Catfish and strawberries: quality management in Vietnamese modern distribution channels. Phan Thi Giac Tam

Transcription

1 Catfish and strawberries: quality management in Vietnamese modern distribution channels Phan Thi Giac Tam

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3 i CONTENTS Summary... ii 1. Introduction and background DOCIFISH catfish export case Presentation of stakeholders Quality requirements Linkages in the supply chain Technical impacts Economic impacts Dalat strawberry market chain Presentation of stakeholders Quality requirements Linkages in the supply chain Technical impact Economic impact Conclusions References LIST OF TABLES, FIGURES AND PHOTOS Tables Table 1: Sources of information for catfish producers in Dong Thap Province... 4 Table 2: Technical performance of catfish producers in Dong Thap Province... 6 Table 3: Economic performance of catfish producers in Dong Thap Province... 6 Table 4: Estimate of the quantities lost after harvest in strawberry supply chains from Dalat in percentage of farmgate output... 8 Figures Figure 1: Marketing channel and fish input channels of the DOCIFISH Company... 2 Figure 2: Map of Dong Thap Province districts participating in DOCIFISH quality assurance scheme.. 3 Figure 3: Share of margins and profits going to various stakeholders in the strawberry supply chains8 Photos Photo 1: Feeding fish in pond... 5

4 ii SUMMARY This article investigates the production and marketing practices of two quality-led supply chains in Viet Nam. The first case study involves catfish produced for the exporting company DOCIFISH in Dong Thap Province of the Mekong River delta. The second part of the article reports how strawberries are being distributed from the Central Highland Province of Lam Dong and delivered to Metro Cash & Carry in Ho Chi Minh City. In both cases, farmers who are involved in the quality-led marketing chains show innovations in their production practices and are ready to invest time and money in the business relationship with their specific buyer for the quality product. These investments are repaid by higher profits for the farmers involved in the quality-led chains compared with those selling through the traditional marketing channels. In both cases, the enabling environment provided by the government through the setting up of a quality assurance scheme, the zoning of specific production areas and the monitoring of the contractual arrangements between farmers and buyers has had a crucial role in helping these marketing chains to develop.

5 1 1. INTRODUCTION AND BACKGROUND The agricultural sector in Viet Nam accounts for a relatively small portion of GDP (about 30 percent). However, it employs 70 percent of the country s labour, mainly as small farmers. Trade liberalization and market restructuring have begun since the late 1990s. More requirements on quality standards from international trade as well as from modern retailers such as supermarkets have induced more integration into marketing chains. The traditional marketing chains in Viet Nam are usually very long with long-distance traders coming to local traders to buy produce. In the harvest season, small local traders are employed to collect produce for the bigger local traders. Some local rural traders have invested in a stall in the city wholesale market even if they only do business there for a short season and rent out the stall to another trader when the season is over. This shows the potential for profit of trading fresh produce, even on a very short seasonal basis. When modern distribution appeared in 1996 the new outlets started buying food produce from the city wholesalers. After just a few years, the supermarkets and other modern distributors had created direct links with rural traders and collectors. Some of these traders have become dedicated suppliers to modern distribution outlets. The role of the traders is very important because they can source different products from different suppliers and assemble one lot for their modern distribution customer. The bigger trader, whether city- or rural-based, is also essential as a source of cash for the rural traders and farmers. Cadilhon et al. (2006) and Moustier et al. (2006) describe in greater details the development of modern distribution in Viet Nam. Some shortened chains have appeared with strong linkages between processing or distribution companies and producers thanks to the role of government in facilitating contract farming and zoning for specific agricultural activities. This study examines the quality improvement management practices in the marketing chains of cultured catfish for export by the DOCIFISH Company and strawberry production to Metro Cash & Carry.

6 2 2. DOCIFISH CATFISH EXPORT CASE 2.1. Presentation of stakeholders Catfish (Pangasius) is raised in ponds along the Hau riverbank and in cages on the river in Dong Thap province. The production is monitored under a quality assurance scheme set up by the Vietnamese Government to certify to foreign importers that the catfish produced in the designated area are produced in clean water, are free of chemical residues, disease or parasites, and have white flesh. The fish is considered of high quality (see below for details of the quality requirements). Waste water discharged directly into the river poses a serious environmental problem. Moreover, the establishment of large catfish production areas throughout the Mekong River Delta Region has locally degraded the water quality in the river and affected downstream villages. Increased agricultural activities in the Mekong Delta are also contributing to increased environmental pressure on the water resource. The river water used in the pond is pumped directly into the ponds. Some farmers have implemented treatment to clean the water in the beginning of the 5 th lunar month (when the downstream flow is very strong and full of upriver silt) and in the 9 th month (when pesticide-contaminated water is pumped out from rice fields into the river). The farmers in this quality-led supply chain produce catfish for sale to DOCIFISH, a state enterprise specialized in processing aquaculture products for export. Figure 1 shows the supplier and customer portfolios of the DOCIFISH processing company. Figure 1: Marketing channel and fish input channels of the DOCIFISH Company Own production area (10 ha) 15% 76% EuropeanUn ion markets DOCIFISH association members 30% DOCIFISH Company Other producers 55% 24% Other markets Source: DOCIFISH Some of the farmer suppliers have been grouped within the DOCIFISH association. The purpose of the DOCIFISH association is to supply good quality fish through contract farming. Association members are preferred suppliers who have large fish volume of more than 100 tonnes of raw fish per crop and good experience in fish cultivation. The modern supply chain investigated here involves: Farmers DOCIFISH processing company Exporters On the other hand, the traditional catfish supply chain involves: Farmers Trader Wholesalers Retailers

7 2.2. Quality requirements The requirements of the processing company are different from those of the traditional traders: the volume of the catch delivered to DOCIFISH must be more than 40 tonnes. Because of this requirement, the farmers selling to the processing company must be large-scale with at least one pond of half a hectare. The meat of the fish must be white colour and must not contain any residuals from antibiotics. In particular, the following inputs are banned: heavy metals, pesticides, use of Chloramphenicol, Nitrofuran, Malachite Green or Leuco Malachite Green. Antibiotics such as tetracycline, oxy-tetracycline are allowed but in limited amounts. Suppliers to DOCIFISH must adhere to two criteria: 1. The fish pond must be within an area certified by the Government for clean production; 2. The product must meet the requirements of the company mentioned above. The certified area is redefined from time to time within assigned production areas that are under quality control of the National Fisheries Quality Assurance and Veterinary Directorate (NAFIQAVED), as shown in Figure 2 below. NAFIQAVED will certify from time to time which areas meet standards for fish purchase of DOCIFISH based upon the results of their laboratory tests. The four certified production sites in Dong Thap Province are: 1. Hong Ngu and Tan Hong Districts; 2. Lap Vo and Lai Vung Districts; 3. Tam Nong, Thanh Binh and Cao lanh Districts; 4. Chau Thanh and Sadec Districts. 3 Figure 2: Map of Dong Thap Province districts participating in DOCIFISH quality assurance scheme The producers must inform the company when their batch is ready for harvesting. The company then checks whether the pond is in the government-certified area. DOCIFISH staff come to the farmer s pond to take a sample of the meat, look at the fish, the water quality and the environment. The sample is sent to the NAFIQAVED centre for analysis. If the sample test does not show any

8 problems, the company will inform the farmer about the day of harvest. If the NAFIQAVED test is positive, thus violating DOCIFISH s first criterion, the farms are excluded from the certified area. The company pays and provides staff for the harvest. When market demand has exceeded the local supply, DOCIFISH extended its purchase to other provinces but still required that tests be done on produce samples before agreeing to buy from farmers Linkages in the supply chain Information is very important for the producers. Information of different types is obtained from different sources (cf. Table 1). Neighbours are the main source of information; farmers tend to gather every evening at a preferred coffee shop. Other important sources are feed traders or veterinary product traders. Government sources such as television or extension services are considered not reliable but needed for information on disease outbreaks. Table 1: Sources of information for catfish producers in Dong Thap Province 4 Type of information Output price Buyers quality requirements Terms of contract Feed quality and feed prices Veterinary products Veterinary regulations Disease outbreaks Technology Source: Field research interviews Sources of information Neighbours, television Neighbours Buyers Neighbours, feed traders Veterinary traders Veterinary traders Television, neighbours Neighbours As far as information exchange is concerned, feed traders from neighbouring Can Tho Province often provide information on catfish prices. Traders of veterinary products give information on government regulations concerning food safety. According to the producers, private traders are a more efficient source of information on government regulations as these regulations are only provided in hardcopy form; and paper dissemination is limited. Verbal communication is much more efficient, particularly when information on such regulations is accompanied by explanation and advice on what to buy or do in order to follow them. Farmers often find themselves in need of money two to three months before the harvest in the seventh and eight months of the production cycle, which does not exceed 12 months. Farmers can borrow from the Development Bank and the Industrial Commercial Bank. However, this requires collateral. The maximum loan given is VND100 million 1. Private fish pond owners may receive loans of VND5 10 million at the interest rate of 5 10 percent per year. Feed agents may provide loans in kind if there is a good relationship between the agent and the farmers, but the agent usually checks the pond to see if there is likely to be a good harvest before he or she takes a decision on providing credit. The DOCIFISH Company has created the DOCIFISH association consisting of its contracted producer suppliers. There are 29 members of the association who are all large-scale producers. The goal of the association is to help farmers supply good quality fish to the company. By contracting out with farmers, DOCIFISH gets some preferential treatment from the government as per the Prime Minister s Decision 80/2002/QD/TTg of 24 June 2002 and Ministry of Finance Circular 04/2003/TT- BTC of 10 January 2003: 1. Support in investment for infrastructure; 2. Support to obtain credit at 3 percent interest per year for working capital; 3. Support on advanced technology and market information. 1 At the time of study, US$1 VND17 800

9 The members of the DOCIFISH association are also preferred suppliers of DOCIFISH. When the prices for catfish are low, there is an informal agreement with the company that DOCIFISH will supply in priority from the association members. There are five aquaculture processing companies in Dong Thap Province. Companies from Can Tho Province and other provinces in the Mekong Delta also come to buy fish in Dong Thap. Recently these companies colluded to lower the farmgate price. The processing companies help each other by providing outputs to those that need catfish to complete their contracts. Farmers attempts to strengthen their bargaining power are weak as they lack money to keep their fish stocked for a long time before the processors agree to increase their purchase price. Catfish producers are considered successful not only based on their yield. A good farmer must be an innovator or keen on adopting new technology; a good farmer must have an extensive network to capture information immediately; be good on judging feed potential; and be capable of diagnosing fish disease. Catfish farmers face a number of difficulties ranging from colluded prices by processing companies, lack of cash, lack of technology and slow action from government on diseased areas. Therefore, they are keen to obtain accurate price information from television and some technical assistance. All the non-contracted farmers who supply the DOCIFISH Company have an informal gathering every day, sometimes twice per day. Farmers exchange technical information, government policy implications, information, and prices. These farmers also get information from the feed agent on selling prices and from the veterinary shop on what kind of medicine to use for their fish. A lot of information is shared among actors. They have an incentive to upgrade their knowledge and to keep social gatherings to exchange information. Such meetings also allow farmers to compare yields and share their technical skills. There is strong support from government in this case through the certification scheme for clean aquaculture. Farmers who sell to the company have to register to the local authority so as to use their pond as collateral to get credit from government banks. They will also be exempted from paying the land tax for three years Technical impacts The quality requirements of DOCIFISH have an impact on the technology used by the farmers, as shown by their technical results in Table 2. In particular, the use of industrial feed recommended by DOCIFISH to its suppliers leads to a whitening of the flesh of the fish, which is a desired quality attribute. Photo 1: Feeding fish in pond 5

10 6 Table 2: Technical performance of catfish producers in Dong Thap Province Supplier to DOCIFISH Company Supplier to traditional market Average pond size (ha) Depth of the pond (m) Density of fish (/m²) Survival rate (%) Frequency of water changing Every day 1 to 2 weeks Feed Industrial Small fish Colour of fish meat 80 to 90 % white Yellow Source: field research interviews 2.5. Economic impacts The technical performance of producers has an impact on the prices they receive for their product and on their overall profit (cf. Table 3). In Thanh Binh and Hong Ngu Districts, the quality of catfish is considered low therefore fish prices are also low: VND /kg while in Lap Vo District it is VND13 500/kg. This difference in technical performance can be explained by the degraded water resources and bad practices of small traditional producers. The small traditional farmers are those with fish ponds in a relatively less favourable area for water supply. They can only change 30 percent of the total pond water every one or two weeks and only shorten this replenishment interval when nearing harvest time. This practice is inexpensive but limits fish density. Large farms are located along the Mekong River banks with more frequent water recharges, allowing higher density of fish. Because the harvest date is not specified in advance by DOCIFISH, once the fish has been judged appropriate for purchase by DOCIFISH, the company may not come to harvest the fish for several days. The costs of maintaining the fish ready for harvest are borne by the farmers. Table 3: Economic performance of catfish producers in Dong Thap Province Unit Supplier to DOCIFISH Company Supplier to traditional market Yield Tonne/ha Cost per unit VND/kg Unit Price VND/kg Gross return VND/kg Gross return VND1 000/ha Cost VND1 000/ha Profit VND1 000/ha Source: field research interviews It was not possible to calculate the margin and profits in the DOCIFISH supply chain as the DOCIFISH Company refused to disclose the value of its economic indicators. However, Table 3 above shows that the gross return of farmers per kilogram of catfish is very low: between VND2 000 and 3 000/kg. This very small return puts the catfish farmers at great risk from fluctuations in the market price. In September 2008, the whole Vietnamese catfish industry suffered from financial pressures as the catfish price became very low.

11 7 3. DALAT STRAWBERRY MARKET CHAIN 3.1. Presentation of stakeholders This quality-led supply chain is geared to the requirements of Metro Cash & Carry (C&C), a modern wholesaler with several outlets in Viet Nam (Cadilhon et al., 2006). The modern supply chain involves the following stakeholders: Farmers Trader Metro C&C collection point in Dalat Metro C&C warehouse in Binh Duong Metro C&C outlets On the other hand, the traditional supply chain comprises: Farmers Trader Wholesaler or other traders Retailer Farmers were interviewed in Ward 7, 8 and 12 of Dalat City in Lam Dong Province. In Ward 8, the quality and the availability of the water is good so most of the farmers growing strawberries are concentrated there. Metro C&C has developed the supply chain. The cash-and-carry has a collection point in Dalat and has a supply contract with three traders. Each trader makes an informal supply contract with around 100 strawberry farmers Quality requirements The quality of the strawberry depends on the technical skills of the farmers but also on the area of production. Strawberries delivered to Metro C&C must abide to special requirements: 1. The strawberry must be classified as Grade 1 (15 20g per strawberry); 2. The fruit must show no bruises; 3. The fruit must be of regular shape; 4. The maturity of the fruit must be only two-thirds; 5. Timing of delivery to Metro collection point is very strict: safe vegetables must be delivered before 11.00, fruits must be delivered before If the delivery is 30 minutes late, a fine amounting to 10 percent of the total value of the delivery is deducted. If the delivery is between 30 and 60 minutes late, the fine is 20 percent of total value. If delivery is later than one hour, Metro C&C will fine the supplier 50 percent of the total value of the delivery. This is implemented because the truck transporting all Metro C&C s goods from Dalat to Ho Chi Minh City has to leave at a given hour. However, there are no requirements for use of pesticides. Every shipment is sampled on arrival at the collection centre to check for appearance; the decision to buy or reject a shipment is done at the collection centre Linkages in the supply chain Metro C&C pays the supplier seven to ten days after delivery. In traditional chains, the trader pays the supplier almost immediately. The role of the trader in both chains is very important as he or she supports farmers with cash and provides information on the standards required by the city customers. Traders supplying the Metro C&C chain pay farmers immediately after daily delivery whereas traditional traders only pay after four or five deliveries. Metro C&C suppliers also pay for the transportation costs of the farmers from the farm to their own enterprise. The contract between Metro C&C and its suppliers makes explicit the delivery conditions, but the type of product to be delivered, the price of payment and quantities to be delivered are left open to negotiation. The strategy of the traders is to buy all the strawberries from the farmers and then grade the fruits according to the different grades for various customers. Farmers in this supply chain get little

12 training on production practices from the downstream actors in the chain. However, these farmers do attend meetings to get technical training from the government extension services Technical impact Farmers who are involved in the Metro C&C supply chain have to develop their technical skills in order to produce strawberries throughout the year, and in particular during the rainy season. This requires attending training sessions organized by the Provincial Department of Agriculture and Rural Development. The techniques being used and the logistic chain have an impact on the post-harvest losses in the two strawberry chains, as shown in Table 4. Table 4: Estimate of the quantities lost after harvest in strawberry supply chains from Dalat in percentage of farmgate output Chain stakeholder Metro C&C supply chain Traditional supply chain Trader Wholesaler or Metro C&C 1 3 City retailer - 10 Total post-harvest losses 8 18 Source: Field research interviews 3.5. Economic impact The purchase price secured by the suppliers of Metro C&C is higher than that of the traditional market by VND3 000/kg. Because Metro C&C requires strawberries all year round, farmers who are involved with suppliers to the cash-and-carry must have financial assets to produce during the rainy season, which requires further investments into the production system. Figure 3 shows that the share of profits and margins secured by the strawberry farmers in the Metro C&C supply chain is higher than that of farmers selling to traditional marketing channels Figure 3: Share of margins and profits going to various stakeholders in the strawberry supply chains Metro C&C supply chain Traditional supply chain 10,9 17, ,2 17, ,3 8,2 24,5 45, ,3 43,3 Margin (% Retail Price) Profits (% Total profits) Farmers Processing Metro Enterpris Enterprice 46, , ,2 5,6 0 Margin (% Retail Price) Profits (% Total profits) Farmers Traders Wholesaler Retailers

13 One trader has made a special investment by buying the rights to produce a new variety from New Zealand. Ms Lan is the only person who carries this variety. She sells to traders from Ho Chi Minh City coming directly to her and to a trader selling to a supermarket in Cambodia. She is currently the only producer trader growing strawberries under greenhouse in Dalat. 9

14 10 4. CONCLUSIONS The two case studies described above shed light on the impacts of joining quality-led marketing chains in Viet Nam. Farmers who wish to get involved in quality marketing chains need to be innovative in order to adopt new production technologies and business skills. In some cases, farmers need to have some working capital to make the necessary investments into their production systems. Likewise, larger landholdings are also needed to enter the quality-led production system, such as in the case of catfish. Quality marketing chains require more linkages among private sector actors but not necessarily only between private sector actors. The role of the public sector is still important. Indeed, in both cases, the Vietnamese Government has created the linkages between input suppliers and producers, as in the catfish case. Government services have also been involved in creating the relationships between farmers and their customers. Farmers involved in quality-led chains need to make specific investments into their relationship with their quality-demanding customers. In both cases farmers invested in their new production system through new varieties of product, new production techniques, improved post-harvest practices, and improved infrastructure such as irrigation, greenhouses, fish ponds and private roads from their plot to the main road. Most importantly, the value distribution among actors of the quality chains benefited the producer farmers in both cases. In particular in the strawberry case, the producers share of margin and the share of profits of the entire value chain was higher in the quality-driven chains than in the traditional marketing channels. However, the bargaining power of the producers is still very weak in the quality-led supply chains because all the contractual arrangements are set by the buyer and to the latter s favour. Quality-driven marketing chains are becoming the main trend in the market structure of Viet Nam. The role of government at this early stage of quality improvement is very important in providing the essential enabling environment that will allow businesses to invest in better quality products. Government services at the local and national levels have been involved in zoning areas to be certified under a quality scheme and facilitating the training of farmers. In the case of catfish, the standard set by the Government and its certification services were also the foundation for the quality-led chain.

15 11 REFERENCES Cadilhon, J.-J., Moustier, P., Poole, N.D., Giac Tam, P.T. & Fearne, A.P Traditional vs. modern food systems? Insights from vegetable supply chains to Ho Chi Minh City (Vietnam). Development Policy Review, 24(1): Moustier, P., Anh, D.T., An, H.B., Binh, V.T., Figuié, M., Tan Loc, N.T. & Giac Tam, P.T., eds Supermarkets and the poor in Vietnam. Hanoi, Making Markets Work Better for the Poor and CIRAD.