Cambodia’s beleaguered rice sector is both literally and figuratively drying up, with drought parching crops and commercial banks refusing liquidity to farmers and millers in need of loans to stay afloat.
The country’s Ministry of Agriculture, Forestry and Fisheries last year warned farmers that they may only be able plant one crop during the current dry season, which typically runs through April.
The ministry has said this could result in a smaller rice harvest year on year in 2020, a significant decline considering the rice sector is still one of the mostly rural nation’s main employers.
The agricultural sector, of which rice farming is the biggest component, employed around 3 million of Cambodia’s 15 million workers and accounted for just over a fifth of the country’s gross domestic product (GDP) in 2018, according to state data.
While the rice sector has long faced problems of underfunding and black market dealing, and is increasingly being impacted by environmental change and degradation, its woes have been compounded by European Union (EU) tariffs imposed last year on rice imports from Cambodia.
Rice shipments to Europe, previously Cambodia’s largest export market, declined due to the tariffs by around a third last year, from nearly 300,000 tons in 2018 to around 200,000 tons, according to Ministry of Agriculture statistics.
The blow was, to some extent, cushioned by an increase of 46% in rice exports to China, the country’s main political ally. Days after the EU’s tariffs went into effect last January, Chinese president Xi Jinping promised to increase the rice quota amount of China imports from Cambodia to 400,000 tons, up from the 300,000 tons set in 2018.
Not only does the quota amount represent artificial demand, as it requires the Chinese government to enforce imports, it is also more wishful thinking than a solution for Phnom Penh considering China failed to meet its smaller quota set for 2018, when it bought only 170,000 of a promised 300,000 tons.
Despite nearly doubling, Cambodia only exported 248,100 tons of milled rice to China in 2019, according to the Cambodian General Directorate of Agriculture. This means it fell well short of the 400,000 ton target and thus likely won’t be enough to lift the industry’s parched 2020 prospects.
Those numbers don’t tell the whole story, however.
While the total tonnage of Cambodia’s rice exports fell by less than 1% last year, chiefly because of the uptick of exports to China, official data shows that the total financial value of rice shipments fell by 4.3%, down to US$501 million. In other words, exports to China aren’t nearly as profitable as exports to the EU.
Yet it is farmers, not middlemen exporters, who are paying the heaviest price. Voice of America reported this month that rice dealers are offsetting the additional cost of EU tariffs by paying farmers less for their produce.
Some farmers say they are now selling their crops for half the price they received in 2018. One producer told VOA that he now sells fragrant rice, a high-quality brand, for 700 riel (US$0.17) per kilogram, when it previously sold for 1,300 riel.
On December 26, Cambodian Prime Minister Hun Sen stressed that his government won’t intervene in 2020 to prop falling prices, as it did in 2017 during an election year when his ruling Cambodian People’s Party (CPP) was keen to secure rural votes.
Cambodia isn’t a “communist country,” he said in his December 26 speech, while stating that “we could only make an appeal, but the market mechanism does not require the state to set the prices.”
His government’s strict adherence to market principles is questionable. It has previously set arbitrary interest rate caps on the microfinance sector, imposed annual minimum wage increases for garment workers, and bailed out the manufacturing sector on numerous occasions.
More likely, Phnom Penh knows that any direct intervention in the rice sector will require more than just price controls, and that state injections could cost billions of dollars at a time when state coffers are needed for more profitable sectors, like garment manufacturing, which could soon be hit by new punitive tariffs from the EU.
Falling profits couldn’t come at a worse time for Cambodia’s rice farmers. The cost of pesticide and fertilizer is rising and fluctuating weather patterns mean farmers are now increasingly dependent on such products to maintain yields.
Flooding and droughts are also becoming increasingly common, which requires farmers to spend even more money on water pumps and irrigation systems, and to put aside enough capital in case of crop failures.
According to a report by ASEAN Today, 45,000 hectares of rice-growing paddies were affected by droughts in December, for which the government was only able to provide financial relief to half of affected farmers.
Farmers are likely instead to turn to the already overheated microfinance sector, which has grown faster in Cambodia than almost any other country worldwide. Between 2004 and 2014, the average loan from a microfinance institution rose from $200 to $1000, twice as fast as per-capita income growth, Bloomberg noted last year.
A report published last August by two local nongovernmental organizations, Collateral Damage: Land Loss and Abuses in Cambodia’s Microfinance Sector, found that 2.4 million Cambodians now have combined outstanding microfinance debts worth around $8 billion, a third of the country’s GDP.
That makes an average debt per borrower of $3,370, the highest in the world for microfinance lending.
For years, experts have warned that the microfinance sector is overheated and that a significant number of borrowers are using loans for non-productive means, usually to purchase consumer goods or to repay other loans.
The Collateral Damage report states that mounting debts are pressuring farmers to sell their land to make repayments, as well as leading to more child labor, migration to neighboring Thailand and Vietnam, and even illegal “bonded labor.”
As profits are falling for farmers at the same time as they need to make new investments in equipment, microfinance loans are expected to rise in 2020. So, too, will the number of defaults, or non-performing loans (NPLs), analysts warn.
Reports suggest that the banking sector’s NPL ratio is currently around 2%, though this could be considerably higher because banks often include these debts under different categories and many debts are taken by borrowers to refinance other loans, the World Bank warns.
At the same time, however, millers and exporters find it increasingly difficult to access credit from commercial banks, which are increasingly wary of lending to the debt-ridden agricultural sector.
Whether private financial institutions lend or not is usually a litmus test for business confidence in a sector.
In December, the Cambodia Rice Federation (CRF), a farmers’ group, called upon the state-owned Rural Development Bank (RDB) to make $200 million available for emergency loans so that millers could continue to purchase their paddy.
The harvest season for premium fragrant rice begins around November, but millers are often cash-strapped at that time of year after purchasing white and fragrant rice varieties harvested between July and October.
It thus isn’t unusual for rice dealers to request RDB assistance. In 2016 and 2017, for instance, the RDB injected an additional $27 million and $23 million in credit for millers to continue buying harvested rice.
But the RDB only extended an additional $50 million for new loans last month, leaving millers to search elsewhere for the additional $150 million they requested.
The CRF’s vice-president, Chan Sokheang, told the Phnom Penh Post in December that commercial banks have recently halved the amount of their agricultural loans, with some trimming credits by up to 60%.
Cambodia’s banks aren’t usually wary about lending. In fact, Cambodia has the fastest growing lending sector in East Asia, with domestic credit growing nine-fold since 2007, the World Bank reported last year.
The World Bank report showed the number of outstanding loans provided by the banking and microfinance sectors were worth more than 100% of Cambodia’s GDP for the first time in 2019.
The National Bank of Cambodia warned in April last year that this leveraging could have “destabilizing effects on the economy.”
Unpredictable weather and disruptions to international trade have compounded the structural problems that have vexed Cambodia’s rice sector for years.
The UN Food and Agriculture Organization (FAO) reported last year that some 44% of Cambodia’s rice exports are undocumented and smuggled out of the country, chiefly because millers cannot afford to purchase the entire harvest and growers look to informal brokers for quick cash.
Recent reports suggest that the government could do more to build silos and warehouses for millers (three new ones were built in late 2018), improve exporters’ infrastructure and invest more in research and development to produce new and better strains of rice.
Civil society groups are speaking out about the perceived lack of government support, with discussion groups in Phnom Penh questioning why the government cannot use part of its $3 billion in foreign reserves to help subsidize the agricultural sector.
The call emerged after Hun Sen said that he may use foreign reserves to offset the tariff costs incurred if Cambodia is removed from the EU’s Everything But Arms (EBA) preferential trade scheme in punitive response to his democratic backsliding.
The EU is expected to make its EBA decision next month. Any revocation of EU privileges would devastate many of Cambodia’s export-oriented industries, particularly the garment sector, and likely require the government to divert further funds away from rice growers to cushion the blow on manufacturers.