FairSmart Agri: Strengthening Cambodia’s Rice Sector

Executive Summary

Hong Kong & Phnom Penh, Cambodia | December 2016

Introduction

The Global Institute For Tomorrow (GIFT) is an independent Hong Kong-based think tank and executive education provider focused on advancing a deeper understanding of global issues. The Global Leaders Programme (GLP) is GIFT’s internationally-recognised two-week executive education programme rooted in Asia which combines intellectual rigor, a beyond-classroom methodology and an output-driven approach to leadership development.

In December 2016, professionals from a global set of companies and organisations joined the 49th GLP, applying their business experience and problem-solving skills to create a new business model to strengthen Cambodia’s rice sector.

In partnership with SOMA Group, one of Cambodia’s leading industrial conglomerates with a strong focus on the country’s development, GLP participants produced a business plan for a new agribusiness focused on contract farming. Through field-research, stakeholder interviews and site visits, participants gained deeper insights into Cambodia; the challenges faced by the country’s rice sector; and the opportunities for a new business to have a positive impact on the livelihoods of rice farmers.

The following pages are an Executive Summary of the business plan. More detailed analysis can be found in the full report which is available upon request.

GLP participants with GLP alumni H.E. Mr. Sok Puthyvuth (centre left), CEO of SOMA Group and President of the Cambodian Rice Federation; and H.E. Mr. Mr. San Vanthi (centre), Deputy Secretary of State, Ministry of Agriculture, Forestry and Fisheries.

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The South East Asian Context

Southeast Asia’s 100 million smallholder farmers dominate its agricultural landscape. However, they face several challenges including low productivity; changing weather patterns; volatile commodity prices; and low access to technology, information and markets.

ASEAN could become a major part of the solution to the global food security challenge and the region’s governments are focusing on increasing agricultural productivity to improve livelihoods and drive economic growth.

625 millionPopulation of ASEAN region

8thASEAN world economy ranking

10-50%Contribution of agricultural sector to GDP across member states

100 millionsmallholder farmers

2 hectaresAverage size of smallholder farms

44%of the world’s rice is grown in the GMS*

200 millionpeople living on less than USD 2 per day

*Greater Mekong Sub-region (GMS)

Source: World Bank, ASEAN Reports

Agriculture is the mainstay of the Cambodian economy, involving around half the country’s workforce and is a pillar of the government’s strategy for national growth, equity, and efficiency. The agricultural industry’s high growth rates over the past decade has lifted four million people (~30% of the population) out of poverty.

KEY FACTS & FIGURES: CAMBODIA’S RICE SECTOR

of population is involved in rice production,processing and marketing

tonnes of paddy produced (2014)

of rice exported in 2015 (target setwas 1 million tonnes)

CAGR from 2010-2015

of global market share

20%

9.3 million

538,396 tonnes

40.1%

2%

Source: Ministry of Agriculture, Forestry and Fisheries, Cambodia 2015

Cambodia's Rice Sector

75% of Cambodia’s cultivated land is devoted to the production of rice, a priority crop. However, in contrast to its neighbours Thailand and Vietnam, the Cambodian rice sector still suffers from low productivity, low use of technology, and weak links to formal markets. The country’s smallholder farmers bear the brunt of this.

Sustainable business models combined with modern agricultural practices are required to support improvements to farmer livelihoods and cross sectoral advancements.

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Project Partner: SOMA Group

SOMA Group, established in 2007, is committed to addressing Cambodia’s socio-economic development challenges through its businesses while concurrently nurturing the country’s next generation of business leaders. SOMA’s business activities range from education, agriculture and energy to construction and trading.

The company’s CEO H.E. Sok Puthyvuth is the current President of the Cambodian Rice Federation and a GIFT GLP Alumni.

SOMA’s Vision for the Cambodian Rice Sector

To support this, the company is developing a three-pronged strategy which includes:

A world-class seed production business;

A post-harvest drying and storage solutions business;

A “farmer-centric” contract farming business.

The contract farming business is an integral part of SOMA's broader strategy to transform the Cambodian rice sector.

The new contract farming business will be applied to SOMA’s seed business and the production of paddy, and eventually other crops across Cambodia.

Paddy produced within the contract farming eco-system will feed into SOMA’s strategically located drying and storage service centre business model that is currently under development.

SOMA’s Contract Farming Business

Drying & Storage Business

Seed Production Business

High-quality, certified seed produced by farmers for SOMA’s paddy production business. This feeds into the company’s post-harvest drying and storage business.

High-quality paddy produced using certified seed from SOMA’s seed production business.

High-quality registered seed; inputs; modern farming technology; training and extension services provided by SOMA to contract farmers.

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SOMA’S THREE-PRONGED APPROACH FOR CAMBODIA’S RICE SECTOR

SOMA’s vision is to promote modern and sustainable technology among rice farmers to improve land productivity, crop quality and the overall economic standing of farming communities.

What is Contract Farming?

Contract farming is a method to organise agricultural production effectively and efficiently through establishing agreements between a farmer (or group of farmers) and a buyer in which the farmer is obliged to adhere to a set of requests by the buyer. In return for this adherence, the buyer purchases the product at a price that is agreed to in advance and supports farmers through the provision of ancillary services.

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Established as a new entity under the SOMA Group, FairSmart Agri will provide:

Introduction of modern and sustainable farming technology

Improved land productivity, crop quality and quantity

Social value created through supporting smallholder farmer’ livelihoods

Promotion of socio-ecological agricultural practices which supports both rural and ecological development

FairSmart Agri

Operating under FairSmart Agri, FairSmart Farms will be established at the provincial level to manage and execute the recruitment of farmers to the business, facilitate input and service delivery and support local farm development in designated/outlined provinces and/or regions.

The sustainable transformation of the rice farming industry must also promote farmer

welfare and re-balance migration from the farmlands. For this reason, a strong alliance is

needed between SOMA and local farmers to ensure mutual benefit.

The creation of FairSmart Agri, a new company hosted under SOMA Group, will support the

development of the Cambodia’s rice sector while improving social conditions for farmers

and rural communities.

The best case projection assumes FairSmart Agri establishes a drying and storage facility which would be located close to the pilot site capturing additional value before SOMA’s proposed drying and storage service hubs come online.

*suggested logo created during the GLP

FairSmart Farms & The Agency Model

The proposed Agency Model will ensure the growth of the contract farming business. Under this model, Agency Leaders will be identified and enrolled in the contract farming business.

Agency Leaders will be responsible for promoting the contract farming business and recruiting farmers (Agency Farmers) to join.

BENEFITS OF THE AGENCY MODEL

Promotes collective and shared responsibility betweenFairSmart Agri, FairSmart Farms, and farming communities to ensure a consistent supply of quality paddy is maintained;

The recruitment and involvement of Agency Leaders to drive farmer recruitment and organisation within the community thereby supporting efficiency within the contract farming business;

Drives farming best practices, knowledge sharing and skills development amongst rice farming communities to ensure overall improvement of the sector.

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FairSmart Agri’s Sustainable Business Model

The following business model shows how FairSmart Agri creates financial and social value

thereby strengthening Cambodia’s rice sector.

FairSmart Agri coordinates the procurement of

high quality inputs and FairSmart Farms will sell

these to the farmer on credit. By leveraging

the purchasing power of SOMA Group,

FairSmart Agri sells inputs at (or below) market

price.

FairSmart Farms sell the inputs to the farmers,

provide contract farming services and

coordinate the collection and sale of paddy.

FairSmart Agri’s finance department will

support financing for input procurement by

leveraging low interest rates from financial

institutions. The finance department is also

responsible for establishing an efficient cash

distribution and payment system from the

company to farmers.

FairSmart Farm and farmers will interact

through an Agency Model. The Agency Model

will serve as a platform for smallholder farmers

to organize, collaborate and benefit through

the procurement of collective and affordable

services.

FairSmart Farm will recruit suitable local farmers

based on pre-determined criteria to become

Agency Leaders . These farmers will receive an

incentive package from FairSmart Agri including a

one-off starter payment, a basic monthly wage and

a post-harvest commission based on the net

output of their Agency.

Agency Leaders will in turn be responsible for

recruiting farmers within their community into the

contract farming business. Recruited farmers are

known as Agency Farmers.

Best case projects assume FairSmart Agri

establishes a drying and storage facility which

would be located close to the pilot site facilitating

the generation of higher profits for FairSmart Agri.

The Integrated Business with Dryer & Storage

capabilities would allow FairSmart Agri to capture

additional value in advance of SOMA’s proposed

drying and storage service hubs coming on-line.

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Pilot Sites & Business ExpansionFairSmart Agri has great potential to grow and spread across the country. Given the importance of building trust and goodwill amongst farming communities, it is recommended that the business model be tested first.

It is proposed that the contract farming model be piloted in two provinces: Battambang and Takeo. Varying in geography, average farm size and rice varieties grown, these provinces will test the effectiveness and viability of the proposed business model.

Proposed Pilot Site Locations

BattambangProvince

Takeo Province

Profile of Target Agency MemberTarget Acreage in Each Province Under Contract Farming

Large farm owners with >50 Ha of land

Farmer groups with collectively >50 Ha

of land

1,000 Ha

Battambang Pilot Site

Takeo Pilot Site

Y1

Y5

5,000 Ha

Y1

Y5

1,000 Ha 5,000 Ha

FairSmart Agri Service OfferingsContract Farming & Agronomic Services

Farmer training (technical and managerial) will ensure the sustainability and longevity of the business while protecting the FairSmart Agri brand.

In order to tackle the deficiencies of the Cambodian rice sector, FairSmart Agri will provide farmers with services such as agricultural inputs on credit, farming best practice information and weather forecasts.

Financial Services

Financial services for farming communities in Cambodia are currently insufficient and inaccessible. The FairSmart Agri finance department will maximize value from the financial system to ensure the viability of the business model as well as enhance the financial value for the Agency Farmers.

The department will access credit at bulk rates; serve as a trustee for farmer surpluses and investing in them to provide higher yield; and leverage the global financial market to minimise the risk of rice price fluctuations for FairSmart Farms.

Agency Management

To streamline management processes, FairSmart Agri will operate an Online Service Platform to support overall management and operations of FairSmart Farms including service requests, production tracking and knowledge exchange between Agency Groups.

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FairSmart Agri Financial Projections

The launch of FairSmart Agri presents an excellent opportunity for investors and strategic partners who wish to create significant impact on Cambodia's promising rice sector.

An initial investment of USD 1.43 million (comprising a 50-50 blend of equity and debt) is required for the implementation of one 1,000 Ha pilot site which increases to 5,000 Ha over five years. Total equity investment required over a five year period is USD 3.9 million.

The financial model shows that FairSmart Agri offers investors an attractive IRR of 20% over a 10 year period. FairSmart Agri has a Net Present Value of USD 2.9 million with a payback period of 5.4 years.

The business is capital intensive as it depends on the introduction of modern agricultural technology to allow for the provision of agricultural services.

For more detailed analysis, scenarios and the key assumptions, please refer to the comprehensive report.

The best case projection assume FairSmart Agri establishes a drying and storage facility which would be located close to the pilot site.

Wet paddy is sold directly to this business and can be dried and stored for sale in the low season, facilitating the generation of higher profits for FairSmart Agri.

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Integrated Drying & Storage Business

Community Benefits & Social Impact

As the contract farming business takes

off, FairSmart Agri will be a key

implementer of modern agricultural

practices and farming technology for

Cambodia’s rice farmers. The provided

services will enhance and connect the

country’s agricultural resources and

players to ensure the production of

globally-competitive high-quality

paddy.

For more information on the FairSmart Agri project please contact GIFT at enquiry@global-inst.com

FairSmart Agri’s Agency Model will ensure that Agency Leaders drive the recruitment process of and are provided with a commission based on their collective Agency Group output at the time of harvest.

Not only is FairSmart Agri a financially viable business, it has the potential to have a direct and immediate impact by providing cost effective and effective agronomic services and inputs to help rice farmers grow high-quality paddy while reducing environmental impact and supporting the community.

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