedonic price model will in turn be examined before this model is taken into account in detail. Table 01. The disturbance variation in farm-gate price of cashew nut Year Variation in farm-gate price (VND/kg) Average price* (VND/kg) 2003 8,200 - 6,000 7422 2004 10,000 - 7,000 2005 16,000 - 11,000 5 Purchasing station level 01 sells cashew nut bean directly to processing companies, while purchasing station level 02 after collecting cashew nut bean from farmers or dealers, can only resells to purchasing station level 01, not directly to processing companies. 8 2006 11,000 - 6,000 8131 Source: Informal data from the local officials Note: *: data from survey in 2003 and 2006 Transaction Cost Ronald Coase (in Escobal, 2001: 2), who initiates the ideas for Transaction Cost Theory, argues that market exchange has costs. He also emphasizes the important role of transaction costs in “contractual arrangement”. Market transactions occur based on the principle of minimizing transaction costs. According to Escobal (2001), transaction costs can be grouped into three types: information, negotiation and monitoring. Due to the existence of transaction costs, farmers may have more chances to integrate into the market as transaction costs are lowered (Escobal, 2001). Thus transaction costs are closely related to and have significant impacts on transaction among parties including farmers and dealers, then result in certain effects on farmers’ selling price. Market efficiency is understood as both economic and social ones such as “cost savings”, “improvement in agency costs”, and the formation of more efficient market structures (Gu and Hitt, 2001: 85). The latter may result from either economic or social efficiency. In agricultural market, market efficiency can be interpreted as reducing unreasonable costs occurred to both farmers and dealers. The formation of more efficient agricultural market structures in which farmers are not inferior also reflects the importance of market efficiency in improving farmers’ selling price. The above theories have formed the environment in which factors affecting farm-gate prices can be addressed in Hedonic price model. 2.2 LITERATURE REVIEW ON HEDONIC PRICE MODEL Being popularly used, hedonic regression is a method in which the price of goods is expressed as a function of characteristics of those goods (Silver,?; Portugal and von Oppen, 1999). Thus price is the dependent variable and products’ characteristics are independent variables. The estimated coefficients can be considered as contributions of those characteristics to the prices. Dummy variables are employed to represent non-numerical characteristics of goods. Since the study aims to examine factors affecting farm-gate price, those factors will in turn be discussed into 6 groups: infrastructure, buyers, product, household characteristics, seasonal effects and information. Infrastructure According to Harrigan et al. (1992), infrastructure development has affected producers, traders and consumers depending on pricing and marketing systems. Due to these influences, traders often try to bargain to lower producer prices when they have been in difficulties reaching the farm-gate. Minten (1999) has mentioned that the distance to main road, the road quality and the access to other infrastructure have closely been related to price variation. Communities with low level of infrastructure incur lower prices than others with better infrastructure conditions. Minten (1999) also concludes that an improvement in infrastructure can help to improve producer prices, to reduce variation in price and to widen access of farmers to the market. Buyers Minten (1999) also discussed about the number and type of traders when examining the determinants of market access and prices. He stated that farmers could obtain higher selling prices when they can choose traders. Thus the more the number of traders is, the better the possibility of farmers to choose whom to sell. The farmers’ choice in deciding whom to sell also reflects their power in negotiating with buyers. Escobal (2001) raised the problem of remote farmers in choosing traders since very few traders 9 come to see them. If there is only one buyer, farmers have no choice except selling their products to that buyer. Oppositely, if there are many buyers, farmers can have an opportunity to choose the ones they want to sell their products to. Farmers may choose this buyer instead of others due to many reasons including the previous relation between farmers and buyers. Product Factors concerning about product are the quality, grading or ranking, the quantity, and types of products sold. Referring to the price differences associated with quality, Tomek and Robinson (1990) emphasized that the quality characteristics of agricultural products such as size, color, moisture level, protein content, and the ratio of defects or impurities can make differences among agricultural products. Differences in quality create difference price levels of products sold. Thus, quality is one important factor deciding whether the selling prices are high or low. The more abundant the quantity of a product, the lower its price is. Concerning our case, the relationship between the quantity of products and the selling prices he can get are intended to be analyzed. Finally, the types of products sold have also influenced the selling prices. Products can be sold in different types such as in fresh, after being dried, before harvest time, in package and others. Each of these types of products sold decides the selling prices that farmers receive. Household characteristics As mentioned in the market bargaining power of farmers, some characteristics of households will be chosen as factors that influence the ability of farmers in negotiating with traders, then affecting selling prices farmers get. Those characteristics cover job, educational levels, ethnicity, and experience in cashew production of sales-decisive person. Experience in cashew production is measured by the number of years that household heads have been involved in cashew production. The inclusion of experience in the study implies that farmers with a long time involved in cashew production have more bargaining power and thus obtain higher prices than those who get less experience. According to Escobal (2001), the possibility of getting higher selling price belongs to farmers with higher education level. Thus educational level is expected to have a positive relationship with the bargaining power of farmers and also the selling prices that farmers obtain. Job and ethnicity are included based on the justification that differences in job and ethnicity will result in differences in negotiating ability of sales-decisive person. Seasonal effects Minten (1999) stated that agricultural production has significantly affected by seasonality. It is expected that farmers can get higher price if they sell their products in the lean season. In contrast, the prices they obtain will be lower in the harvest season since the products are abundant. To less perishable agricultural products, like cashew nut, storage to get higher prices seems to be more reasonable. However, there are also many reasons that cause farmers to sell their products immediately in the harvest season or even before the harvest season when their products are undervalued. Another cause of price differences over time can be accused for the differences in production conditions, storage and transport costs (Minten, 1999). Those factors vary through time and significantly differ between dry and rainy seasons. This is also seasonal effect that influences selling prices of farmers. Information Market information is a very important factor. As discussed by NDA (?), market information can help farmers to decide whether they should sell their products immediately or whether storage is necessary or not. With information, farmers know where and whom to sell. They also can check on the prices they get with the reported market prices especially in case that they sell in auction or 10 prior arrangements with traders. If the pattern of prices is going to rise up, storage can be a good solution. In contrast, it is not necessary to keep products in store. According to FAO (?) farmers can use information on market to check whether the prices they get are reasonable or not. Vakis et al. (2003) conclude that transaction costs will be reduced when farmers are informed about prices information. Concerning the bargaining power, the shortage of information, late and inaccurate receipt of information may cause disadvantage for farmers in negotiating with traders and make their bargaining power weak (Poole, 2001; Escobal, 2001). As a result, farmers’ selling price can be improved based on price information attainment. 2.3 LITERATURE REVIEW ON SUPPLY CHAIN Concept of value chain A value chain is considered as the full range of activities to bring a product from the original concept to the final consumer by going-through the different phases of growing and processing (Kaplinski and Morris, 2001, p.4). Value chain analysis focuses on not only the flow of products and services (tangible assets) along the chain, but also the flow of intangible assets (i.e. information and knowledge) and of power relations within the chain. Concept of supply chain Supply chain analysis is a broadly defined as successive stages of value creation and capture in a vertically organized set of stakeholders (Sergio et al., 2001, p.9). It includes all activities associated with the transformation and transportation of goods from the raw materials to the end user plus the information and financial flows. Value - adding to agro-forestry products Value-adding includes any process or service in the supply chain that adds to or enhances the market value of products to customers (AFFA, p.6). Richard S. and Brendan D. (2004, p. 6) concerned how a relative small share of the prices consumers pay for products is constituted the prices farmers receive for the raw commodity ‘at the farm gate’. They found reasonable to ask why the difference is so great, and what could be done to capture some of that difference by performing activities beyond the farm gate. Thus, they consider possibilities those farmers can modify further process or transform the basic commodities produced on farm. AFFA (1999, p.6) pointed that value can be added in agricultural product as a result of transforming raw products into highly processed or manufactured products, a change in the distribution between markets; or gearing toward better meeting consumer demand. Richard S. and Brendan D. (2004, p. 6) have also emphasized indirect benefits from value –adding to farmers as follows: (i) value- adding creates an additional business—often non-farm business; (ii) value adding potentially results in significant changes in on-farm production as the value-added product requires specific requirements on farming production. However, value adding from the involvement in processes beyond the farm gate is usually attained with the capital investment, time and employment commitment. The tasks carried out in the value chain beyond the farm gate usually require a range of special skills and focuses, which may not naturally reside in farmers used to dealing with the particular challenges of farm production. Adding value to farm commodities always incurs costs as well, and the question is whether the extra value exceeds the extra costs. Among other things, it is important whether the farmer can conduct the value-adding task better than existing businesses. 11 ‘Marketing margin’ is defined as ‘the difference between the price paid by the consumer and that obtained by the producer’ (Tomek and Robinson, 1990). The increase in this margin is associated with the added cost. However, the disparity between the added value and the added cost has motivated farmers to capture higher marketing margin through the value-adding themselves. Paul (2004) pointed that value adding performance ultimately obtains “fair” margin and price integration along the chain. 12 3. CASHEW NUT INDUSTRY IN VIETNAM 3.1 SAMPLE DESCRIPTION Map 01. Annual cashew nut output in Vietnam Map 02. Study sites of Binh Phuoc and Dak Nong provinces This section accordingly proceeds to provide a brief explanation of sample area, an indispensable introduction of focused interviewee, questionnaire and sample size employed in the empirical study. Cashew nut planted areas in Vietnam have mostly been allocated in the South, especially in the Southeast of Vietnam (see Map 01). Being prominent among these provinces, Binh Phuoc and Dak Lak which has now been divided into Dak Nong and Dak Lak provinces have highly attained large planted areas and high output. Ranked number 02 among several multi-year industrial crops namely, coffee, rubber, pepper and cashew, cashew nut in Binh Phuoc province has accounted for 35% of planted areas in the whole country (see Table 02). This appreciation has come from not only cashew’s highest production area, its supply for the development of processing industry, export performance but also from its important socioeconomic role to farmers (GSO 2002, p. 76; DoTT, p.134). Following coffee, cashew nut is also ranked number 02 among several multi-year industrial crops in Dak Nong province. Cashew nut in Dak Nong has achieved the highest annual growth rate of planted area, especially in 2004 and 2005 at 266% and 314% respectively. Empirical study site Cashew planted area has rapidly increased, posting an annual growth rate of over 10% in 2002- 2005. Export performance has annually grown higher than 40% in 2001-03; in the recent two years 2004-05, though the export growth rate has not been highly achieved, it has still remained at high volume. Among districts in Binh Phuoc, Bu Dang, Phuoc Long and Dong Phu have the highest cashew nut production, amounting to 83% in total production and 85% in total output in 2005 (Appendix 2.2). These three districts have currently the highest portions of households under cashew cultivation and the largest crop volumes, reporting at 80% in total households and 84% in total cashew nut respectively; well as their different development states (Appendix 2.3). We therefore choose Bu Dang, Phuoc Long and Dong Phu for our empirical study. 13 In the same manner, we find Dak Rlap district as a prominent one in cashew nut production. Within the district, we choose particularly QuangTin and Dak Rtih for their highest planted areas of cashew and populousness of ethnic minority (Appendix 2.4, 2.5 and 2.6). Table 02. Cashew plantation, output and export in Vietnam 1999-2005 1999 2000 2001 2002 2003 2004 2005 Planted area (Ha) Vietnam 185,200 195,600 199,200 240,200 261,500 295,900 328,000 Binh Phuoc 64,830 70,524 69,887 95,554 99,539 107,939 116,029 Dak Nong 2,498 2,491 2,790 2,534 2,507 6,665 20,930 Gross output (Tons) Vietnam 35,600 67,600 73,100 128,800 164,400 204,700 232,000 Binh Phuoc 9,570 19,214 19,396 61,919 69,032 98,130 114,985 Dak Nong 759 321 1,526 1,269 1,940 3,728 6,653 Export (Tons) Vietnam 18,400 34,200 43,600 61,900 82,200 104,600 108,800 Binh Phuoc 1,372 1,426 2,163 3,417 4,908 5,406 4,712 Dak Nong 23,4066 7,861 Source: GSO (2006), Binh Phuoc GSO (2006), Dak Nong GSO (2006) Sample size, questionnaires and interviewee The questionnaires (see Appendix 01) are designed to interview all stakeholders in the value chain of cashew nut including farmers, traders (dealers, purchasing stations and manufacturing companies). For farmers, it is designed to explore three main areas namely, general households’ information, transaction behaviors between household and trader and factors determining farmgate price under the hedonic pricing approach. For traders and processing company, the questionnaires aims to analyze cost and benefit in their cashew nut business, their relationship between farmers and their buyers either processing companies or purchasing station level 01. The household interviewees are persons who take responsibility of household‘s cashew nut sale, commonly household’s head. The sample size is 100 households under cashew plantation at least three years old. As for each household, there are possibly two to five different cashew nuts’ farmgate prices for all transactions during the study year. Totally, 253 observations/transactions conducted by these 100 households enter into the estimation. Appendix 4.2 and 4.3 gives statistic description of dependent variable and explanatory ones in the empirical estimation. As for traders, there are 18 samples of traders including purchasing station level 01, purchasing station level 02, and dealers in the two provinces. As in DakNong province there is not any purchasing station level 01, trader interviewees are only dealers and purchasing station level 02. There are also two samples of processing companies, one in Binh Phuoc province and one in DakNong province. 6 Export volume is higher than the output in cashew nut production in the area as the local processing companies can purchase cashew nut bean from neighboring provinces like Binh Phuoc for their processing and exporting 14 3.2 POLICIES AND INSTITUTIONAL FACTORS Institutional factors in cashew nut industry Figure 01 describes participants and stakeholders in the cashew nut industry. Farmers demand several input factors for their production which are supplied by both private and public sectors including seed, fertilizer, pesticide, irrigation, water, electricity, technology and others. While some factors are better supplied under market mechanism, other input factors have called for the GoV’s participation and other supporting program such as irrigation, electricity and technology. These factors are detailed in supporting factors. Four main supporting factors in cashew nut production are technology transfer either from Agricultural Extension Center (AEC), Plant Protection Division (PPD)7 or directly from the research institution and universities like Nong Lam University; sale on credit support from fertilizer and pesticide companies; input support from the Government’s program like supporting price of highly yielded seed and other market supports such as information on the market price in the international market. Prominent among these four factors, technology transfer has popularly been carried out in DakNong and Binh Phuoc through the AEC, PPD, and agricultural companies under their marketing strategies, research institution and university. Farmers have received technology transfer and usually in accompany with samples of advanced seed, newly developed fertilizers and pesticide. Financial supports include supporting price of seed, and credit program which has gone together with certain kind of crops or animals under the GoV’s recommendation including cashew nut as a strategic crop. The fact that has highly achieved in Binh Phuoc, not yet in DakNong is sale on credit from fertilizer and pesticide companies. A poor farmer as a member of Farmer Association can purchase fertilizer and pesticide on credit at 50%, repayable remaining 50% after their harvesting. The requirement for such a sale on credit performance is the existence of a formal organization as a legal entity in making transaction with companies. These are either Farmer Association or Farmer Club in Binh Phuoc. Though Farmer Association in DakNong has already established, it has however not performed such an activity to serve its members. Meeting with local authorities Research team discussion The cashew nut industry’s performance is also observed by the GoV, particularly the DARD and MARD in regard to planning on planted area, output and yield; the AEC and PPD regarding more detailed on technology, control on fertilizer and pesticide; Vietnam cashew nut Association (VINACAS) as a representative of cashew nut processing companies considering cashew nut’s 7 AEC and PPD belong to the Department of Agricultural and Rural Development 15 quality and trading in the local market. In addition, individual purchaser and processing companies has also more direct control and evaluation on cashew nut’s quality in the market. Working at night with farmers Group discussion with farmers Cashew nut bean from farmer is sold to the market mostly into two channels (1) dealers, purchasing station level 01 and processing companies; (2) purchasing station level 02, purchasing station level 01 and processing companies. The fact that farmer sells cashew nut directly to purchasing station level 01 is so rare in Binh Phuoc. And there is no such a case in Dak Nong as there is not any purchasing station level 01 in DakNong. Farmers in some cases have kept a part of their cashew nut bean as seed in the next crop. Some farmers have started certain post-harvest activities to increase value added in Binh Phuoc province while such activities have not yet performed in DakNong province. Processing can be divided into 04 main steps, namely drying, steaming, peeling and kernel processing. Within these four steps, the first three steps can now be carried out by farmers. Though processing companies have also performed all processing activities in their premise, they gradually hand over the first three steps to farmers and traders. Farmers conduct these post-harvest activities for their own cashew nut and then sell partially processed product (by-product) to processing companies for further processing step instead of cashew nut bean. Alternatively, farmers perform these post- harvest activities for others to receive their based-product wage as processing labor cost. Relevant policies in cashew nut industry • Policies on cashew plantation Sale on credit of input production from companies: Cashew nut has now been considered as a strategic plant in Binh Phuoc and DakNong provinces. There have three main policies on plantation in Binh Phuoc and DakNong provinces. The first is sale production input on credit to farmers without any interest rate. As mentioned, this activity has not yet been achieved in DakNong. Actually, such a performance is not the GoV’s policy, but it has derived from the demand and supply in the input market. Farmers have demanded fertilizer and pesticide but they are in lack of capital for investment, while input supply companies can sell these inputs on 50% credit repayable after 12 month period of this annual crop. Supporting highly yielded seed from the GoV’ s program: The program has carried out through AEC and PPD so as to encourage farmers to apply highly yielded seed, change from old variety to grafted cashew nut variety. However, the program’s achievement is still a controversial issue as such a new variety application also requires high investment of capital, technology and labor which is not easily attained for the ethnic minority farmers and in remote area and poor farmers. 16 GoV’s support for the operation of Farm Association, Farm Club and AEC and PPD: Most of these organization operations are technology transfer through training and seminars. Other supporting policies are (1) exemption of tax on using agricultural land to perennial crops including cashew nut, (2) building up grafted cashew model and (3) credit support program in general to poverty alleviation. • Policies on cashew nut trading Permission of newly established purchasing stations of processing companies outside the province: Since 2003, the Department of Trade and Tourism has permitted the establishment of purchasing station of processing companies outside the province. The increase in numbers of purchasing stations in Binh Phuoc province has actually enlarged the demand for cashew nut not only from local processing companies but only from processing companies outside the province. Bonus for export volume to processing companies: This is the GoV’s policy to encourage processing companies’ exportation. Processing companies will receive a bonus from the GoV’s budget at a certain high exportation volume. Vietnam cashew nut Association (VINACAS) as a representative of cashew nut processing companies has also efforts to observe cashew nut’s quality and trading in the local market. In 2003, it tried to determine the purchasing price among its member in the local market; the price however operated under the market mechanism. Such a price determination has not been appeared since it has been unable to put in action. In 2005 and 2006, to keep the cashew nut’s quality in the local market, it has strictly observed the quality through setting up criteria for each grade. Such guidance has found useful in trading as both farmer and trader has a base in making transaction. 17 Figure 01. Sub-sector map INPUT FACTORS 1. Seed (AEC, Co., traders, sefl-sufficient ) 2. Fertilisers, pestisides (AEC,Co., traders) 3. Labors: Sefl-sufficient Employed 4. AEC Technological transfer 5. Other financial inputs OUTPUT FACTORS Sefl-sufficient farmers 1. SUPPLY CHAIN IN SELLING FRESH PRODUCT FARMER Æ DEALER Æ PURCHASING STATION (1) Æ PROCESSING CO., FARMER Æ PURCHASING STATION (2) Æ PURCHASING STATION (1) Æ PROCESSING CO., 2. POSTHARVEST PROCESSING DRYING (1) Æ STEAMING (2)Æ PEELING (3)Æ KERNEL PROCESSING (4) F A R M E R S GOVERNANCE SYSTEM 1. The DARD and MARD to observe plantation and production 2. Agricultural Extension Center (AEC) 3. Vietnam cashew nut association 4. Purchasers and processing Co., SUPPORTING FACTORS 1. Technological transfer from AEC Research institutes, universities 2. Fertilizer and pesticide companies 3. Financial support • Supporting price of seed 4. Other market supports 18 3.3 ORGANIZATION OF COMMODITY CHAINS 3.3.1 Cashew nut bean Farmers sell cashew nut to processing companies through three channels, namely (1) direct sale to purchasing station level 01, which is so rare in Binh Phuoc province, (2) to collector/ assembler at farmer’s house or farm and (3) sale at purchasing station level 02 (see Figure 02). There is not the first channel in Dak Nong as there is not any purchasing station level 01 in DakNong. Purchasing station, level 01 Purchasing station, level 02 Figure 02. Cashew nut chain in Binh Phuoc and DakNong The collector is the first link between farmer and other middlemen in purchasing system. He buys smaller lots of scattered cashew nut production by his own capital, combines and classifies these into fewer types and finally resells them at a certain location, usually a purchasing station level 01. In addition to a