Myanmar Agriculture: High Growth Potential
Myanmar Agriculture: High Growth Potential
For decades Myanmar’s agricultural sector has been starved of investment – both foreign and domestic. This has the left the industry, which is still the source of employment for well over half the country’s population, struggling on every front. Agriculture suffers from a lack of proper inputs, a lack of training and information for farmers, from an absence of proper supply chains and established export markets, and from insufficient financing.
Although Myanmar benefits from exceptionally fertile soil and plentiful water sources, the country is also vulnerable to extreme weather events and natural disasters. The Global Climate Risk Index 2016 found that Myanmar was one of the countries worst hit by extreme weather events between 1995 and 2014.
Slowly but surely, however, many of the issues that hold back the agriculture sector are beginning to be addressed. The government recognizes that agricultural reform and modernization will be the fulcrum of Myanmar’s economic transformation. The administration is eager to attract more FDI into agriculture, where there is huge potential to boost productivity.
The FDI flows in the data from the Directorate of Investment and Company Administration is likely an underestimate. DICA is unable to record all FDI flows, although it is making efforts to improve its data collection. The directorate says its overall FDI figures may understate investment by as much as 40%. But even taking that into account, investment into agriculture is meager compared to other sectors.
DICA records investment into livestock and fisheries, which is higher, as a separate sector. But even if the two are combined, FDI is paltry compared to flows elsewhere in the economy.
Approvals for applications to put FDI to work in different sectors offer a useful indicator of foreign interest. The directorate approved just $98 million of planned FDI into livestock in fisheries across the whole of the 2016-17 financial year, but no projects into agriculture.
To remedy this challenge, the government has removed restrictions on foreign investment and designated agriculture a promoted sector under its new Investment Law. Foreign investors no longer need a local partner to undertake an array of agricultural activities including commercial livestock and poultry farming, the import and production of seeds and the manufacture and distribution of fertilizer and pesticide.
Designating agriculture as a promoted sector means that many activities also qualify for a corporate income tax exemption, which can be three, five or seven years, depending on the geographic location. Pulse growing areas of Kachin State and Sagaing Region for instance, are eligible for five and seven year exemptions.
The government has also begun drawing up a national Agricultural Development Strategy with help from the Asian Development Bank, Food and Agricultural Organization of the United Nations, and Livelihood and Food Security Trust Fund. Part of the strategy is to improve coordination between the private and public sectors. The Yangon Region government, meanwhile, is working on its own master plan for how to develop the agricultural industry over a three-year period.
Although rice, beans and pulses dominate the agricultural sector, Myanmar’s diversity means is a huge range of products including sesame, mango, avocado and shrimp that have the potential to be successful exports in the medium-term. Chinese-Israeli asset management Hyleen Capital is reportedly investing in a sweet sorghum planation. And the Myanmar government’s aim of exporting 60,000 tonnes of coffee a year by 2030 is likely to attract interest from abroad.
Downstream activities like processing represent one of the main opportunities for foreign firms. At present, foreign companies typically buy harvested crops in bulk from traders and then export to international markets. Rice, beans and pulses – which make up the vast majority of Myanmar’s agricultural exports – generally leave the country to be milled or processed abroad. The pattern is similar in much of the fishing industry. In the Myeik archipelgo in Myanmar’s south, an estimated 90% of the fishing catch goes to nearby Thailand, where it is then processed and exported abroad and back to Myanmar.
Foreign firms have already started forming joint ventures to build milling facilities, particularly for rice, and capture some of the value being exported. Myanmar Agricultural Public Company (MAPCO) and Japanese firm Mitsui have a rice milling facility in Nay Pyi Taw. MAPCO is opening a second this year in Ayeyarwady Region and hopes to have a third up and running in the Yangon area in 2018. Singapore’s Agrocorp International has partnered with local firm Chin Corp Myanmar for a parboiled rice production and export facility in Ayeyarwady Region. However, the majority of the rice mills in the Ayeyarwady delta remain very small scale.
The beans and pulses industry is also in desperate need of milling and processing facilities. India takes around 80% of Myanmar’s exported beans and pulses, but proper processing facilities would allow higher value added exports and the possibility of breaking into new markets like North America and the Middle East. Many existing processing facilities for beans and pulses would need to be upgraded to meet the quality standards demanded by foreign export market.
The country also imports a high volume of processed foods that could be made locally. Noodles and potato chips imported from Thailand, for example, could be replaced by locally made products given the right facilities. At least initially, it seems likely that processing facilities will be based around a specific raw crop or produce.
Before milling and processing, however, there is an urgent need to improve yields and quality through higher quality inputs. Better irrigation, fertilizer, seeds, and machinery are all crucial. Improving irrigation is largely down to the government and international donors, but foreign investment can help address the others.
A National Economic and Social Advisory Council white paper on Myanmar agricultural reform notes that surveys in India, China, Vietnam, and Bangladesh indicate private suppliers provide almost 100% of farmers’ fertilizer and chemicals and a major share of improved seeds.
Progress on these fronts in Myanmar is nascent, but noticeable. A World Bank agricultural project includes improving seed storage and laboratory facilities. There are already foreign firms with seed businesses operating on a small scale. Local firm Myanmar Awba Group has secured International Finance Corporation (IFC) support for an agricultural inputs complex slated to be first modern crop protection plan in Myanmar that meets World Bank environmental criteria. MAPCO also has plans for a fertilizer factory in the Thilawa industrial zone near Yangon, which will help it supply farmers involved its contract farming ventures.
“Fertilizer use per hectare is around 1/12th of what it is in Vietnam, so doubling or tripling of fertilizer consumption in Myanmar is very likely to happen over the next few years” said Vikram Kumar, country manager for the IFC in Myanmar.
A New Lease on Life
Access to finance presents a major hurdle for farmers hoping to access better seeds and other high-quality inputs. This is unlikely to be remedied in the short-term, but the government is making small steps in the right direction. The struggling and likely loss-making Myanmar Agricultural Development Bank (MADB), by far the largest source of financing for the nation’s farmers, has been brought under the finance ministry’s control as part of a fundamental audit and reform effort.
Reforming MADB will likely take years. But alternative sources of funding are on the rise. The graph below shows the change in access to different sources of financing according to community surveys for agriculture and aquaculture in the Ayeyarwaddy delta.
Microfinance is expanding quickly, thanks in part to new regulations that make it easier to raise capital, but supply of microfinance loans remains far short of meeting the annual need. Improving farmers’ access to affordable funding will remain a key issue for years to come.
Finance is also an issue for access to machinery, although the spread mechanization has increased hugely in the last few years. The graphs below show the rise in mechanization for land preparation and harvesting in paddy farming in the Ayeyarwaddy delta between 2006-2016.
Source for both charts: Credit Access and Utilization in Agriculture and Aquaculture in the Ayarwady Delta, Lu Min Lwin and Khun Moe Tun
Hire purchase and leasing are widespread, and some local banks have partnered with NGOs for partial risk guarantee programs. The demand for mechanization has been heightened by a rise in real wages for farm laborers, who are in increasingly short supply as a result of the mass migration from rural farm-based work into urban largely manufacturing jobs.
Myanmar’s system of hire purchase and leasing involves people leasing individual machines to individual small-scale farmers, indicating the spread of mechanization is scale neutral. River routes and barges are being used to transport machinery sold in Yangon further afield, and in some cases all the way up to the country’s northern areas.
“The landscape is fragmented, so it’s hard to say exactly what’s happening,” says one USAID economist. “But initial indications are that mechanization is reaching small-scale farmers in the dry-zone too, not just in the delta.”
Yet the demand for machinery still vastly outstrips supply. Only 20% of the agriclutural land available in Myanmar is farmed using machinery, according an Oxford Business Group report published in May.
There is also the potential for Myanmar to benefit from the same technological advances being made in more developed countries. Awba Myanma is working on location-specific rainfall, irrigation and soil maps to provide farmers with better information on which specific inputs they need. The firm is also providing on-the-spot soil testing services for farmers that should improve on the lab-based system offered by the state. There is a huge demand for better technology and data services from private providers.
A Stronger Supply Chain
Improvements are necessary at every point across the supply chain. Storage facilities are lacking – in the form of cold storage and transport for perishable crops and basic warehousing for farmers. Many farmers are forced to sell harvests at low prices because they are unable to store their crop – or lack the financing to wait – until the market improves.
“The supply chain is the most critical aspect, improving this will change everything,” said Vikram Kumar, country manager for the IFC.
International financial institutions are offering support. The IFC is in discussions with the Government to support regulatory and market level reform that will drive improvement across the entire agricultural value chain, from inputs through to processing, monitoring and shipping. But serious investment from local and international investors will be key.
The government has instituted a new custom clearance system for Yangon border points, which has met with teething problems but should smooth transport in the medium to long term. The north of the country still has limited port facilities, which presents an issue for crops like pulses grown in the dryer areas that then have to be moved all the way to Yangon.
The government’s plans for projects to upgrade key transport infrastructure like ports and roads will require a huge amount of private sector funding. But slow progress is being made on developing a public-private partnership framework that could be used to draw investment into everything from road to power plants.
Bi-lateral and regional projects are also helping improve transport links between Myanmar and neighboring countries. As part of the India-Myanmar Kaladan Multi-Modal Transit Transport Project to link the ports of Kolkata and Sittwe, the Sittwe seaport in western Myanmar has been upgraded substantially. The Rakhine State government is hoping to see a sharp increase in the export of beans and pulses to India as a result.
The cumbersomely worded Greater Mekong Subregion Cross-Border Transport Facilitation Agreement should see coordinated customs procedures, better transport and smoother trade links between Myanmar and its GMS neighbours in the next year.
Overseas exports also hold new opportunities. Improvements in quality, productivity and yield will open new markets for key crops. Myanmar is once more eligible for reduced tariffs under the US Generalized System of Preferences. The country also benefits from duty and quota-free access to the European Union market for all exports apart from arms and ammunition. In both cases this creates the potential for duty arbitrage. Myanmar already exports rice and beans to the EU, and improvements in quality standards and packaging should allow the export of higher value added products.
Progress is prompting optimism about the outlook for FDI in agriculture, but the industry is still replete with problems. Contract farming, whether for general crops like rice or more specialist products like mushrooms and ginger, is difficult in a landscape of small fragmented farms. The shortage of financing for better quality inputs, a lack of large centralized farms and processing facilities will make scaling up operations deeply problematic. A lack of infrastructure for transport and storage compounds the problem.
Farmers now have the freedom to choose what they grow on their land, provided their land has a general “Agricultural Land” classification. With this new flexibility have come positive examples of farmers changing their land from Paddy Land to Agricultural Land, and, for example, starting up more profitable and productive fish farms. Famers lacking financing, training and information, however, have difficulties determining the feasibility and profitability of different crops, which can prevent them making the switch.
“There’s enormous potential in the agricultural sector ‑ we’re sitting on a gold mine,” says Ewan Lamont, chief operating officer at Myanma Awba. “But the operations side is still very difficult and this is the part that foreign investors always underestimate. We’re at a fundamentally different stage of operations here compared to anywhere else in Southeast Asia.”
But the potential of Myanmar’s agricultural sector is almost unparalleled. As broken supply chains are strengthened, inputs improved and farmers given the financing and information to allow them to respond to market signals, the argument for more local and foreign investment will grow slowly but steadily more convincing.