DETERMINANTS OF SUGARCANE PROFITABILITY: THE CASE OF SMALLHOLDERS IN VIETNAMESE MEKONG DELTA

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1 DETERMINANTS OF SUGARCANE PROFITABILITY: THE CASE OF SMALLHOLDERS IN VIETNAMESE MEKONG DELTA Le Canh Bich Tho Lecturer. Tay Do University, Can Tho City, Viet Nam. ABSTRACT Mekong delta is highly advantage in natural conditions and quality of sugarcane compared to other regions in Vietnam. Nevertheless, cane production still has to face a lot of problems related to low and unstable output price, small and scattered farm size, very low levels of mechanization, weak connection between farmers and enterprises. Therefore, this study was conducted to identify factors affecting the profitability of sugarcane small holders in two provinces of Mekong Delta. Primary data were collected from 100 smallholder cane growers in the year Results of the study revealed that the performance of these farmers is affected by cultivated area, mechanization level and output price. It is recommended that farmers should take initiative in participation in cane cooperatives and big farm model to be more beneficial to inputs price, harvested machine and formal credit in the beginning of each season. Moreover, these cane-growers should be given support in micro finance as well as agricultural, high-technology and marketing training courses each year. 1. Introduction Keywords: sugarcane, smallholders, profitability, cane growers, big farm model. Mekong Delta is considered as the largest sugarcane area in Vietnam, accounting for 21.6% of planting size and 28.7% of production. In the crop year , with more than 58,654 ha farming and 87.4 tons/ha of yield, provinces in Mekong River reached the highest average yield when comparing to other regions in the country. However, sugarcane Mekong Delta has sugar content of about 9.4 CCS, lower than the national average of 9.6 CCS (MARD, 2013). Until September 2016, the area of sugarcane planted in Mekong Delta has declined to 40,000 hectares, nearly 7,000 hectares lower when comparing to that figure in Due to low level and short period of flooding in year, factories decided to buy raw cane with substandard sucrose content. This type of purchase has caused farmers to be badly affected by low output prices and they would find reasons to quit growing sugarcane in the next years (Sugarcane Research Institute, 2016). The major significantly positive factors in the output of sugarcane smallholders in Lao can be listed as capital invested in production, cultivated area and producing steps are mainly by hired manual labor (Supaporn, 2015). The study of Solomon et.al in 2016 also revealed that the costs of inputs of sugarcane i.e. urea, DAP, FYM, land preparation, seed and its application, weeding and cost of irrigation were the important factors which influenced on the returns of sugarcane growers. Also being interested in economic challenges of small-cale cane farmers, Clainos and Ledwin (2011) indicated that low sugarcane productivity and profitability are largely due to lack of input materials, lack of modern machines in producing steps, low prices paid for the harvested cane, high cost of transportation and storage, and limited agricultural as well as marketing training courses. In addition, Masuku (2011) found an evidence that there was a positive correlation between profit and other variables, including farming experience, change in sucrose quota, yield per ha, sucrose content and the distance from the farm to the mill. In Mekong Delta areas, profit of sugarcane households was found to be negatively correlated with labor cost, fertilizer and pesticides cost in the context of exclusive cultivation area that is heavily influenced by salinity intrusion and drought. On the other hand, 57

2 production experience, cultivated area, selling price and number of training participants had a positive effect on profitability. This is an important basis for increasing the cooperation between enterprises and small-scale farmers in order to restrict fluctuated output price in each harvest. This study provides scientific evidence in the steps towards identifying factors affected profitability and improving efficiency of sugarcane production in Mekong Delta provinces. 2. Methodology Research area In 2015, sugarcane farming area in the Mekong Delta was about 56.8 thousand hectares, production reached 4,977 thousand tons, mainly concentrated in Hau Giang, Soc Trang, Long An and Tra Vinh provinces. Hau Giang and Soc Trang were selected to be study area for leading in sugarcane cultivating area and production in Mekong Delta during the period from 2010 to 2014 (Figure 1). Similarly, also based on the two above criteria, two districts Phung Hiep (Hau Giang) and Cu Lao Dung (Soc Trang) were chosen to conduct sampling survey. Figure 1. Sugarcane cultivated area and production by province in Mekong Delta 14,500 14,000 13,500 13,000 12,500 12,000 11,500 11, Hau Giang area Hau Giang production Soc Trang area Soc Trang production Sampling techniques Source: Hau Giang and Soc Trang Statistical Yearbooks Due to the limitation of time and research budget, sample size was 100 units (cane growers). Sampling method is conditional nonprobability technique (households who have produced sugarcane for more than 3 years), the structure of sample observations is illustrated that 50 farmers located in Phung Hiep District (Hau Giang province) and 50 farmers from Cu Lao Dung District (Soc Trang province). Primary data was collected by interviewing personally 100 farmers in the two districts using structured questionnaire to record information on household resources and sugarcane production in Method of data analysis Factors affecting profitability of sugarcane cultivation were determined by the multivariate regression model. This method was used to measure the absolute change of the dependent variable (Y i ) according to the relative change (%) of the independent variables (X i ). The influence level of independent variables on the dependent variable is given by the formula (Gujarati, 2004): Y/( X i / X i (%)) = β i /100 The coefficient β i /100 measures the absolute change of Y according to the relative change (%) of X i Y i = β 0 + β 1 X 1 + β 2 X β i X i + e With Y i being the dependent variable, gross margins of the i th sugarcane grower per hectare (million VND/ha); X i are independent variables including cultivated area, mechanization level, technology support, distance to port and output price respectively; β i is partial regression coefficient of the X i variables; e is residuals 58

3 3. Empirical results Socio-economic characteristics of cane growers Thanks to the low risk of disease and characteristics compatible with traditional cultivation, cane growing has been brought certain advantages to farmers. Analysing financial ratios of the cane growing model will help proposing appropriate solution to increase benefits for each cane growing household in the study area. Table 1 shows that majority (87.8%) of the respondents were male and be within the age group Older than 50 years old (52.2%). The productive group of sugercane in Vietnamese Mekong Delta, young farmers who are always active and ready to adopt new technique, occupied just a proportion of 19%. This can be considered as a disadvantage of cane production since older farmers are more likely to apply traditional seasonal crops calendar and not willing to change to another new ways of using fertilizers and pesticides. Figures on educational level indicated that 44.4% of cane growers have primary education. This was followed by the secondary education and high school groups with 31% and 14.8% respectively. There was only 6.1% of uneducated respondents. Not many cane farmers (18.9%) belong to households with more than 5 members, followed by those with the family size of 3 to 5 persons constituting 46%. It can also be seen that 46.7% of cane growers own from 0.1 to 1 hectare land size for production. This result indicated that the largest proportions of total farm holdings in the study area are small scale holdings. It is highly advantage if households can always take advantage of family labor for small-scale production. However, when looking at mechanization level and technology support brought into sugarcane farming, we can see that farmers in Vietnamese Mekong Delta are facing a big disadvantage with 58% of households applied 0% level of mechanization and 78.8% of them received no technology support from authorities and enterprises. Table 1. Socioeconomics characteristics of sugarcane farming households Item No. of respondents Percentage (%) Gender Male Female Age From 21 to From 31 to From 41 to Older than Education Uneducated Primary school Secondary school High school Undergraduate Graduate Family size From 1 to From 3 to More than Land holding (ha) From 0.1 to From 1 to More than Mechanization level 0% < 25% < 50% 9 21 < 75% % - 100% Technology support Yes No Having loans Yes No Output contract (% yes) Yes No Source: Field survey,

4 Determinants of sugarcane profitability in Vietnamese Mekong Delta Agricultural activity in general and sugarcane in particular are always influenced by internal and external factors models of the model. Profit, the main concern of farmers, was also affected by the selling price, labor cost, fertilizer cost. Therefore, the determination of the factors affecting the profitability of the sugarcane production model will be the basis for building appropriate solutions to deal with each factor, thereby improving efficiency of the production model. Result of the factors affecting cane growers profit is presented in Table 2. Table 2. Determinants of sugarcane profitability Item Coefficient SE t-value Sig. Cultivated area Mechanization Technology support Distance Output price R Adjusted R Adjusted Mean Square (MSE) Prob (F-statistic) Source: Field survey, 2016 By analyzing the multiple regression using the linear-log function, where Y is the gross margin (million VND/ha), it is indicated that there were 5 independent variables included in the model with just 3 factors positively affecting the profitability of sugarcane production (cultivated area, mechanization level and output price). As seen in the table, the level mechanization positively affected profit with 5% level of significance, which means that the gross margins of the model will increase to almost 6 million VND/ha when the mechanization level of sugarcane farming increased 1 level (five levels of mechanization mentioned in Table 1). This result is consistentn with the report by Vietnam Sugar Institute (2012) that the application of synchronous mechanization in producing steps will reduce the cost of production by 55% when comparing to manual methods and contributing 30% of profits to sugarcane growers. Moving to the output price factor, when the price of raw sugarcane increases 100 VND/kg, profit will increase by 0.05 million VND/ha. In the season, the price of sugar cane material is relatively higher than that of previous crops, contributing to offset the cost of production as well as helping farmers to produce confidently in the next crop. However, the biggest difficulty is still the unstable market price of sugarcane, which makes it difficult for farmers to expand production size. In a macro-economic perspective, (Danh, 2011) conducted forecasts of world sugar prices as well as the relationship between sugar prices and the scale of cultivation of sugarcane farmers in the Mekong Delta. Sugar prices will tend to increase due to reduced international sugar stocks and inadequate demand. At the same time, the world sugar price has become a very important and influential factor in both Mekong Delta s short and long term cultivating plan. This is also similar with the finding that low price of output was the major problems in sugarcane production (Adnan et.al, 2013). Conclusion This study investigated the determinants of profit for smallholder cane growers in the two provinces Hau Giang and Soc Trang in Mekong River area. Profitability of the sugarcane production is affected by the cane cultivated area, mechanization level in production steps and the output price selling to middleman. The results of this study would help providing significant understanding regarding disadvantages and factors affecting small-scale farming households in the sugar industry in Viet Nam as well as other regions with similar soil and weather conditions. Recommendations Farmers should consider the ability to join in big farm to change traditional farming habit as well as to build links associated with sugar enterprises curve for stability in production through the output contract. At the same time, farmers should participate in cooperations or social associations to improve technical and management skills through training classes quarterly. In addition, being members in the above organizations could help farmers to access with more input services like seeds, fertilizers, pesticides, especially heavy machines and heads of groups will be the representatives in contract negotiation with sugar enterprises in local areas. Sugarcane cultivating technical skills should be given to farmers through training classes in the beginning of each season. Agribank and other commercial banks should also develop microfinance service to sugarcane production through loans granted with lower interest rates and longer periods. 60

5 References 1. Adnan Nazir, Ghulam Ali Jariko, Mumtaz Ali Junejo. (2013). Factors Affecting Sugarcane Production in Pakistan. Pakistan Journal of Commerce and Social Sciences, 7, Aina O.S. (2015). Economics analysis of sugarcane production in Moro Local Government Area of Kwara State, Nigeria. International Research Journal of Plant Science, 6, Clainos Chidoko, Ledwin Chimwai. (2011). Economic Challenges of Sugarcane production in the Lowveld of Zimbabwe. International Journal of Economics and Research, 2(5), Danh, V. T. (2011). Sugarcane Supply in Vietnamese Mekong Delta. Can Tho University Journal of Science, 17b, Dorward, A. (1999). Firm Size and Productivity in Malawian Smallholder Agriculture. Journal of Development Studies, 35, General Statistics Office. Retrieved 05 22, 2017, from 7. Gujarati, D. N. (2004). Basic Econometrics (Vol. 4th). The McGraw-Hill Companies. 8. Heltberg, R. (1998). Rural market Imperfections and the Farm Size - Productivity: Evidence from Pakistan. World Development, 26, MARD (2013). Report on Agricultural Production in Masuku, M. (2011). Determinants of Sugarcane Profitability: The Case of Smallholder. Asian Journal of Agricultural Sciences, 3(3), Solomon, E., Paulos, T. and Bamlaku, A. (2016). The Determinant Factors of Sugarcane Productivity: The Case of Wondo Genet, Ethiopia. Journal of Resources Development and Management, 25, Sugarcane Research Institute (2016). Review of the Vietnamese sugar sector. 13. Supaporn, P. (2015). Determinants of Technical Efficiency of Sugarcane Production among Small Holder Farmers in Lao PDR. American Journal of Applied Sciences, 12(9),