Value Chain Financing Approach: A Good Way to Sustainable Agricultural Growth in Vietnam45277

Value Chain Financing Approach: A Good Way to Sustainable Agricultural Growth in Vietnam * , Tran Huu Cuong(2), Ho Thi Minh Hop(1), Nguyen The Kien(3), Philippe (1),(2),( ) Bui Thi Lam Lebailly (1) (1) University of Liège, Gembloux, Belgium Vietnam National University of Agriculture, Hanoi, Vietnam (3) VNU University of Economics and Business, Vietnam National University, Hanoi, Vietnam * Correspondence: btlam.hua@gmail.com (2) Abstract: Nowadays, there is an increasing interest in the value chain financing approach (AVCF) as a crucial tool towards sustainable agricultural development The paper aims to mainly describe the performance of the internal and external financing mechanisms existing in the Seng Cu rice value chain in Lao Cai and focus on the impact of the contract farming on rice production based on cost and benefit analysis of 160 representative producers, classified into three groups: small, medium and large scales Besides this, in-depth interviews with 45 other stakeholders involved in the chain also conducted to obtain the insightful qualitative analysis The study points out that the combination of internal and external finance in the chain create a financial ecosystem, in which each type of player likely meets their tailored demands and becomes paramount to their success However, in practice, the participation of agricultural bank in the chain still limit and financial shortage seems popular for many Concerning the farming contracts established between the enterprises and local producers, it remarkably contributes to not only better input usage and higher value-added of producers in terms of value and proportion, but also well manages the quality of the product flows the chain Finally, the recommendations for policymakers, producers, and agribusiness are suggested to enhance the effectiveness of these financing sources and to sustainably develop the Seng Cu rice chain in the locality as well as the agriculture sector nationwide Keywords: Agricultural value chain finance; small producer; rural finance; sustainability; Vietnam Introduction In developing countries, like Vietnam, agricultural sector always plays a pivotal role food security, poverty reduction and improvement of income and living standards as well as effective risk-coping strategies for farmers (FAO, 2017;2018; IFC, 2014; Khandker & Koolwal, 2016; Nguyen, 2010; OI, 2013) Although its multi-faceted importance in economies is well-document, agriculture still is considered as an unattractive field for investment due to the prejudices about high risk and low profitable ratio Therefore, agricultural investment still remains a large bottleneck to promote agriculture development and achieve other Millennium Development Goals (MDGs), that Vietnam has been striving to fully achieve In fact, Vietnamese farmers have been facing with various endogenous and exogenous obstacles to access formal credit service, that restrict agricultural productivity and other economic opportunities (HLPE, 2013) Left with no other options, farmers take a loan from informal sources with much higher interest rate to finance their production investment and other urgent cases, hence, are continuously stuck in their miserable lives In recent years, the studies on Agricultural Value Chain Financing (hereinafter: AVCF) have become strangely attractive because of their effectiveness in many fields: economic, social and environmental as a whole In short, AVCF encompasses the flow of products, finance, agricultural knowledge and market information from production to consumption phase In essence, value chains differ remarkably across regions and products, therefore, large-scale and “one-size-fits-all” subsidy programs funded by central governments are not appropriate and costly It should be clearly identified what are the tailored demand of each chain participator and how distribute the benefit existing in the chain Under AVCF approach, small farmers likely gain a greater share of their value and assume fewer risks (Miyata et al., 2009; Olomola, 2010; Saigenji & Zeller, 2009) and the chain is developed towards sustainability In this paper, Lao Cai is chosen to represent the research on AVCF, in which Seng Cu rice is the case study The province is located in the Northern Midlands and Mountain (NMM), the largest ecological area, concurrently, the homeland of the majority of the poor in Vietnam (GSO, 2017) The paper aims to describe how are the AVCF mechanisms performing and its impacts on agricultural production based on the cost and benefit analysis of 160 Seng Cu rice growers surveyed To this, the remainders of the paper are organized as follows Section provides the literature review of AVCF and section explains the methods used for choosing the research site, collecting data, and then, analyzing data Next, section presents the results and discussion, comprising the picture of Seng Cu rice value chain and the finance existing along the chain Besides this, the study also focuses on the impact of contract farming on different farmer subgroups classified based on Seng Cu rice cultivation, including small, medium and large scale Finally, section concludes the main findings of the paper with some brief policy implications needed Literature review Until now, AVCF is likely an interesting topic for agricultural development agencies and has increasingly been applied worldwide, especially in developing nations and agriculture-based regions This approach supports chain actors via tailoring services and products along with a specific value chain in order to reduce the financial cost and risk as well as enhance the effectiveness and competitiveness of agricultural product, each valueadded stage as a whole chain (AfDB, 2013; HLPE, 2013; Miller, 2012; Miller & Jones, 2010) More broadly, AVCF also is able to tackle the environmental issues, that are being considered a weak performance to reaching the triple bottom line (economic, social and environmental) of green microfinance (Allet & Hudon, 2015) It is clear that the agricultural sector is characterized by the heterogeneity of financial needs, especially smallholder farmers They not only have a diversity of agricultural activities (crop; livestock) and/or economic performance (farm; non-farm), but also the combination of production and consumption unit With traditional credit, formal financial institutions cannot provide timely and sophisticatedly enough as farmer’s desires Under this more comprehensive approach to agricultural finance, it significantly contributes to the chain being more inclusive and convenient because of financial availability for smallholders (Miller & Jones, 2010) Similar requirements also take place with other chain participants The different actors in the chain, therefore, should be funded with different instruments and financial providers (Miller, 2012) According to IISD (2015), agriculture evolves a hugely wide range of activities, from farming performance to the productive infrastructure system as well as research and development In parallel with it, agriculture finance also encompasses four groups of financial demand, including (i) the needs of farmers and agribusinesses; (ii) the transactions among participants along with the chain, (iii) rural infrastructure investments; and (iv) generating knowledge and innovation Concerning the source of finance existing in the particular chain, Miller (2012) classifies and defines as follow: Internal value chain finance refers to the financial sources occurring inside the agrichain among participants For example, suppliers provide in-kind credit to a farmer (i.e., trade credit) or wholesalers funds in advance inputs and buyback agreement (i.e., contract farming) External value chain finance implies the funds derived from outside the agri-chain, whereby banks and other financial institutions create one-to-one relationships via contractual agreements with different actors Figure 1: Financial sources existing in a typical agricultural value chain and its impacts Source: author’s illustration adapted from Miller and Jones (2010) and AfDB (2013) Similarly, the study of AfDB (2013) also analyses deeply four key roles of AVCF approach in agricultural development and economy (Figure 1) Firstly, it likely enhances the competitiveness of agricultural products and the chain It has become more and more important in the context of the domestic and international trade strongly driven by the consumer tastes that change increasingly rapidly Thus, without linkage among players in the chain, the gap between products at farm gate and consumers’ desire is widened, resulting in a reduction of not only the price and quantity of products sold, but also the economic benefit of all participants in the chain, and so forth Secondly, AVCF is able to boost agricultural development towards sustainability via the use of natural resources and strengthening resilience against shocks (De La O Campos et al., 2018) In reality, the poor are characterized by small scale producers with tiny investment, and their businesses were running under difficult and constraining conditions Therefore, proper financial services to secure the best possible investment choices can help them transform their farming production from subsistence to commercialization45 and to approach sustainable income and livelihood Thirdly, AVCF can escape from the vicious cycle of poverty through address its grass-root reasons, lacking access to affordable, quality and full-range of financial services Understandably, financial shortage negatively affects not only the production stage due to low investment but also their power bargaining with marketing actors Their income and livelihood, therefore, is undermined by both of endogenous and exogenous drawbacks Finally, AVCF improves financial inclusion in the agricultural sector Financial Inclusion is defined as the popularity and diversity of formal financial services accessing and using by citizens in society (Fungáčová & Weill, 2015) The availability formal sources of borrowing directly affect to the shadow (i.e alternative) banking system, comprising microfinance institutions and trading credit among enterprises, as well as informal sources, such as underground banks and unregulated pawnshops The expansion of the non-banking services, e.g informal sources from family, friends or moneylenders, negatively impacts on financial stability and economic growth (Bruhn & Love, 2014) The growth and development of a country is significantly dependent on the expansion of banking and financial services to the currently financially-excluded class of citizens in the economy, as they possess untapped valuable potentials that could be of tremendous benefit to the economy at large (Michael & Sharon, 2014) However, financial inclusion still is the big challenge worldwide, especially in less developed nations Methodology 3.1 Research Site According to Bui et al (2018), Lao Cai is the ideal site for researching on the montane rice sector because the province has typical socioeconomic and political characteristics representing the NMM region and it is also endowed the favourable natural condition for rice growing More detailed, as per GRiSP (2013), rice planted in low-latitude areas, with high solar radiation, and cool temperature tends to get higher productivity Rice cultivators, therefore, should exploit these geographic features to obtain high quality and high yield to improve their economic situation In the national market, Seng Cu rice is the unique kind of rice recognized the special and safe product in Lao Cai province (Figure 2.c) 45 There are three levels of market orientation: subsistence, semi- commercial and commercial system In parallel with it, there are significant differentiations in terms of farming system, farmers’ objective, input management, and household’s income sources Paracel Islands Spartly Islands (a) vnj( c) (b) Source: Figure (a) and (b) are author's own elaboration; Figure 2(c) is cited from https://vnexpress.net/thoi-su/ban-do-cac-loai-gao-dac-san-o-viet-nam-3768497.html Figure 2: Description of the research sites for the study Regarding cereals, rice cultivating is often prioritized than maize, so most cropping land is devoted to it (Figure 2.b) Maize is planted on steep hills and places where it is not possible to harvest rice because of water shortages There are two main typical agro-ecologic zones in Lao Cai, upland and lowland In upland, rice is planted in small terraced plots on hillsides and limited water condition nearly without public irrigation On the contrary, rice in the lowlands is grown in much larger, flat fields and harvested twice per year Producers here also take advantage of the well-constructed irrigation system (Figure 2.b) and many productive infrastructures Concerning Seng Cu rice production, the study chooses four largest production-area communes from two districts, existing in two different ecological zones (i.e upland versus lowland, in accordance with rainfed versus irrigated) Figure 2(a) maps (i) two lowland communes, namely, Muong Vi and Ban Xen (green and 2, respectively); and (ii) two upland communes called Nam Lu and Lung Khau Nhin (orange and 4) The results of indepth interviews of the agricultural officials indicated that the majority of rice growers in those communes, more or less, are planting Seng Cu rice, but the proportion of their cultivated land spent for Seng Cu rice fluctuated significantly, especially in the uplands Arguably, the purpose of Seng Cu cultivation strongly influences this difference While lowlanders aim to maximise profit, uplanders prioritise food security This is why upland rice farmers tend to plant high-yielding hybrid varieties, not Seng Cu rice 3.2 Sampling size The study collected both secondary and primary data to conduct the qualitative and quantitative analyses Qualitative analysis was applied to explore the typical characteristics of each kind of chain actor under different prism observations, and interactions and relationships existing among participants in different product channels Moreover, their attitude and feedback on the corresponding policy system were precisely recorded The authors also applied purposive sampling, open data collection through individual in-depth interviews, case studies, and observations For the quantitative analysis, this study used the data collected from the household survey and in-depth interviews to identify the cost and return of each activity in the chain Based on this, value-added analysis for each process and the whole value chain was calculated The household survey with the stratified random sampling method was carried out in 2016 The structured questionnaire was used to collect primary data on (i) the specific characteristics of the household; (ii) Seng Cu rice-farming practices and input management; (iii) costs and income generated from Seng Cu rice production; and (iv) the households’ feedback on two important services, agricultural credit and extension The sample size was calculated by the following formula used in the work of Cochran (1977): n= ( ) Where: n is the sample size; Z is the statistical value containing the area under the normal curve (e.g Z = 1.96 for 95% level of confidence); p is the estimated proportion of a feature that is present in the population (in general, the p value is equal to 0.5); and e is the desired level of precision (7.5%) Based on the above equation, the sample size of 170 households is identified However, the authors removed 10 non-representative outliers and divided the 160 remaining observations into two ecological production zones, containing 80 rice-growing households (see more at (Bui et al., 2018)) To analyse the costs and benefits of other actors in the Seng Cu rice chain, the authors conducted 31 individual interviews, including small collectors in upland communes, 10 large collectors in Lao Cai city and districts, and 12 retailers in Lao Cai city in 2017 through convenience and judgment sampling methods The authors also interviewed annually the local authorities 2015 to 2017 at three administrative levels to have an overview of subsidised programmes for the agricultural sector, including Seng Cu rice 3.3 Data Collection The study collected both secondary and primary data in order to achieve qualitative and quantitative analyses For each type of data source, the collecting methods are elaborately described below 3.3.1 Secondary data collection Normally, a study is started by identifying the research questions existing in the subject area through archival research, which provides the historical context to the observed data changed over time and relevant issues This type of activities is conducted through the analyses of existing materials and published/unpublished written documentations (Angrosino, 2007) In this research, archival research, firstly, gathered all previous reports and relevant official statistics about the given regions and the socio-economic situation in the locality The result of this step is to identify the proper research sites and representative agricultural products for the study (Seng Cu rice) Moreover, this data source also supports and/or compares the primary data collected from the fieldwork in the next steps Moreover, the second type of documents which serve literature review and discussion, etc are also collected It consists of articles, books, consultancy reports, technical notes, project reports, government official reports, policy documents, and so on 3.3.2 Primary data collection Primary data is the original data, served for the specific studying purposes, therefore, the researchers have to organize and conduct by themselves to collect accurate information It exists in the diversity of types, like numeric, textual, visual or a combination of the above (MacIntosh & O'Gorman, 2015) Participant Observation is defined as an ethnographic research approach in which the researcher’s participation in the lives of the local people while also maintaining an appropriate distance in order to develop ongoing relations with the people in it, and actively reflects on what is going on (Emerson et al., 1995; Fetterman, 2009) However, in this study, the research likely priorities the studied issues among the local ongoing background due to the limitation of time and funding This method plays a pivotal role to what extent, in the evaluation of the validity of data collected through the interview (Kelly, 2005) It is important to note that finance is usually a sensitive and delicate topic in any society In-depth interviews were frequently conducted with officials working at Lao Cai Development of Agriculture and Rural Development and clerks of the agricultural banks in the research site as well as stakeholders directly involved in the chain Group discussions are held for to 10 household participants to identify the current local rice farming practices and the reasons why farmers did not (want to) apply advanced practices; the main difficulties and how to overcome them Besides this, the role of SC rice in household’s economic opportunities, livelihood and culture is also sketched out Household survey is a very important stage among data collection process This method is considered the most suitable in the case of a heterogeneous population (Shallabh) The structured questionnaire and face-to-face individual interviews were applied to capture (i) the specific characteristics of the household; (ii) SC rice farming practices and input management; (iii) costs and income generated from SC rice production as well as other economic activities; and (iv) the farmers’ feedback on two important services, agricultural credit and extension 3.4 Data Analysis In order to evaluate the impacts of contract farming on Seng Cu rice production, in this study, the authors divided the whole sample into three subgroups based on the scale of cultivated land for Seng Cu rice and their status whether they contract with an enterprise or not In mountainous provinces like Lao Cai, the scarcity of agricultural land is popular On average, the agricultural land per local household was 0.82 in 2016, therefore, almost rural households are small operational holdings, that is no worth to apply the threshold less than of land, that is popular in the world (HLPE, 2013) Yet, the author divides the sampling size into three underlying subgroups based on their cultivated area owning The household belongs to 25% of the smallest Seng Cu rice area in the year surveyed is considered the small scale group Similarly, 50% and 25% of 160 households surveyed has larger areas are categorized the medium and large scale groups, respectively More detailed, there are 40 households labeling small scale farmers, who had average SC rice cultivation at 0.15 And, 80 medium-scale farmers planted 3.1 in that year Similarly, 40 large scale farmers used 8.8 for Seng Cu rice growing, and they often harvest twice times per year Comparative analysis within subgroups always apply the Student’s T-Test to determine whether the sample means of two continuous parameters are significantly different from each other or not The study uses main indicators in the value added analysis named Value Links 2.0 and proposed by GIZ (Springer-Heinze, 2018) as follow Intermediate Cost (IC) includes the total value of purchasing variable inputs (goods and services) used the agricultural production cycles Gross Output (GO) is the total value of main and by-product outputs generated Value Added (VA) is the total worth created on agricultural production and calculated the following equations: VA = GO - IC Results and discussion 3.1 An overview about Seng Cu rice value chain in Lao Cai 3.1.1 Main characteristics of participants in the Seng Cu Rice Value Chain in Lao Cai In order to sketch out a clear picture of finance along with the Seng Cu rice value chain, the authors divide into three main components The first is the description of farming practices of the Seng Cu rice-growing households, therefrom, assess its influence and households’ characteristics on productivity (see more from(Bui et al., 2018)) The Frontier 4.1 Program and Stochastic Frontier Analysis (SFA) was applied to measure the technical efficiency of each household surveyed It is important to note that households should adjust current farming practices and be facilitated access to some important services (irrigation, extension, and credit) to improve production effectiveness (ibid) The second part focuses on the cost and benefit analysis of each type of value chain actors and the distribution of benefits among them (Bui et al., 2019) Some main important points will be summarized in the underlying paragraphs Finally, the central contribution of this paper is to describe how are main financing source existing in the chain performing and who are involving in Besides this, the paper also examines its impacts on the operational chains, of which focus on the influences of contract farming on households Clearly, producers play a crucial role in determining the quantity and quality generated As the early stage of value chain analysis introduced by (M4P, 2008) and (SpringerHeinze, 2018), identifying the chain participators and mapping the marketing channels must be always clarified It can be seen from Figure illustrates that there are five main actors participating in the Seng Cu chain in Lao Cai They consist of (i) input suppliers, (ii) producers (in upland and lowland), (iii) small collectors, (iv) large collectors, and (v) retailers They also parallel with five key value-addition phases, including input supply, production, collection, processing, and trading Besides producers, marketing actors (comprising the Tien Phong Cooperative (T.P.C), the Muong Khuong Cooperative (M.K.C) and large collectors), also have a pivotal role in the chain’s development Here, this type of wholesaler is responsible for multiple functions in the post-harvesting phase (collecting, processing, trading, delivering), requiring high technology to manage the quality of milled rice Furthermore, six market channels in the chain to transform raw materials into final customers of the product Our in-depth interviews reveal that large collectors account for the biggest share of purchased paddy output (approximately 80% for 4,000 tonnes in 2017) In which, they collected about 60% and 50% of total amount paddy produced in the upland and the lowland areas, respectively Sadly, the study points out that these actors often deliberately mix ordinary rice with Seng Cu to pursue the maximizing-profit, resulting in strong reduction of quality and significant dissatisfaction of high-end customers Figure 2: Marketing Channels of Seng Cu Rice in Lao Cai (Source: In-depth interviews, 2016-2017) T.P.C and M.K.C are two business units exploiting the trademarks “Seng Cu Rice Lao Cai” and “Seng Cu Rice Muong Khuong” and establishing the contract farming with producers in order to better manage the quality of paddy However, T.P.C and M.K.C just only bought about 700 tonnes (about 14%) and 200 tonnes (4%) at the same year observed In fact, they want to scale up their performance to optimize the utility of the processing machinery system invested before The reason explaining for their tiny volume collected was a financial shortage and they just borrowed a small size of loan from the local banks due to lack of collateral or low assessment of mortgage assets by clerks, or both Clearly, it needs interventions from local authorities to facilitate credit access for potential agribusinesses and/or agro start-ups, at the same time, enhance the awareness of large collectors in protecting the trademark and quality of this special product 3.1.2 Opportunities and challenges in development of Seng Cu rice chain in Lao Cai The section is derived from the findings in the Seng Cu rice value chain analysis mentioned above (see more (Bui et al., 2019) and (Bui et al., 2018)) Table 1: SWOT analysis of production phase in the Seng Cu rice in Lao Cai SWOT Strength (S) Weakness (W) S1: Strong trademark of SC W1: Most of producers have rice low education, low bargaining S2: Many producers have power, and then, receive lower relatively good experiences price in rice production W2: improper farming S4: High quality leads to practices high selling price and W3: financial shortage and economic benefit for chain many obstacles to access actor, especially producers preferential credit S5: Established the link W4: outdated technology in between fertilizer processing and storing companies and producers W5 Quality decline due to the S6: Set up the linkage deliberately mix ordinary rice between producers and the into SC rice to maximise profit marketing actors (TPC, W6: Established linkages are MKC) still weak Opportunities (O) Breakthrough strategy: Adapting strategy: O1: suitable natural condition (1) Strengthen the farmer - (6) Enhance the effectiveness of O2: large potential for enterprise linkages (i.e extension and share the expanding the growing area production and knowledge among CIGs’ O3: SC rice is highly paid consumption) members attention by local authorities (2) Enhance the production 7) provide training for group O4: Supporting policies on capability through the leaders of collective groups special agricultural products common interest groups about market knowledge, (i.e vertical links) for both producers and (3) Take advantage the value chain, management skill agribusiness supportive funds along the for responsibilities O5: The increasing demand of chain (8) Focus on post-harvesting high-end customers on SC rice (4) Exploit niche potential technology and innovation to O6: Vietnam has signed and/or markets through exporting optimally exploit the value of jointed a vast regional and SC rice international trade (9) Facilitate credit access both agreements farmers and agribusiness Threats (T) Regulating strategy: Protection strategy: T1: difficulty in production (4) deploy supporting (10) Increase to effectiveness of because insects are attracted packages of the province, agricultural extension and by its perfume, causing vast projects and programs of technology application to help diseases concerned departments and producers achieving T2: Poor infrastructure and sectors relevant to collective sustainable farming practices important public services groups/cooperatives and based on the principle “Gain (irrigation, credit, extension) companies more for less” suggested by T3: Lack of appropriate (5) Call for investors WorldBank (2016) machines in terraced fields, participating in drying, rice (11) Suggest suitable solutions T4: Easily affected by climate husking and processing in against nature-related risks, change and nature-related province/districts and have better performance when crop risks big rice planting region disease outbreak occurring T5: Weak governance of local (12) Enhance trade promotion authorities activities and advertise clean T6: High competitiveness from products in business link other high-quality rice (12) Increase the coordination T7: High requirements of SC among relevant departments rice in processing and storing and chain sectors as the PPP model Source: authors After the result of strength, weakness, opportunity, and threat (SWOT) analysis is the set of strategies for upgrading this important agricultural value chain Briefly, there are four main plans based on SWOT analysis, comprising Breakthrough strategy (S-O); Adapting strategy (O-W); Regulating strategy (T-S) and Protection strategy (T-W) In doing so, the relevant actors are able to determine 12 specific activities in order to boost effectively the Seng Cu rice value chain and each chain participant 3.2 Value chain financing mechainisms in the Seng Cu rice chain Lao Cai is characterized by the multifaceted importance of Vietnam: border province, close to China; homeland of the poor; cultural diversity of ethnic minorities; mountainous terrain, scarcity of agricultural land and agriculture as the major livelihood of local people For these reasons, the Vietnamese Government always pay attention in regional development through various financing supports over three past decades It is evident that in rural Lao Cai, there is the co-existence of formal, semi-formal and informal financial suppliers and non-reimbursable Government’s subsidies Formal sector, VBARD and VBSP, consists of two state-owned and well-intended banks as the powerful tools of Government in agricultural development and poverty reduction Its plenty of loanable fund help them to make up a predominant market share in terms of amount of clients and outstanding loan Yet, the upper hand of these bank in rural financial market as quasimonopoly has still been controversial and various criticisms from international donors and researchers (Bui et al., 2019; Dufhues, 2007; Sauli et al., 2017) Under this financial market in rural areas, access to formal credit often one of the most obstacles of farmers (Bui et al., 2019; GSO, 2016) and agro enterprises (Sauli et al., 2017) Table illustrates the actual access and usage financial sources of all participants in Seng Cu rice value chain based on our field trip study in Lao Cai province Table 2: The main financing sources and its popularity in the value chain of Sengcu rice in Lao Cai External financing sources Internal sources Sources VBARD VBSP Gov subsidies NGOs Informal loan Trade credit Contract farming 1 3 2 2 2 2 1 1 2 3 2 4 1 1 Participants Input suppliers Small producers Larger producers Small collectors Larger collectors TP cooperative Retailers Source: authors’ illustration, adapted by Roman (2008) Note: Level of access to financial sources (from sufficient to poor) The case study in Lao Cai shows that many producers and most agro enterprises in the locality have still been limited to access to formal credit, restricting investment in the agriculture sector and other economic opportunities The household survey of 160 Seng Cu rice growers revealed that 38.8% and 33.1% of total respondents have agricultural credits at the VBARD and VBSP, respectively In fact, most upland households are faced with financing shortage, leading to lower investment in Seng Cu rice production as the inputs dosage recommended by the local extension However, they could not access banking credits due to complicated documents and collaterals required by banks as well as high transaction costs for both borrowers and lenders Furthermore, the absence of credit officers in the field trip, that can be better evaluated the production capability (human, natural, physical and capital owning), leads to inaccurately assessment and ill-timed disbursement Without access to the formal sector, smallholder farmers fund their investment need through two informal financing providers The first is provided by moneylenders at higher interest rates to fund their agricultural inputs and other consumption There are several empirical evidences provoking that informal credit with heavy interest rate (i.e., usury) exacerbate the poverty density in rural areas in developing countries The second source derives from financial arrangements among SC rice growers and stakeholders in the chain In principle, the chain players have stronger financial power tend to provide credit to lower partners, thereby facilitating the business and production cycle operated effectively and increase income for all participators as a whole In this study, there are two underlying linkages offering internal financing for SC rice growers, which significantly contributed to the sustainable development of the chain In the production phase, at the time of household survey conducted, SC rice growers are advance financed the cost of fertilizer (right time, right type, right application) by both of VBARD and fertilizer companies To that, growers registered with the local authorities the land area cultivating SC rice and the quantity of fertilizer needed in this cropping season The local authorities here include the village head or the leader of CIG and the extension staff working in the commune After that, the list of SC rice producers, their land and desired fertilizer was transferred to the commune as the confirmation and guarantee Next, the representative authorities/person signed a contract with VBARD for taking a loan in accordance with the total cost of fertilizer registered and paid back at the harvesting time After VBARD paying directly for a pre-selected fertilizer company, producers were able to receive the amount of fertilizer required As per Miller and Jones (2010), this mechanism called Trade Receivables Finance or Input Trade Credit Besides the advantages regarding the quality of fertilizer, the farmer borrowers also received the technical assistance provided by local extension and technical staff of the company in order to achieve suitable input management towards sustainability Obviously, sustainable farming practices result in a reduction of natural resources used, being a friendly ecosystem and achieve a high quality of paddy output It is noted that Seng Cu rice often has the highest price in the domestic market, serving the high-class customer groups and requiring the equivalent quality of rice However, according to Bui et al (2018), improper farming practices is relatively popular in both of the two ecological rice production in the locality More detailed, lowland producers tend to overuse chemical fertilizers and pesticides in order to pursue the maximum yield As a result, chemical residuals likely have occurred more seriously, which was reflected through not only the comparison between the actual input usage of households surveyed and the dosage recommended by local extension, but also the local customer’s survey By contrast, ethnic minority producers in uplands applied few commercial inputs because of their limited financial resource, that leads them to achieve under-optimal productivity and income Therefore, technical guides play a crucial role in the improvement of technical efficiency based on the principle gain more for less introduced by WorldBank (2016) Besides the linkage mentioned above, the contracts established between producers and agro enterprises namely Tien Phong Cooperative (T.P.C) and Muong Khuong Cooperative (M.K.C) (hereinafter called the linkage contract farming) There are two differences existing between these linkages The first regards to price regulated in the contract M.K.C determines a fixed purchasing price at the beginning of the season, whilst T.P.C defines the market price at the harvesting time The second point is the level of tightness of the link M.K.C only concerns with trading died paddy product, while T.P.C involves in the whole flows of product in order to control the quality of output Regarding the production phase, the T.P.C finance in advance to linked producers some kind of important inputs, like certified seeds, organic pesticide, rice fertilizers as they desired In addition, technical services related to disease management and input applications also provide freely for farmers At harvesting time, the unit participates together with farmers to reap and buy fresh paddy in the fields The activities not only enhance the helpful linkage but also avoid significantly the fact that some farmers mix other ordinary rice with Seng Cu dried paddy in order to get higher profit At the processing stage, the T.P.C has been focusing on innovation and investing in the full-option set of machinery, including dryer, miller, polisher, wrapper, and vacuum-packed machine As a result, mechanization helps the T.P.C obtain not only the leading quality of milled rice, but also a higher recovery rate of milled rice after processing, compared to others (Bui et al., 2019) In addition, this cooperative hardly attempts to optimally exploit almost value of Seng Cu rice, such as white rice, brown rice, germ rice, and alcohol, and by-products (broken rice and bran) to enhance the value addition for all participators involved, including producers Unfortunately, financial problems are the most difficult drawback hindering the expansion of the T.P.C Controlling the quality of input and output, the T.P.C strongly needs working capital, especially in harvesting time to collect fresh paddy This is the reason T.P.C just can collect about 700 tons at the time of repeated surveys conducted in 2018, using only one-third of the actual capacity of the machines invested This creates a large amount of depreciation and undermines their profit Clearly, the T.P.C – the leading actor of SC rice chain - needs to scale up its coordination attempts to fully utilize the plant capacity From viewpoint of farmers, their productivity needs to be improved significantly through technical assistance, their output volumes need to ensure about selling price by the contractual agreements, not by spot transaction with local traders, and their livelihood needs to be more suitable even external or internal shocks occurring Many farmers want to join the T.P.C’s linkage in order to take advantages mentioned above, however, the limited financial capacity of T.P.C hampers their coordination Despite its high potential, the cooperative is still evaluated under creditworthiness and got a small size loan at VND billion at VBARD, compared to their desire at 3-4 VND billion The reason explaining for it regards to the assessment of collateral (land use certificate) by this bank, that is much lower than the value of its collateral, a land-use certificate As per the WorldBank (2014), the collateral-to-loan ratio in Vietnam at 218%, which is higher than most neighbouring ASEAN countries From this view of point, in order to boost the agricultural sector, it is necessary to support the leading actors in the chain, like TPC, to access banking credit and other appropriate facilitations Clearly, banks should simplify their procedures and easy credit assessment to select and fund potential customers while ensuring minimum payment risk Finally, the study presents an increasingly important cooperation among farmers, that is, horizontal links through Common Interest Groups (CIGs) This model is more popular in uplands than lowlands Alone in Muong Khuong, there are about 333 Seng Cu rice-growing households belonging to 21 CIGs in studied communes It is notable that 73% of the total households participating were the poor Being a CIG’s member, they receive vast advantages than before Firstly, group’s members often share their work in the field, such as land preparation, disease management, transplanting, and harvesting, etc The share is meaningful to mitigate expenditures for seasonal workers hired, often, with a high price In addition, it facilitates almost rice in the same field has the same phase of growth (vegetative, reproductive, ripening), leading the higher productivity and the better quality (GRiSP, 2013) Furthermore, it is also able to facilitate to use of harvesting machines and reduce the paddy losses They also often create internal discussions in order to exchange agricultural knowledge, skill and advanced technologies, which lead to an improvement in the production capability of each member as well as the whole group Secondly, the CIG members can access easier several important public services, like extension, credit, and/or participate in the contract with enterprises, like T.P.C and M.K.C mentioned above Not stop here, they also have broadly benefitted from technical training granted by enterprise linkage In addition, in the trainings the farmers are informed of the requirements and organization of the commercial supply chain Thirdly, farmer members also take advantage of “together buy, together sell”, this helps them get better prices based on the increase of bargaining power in commercial transactions This judgment is confirmed through the comparison of the surveyed households, who were often got worse price by traders It is a common belief that the right finance at the right time able to make greater efficiency, the better quality of agricultural products, hence, increase producers’ incomes (Bui et al., 2018) It is more clearly in the case of SC rice because market-oriented agricultural products often require a strict regimen, which means intensive farming and use large labor for input management as well as and pre- and post-harvest (Key & Runsten, 1999) Therefore, agricultural finance should create a supportive ecosystem approach to achieve the twin goals at intergovernmental and national levels in reducing poverty and creating shared prosperity for farmers Figure illustrates the empirical evidence of the financial ecosystem existing in the Seng Cu rice value chain More broadly, that significantly contribute to obtaining the triple bottom line (Planet, People, and Profit), the term is coined by John Elkington in 1994 Figure 3: Impacts of value chain mechanisms (Source: authors’ illustration) 3.3 Impacts of contract farming on Seng Cu rice production in Lao Cai In this section, the authors focus on contract farming established between farmer and enterprise as the crucial tool in order to boost the agricultural sector as well as smallholder farming To this, a comparison between two groups, participating in the contract versus non participating (hereinafter: contracted and non-contracted) Several reasonable solutions for producers, participants involved and policymakers based on the case study able to expand partly to other disadvantage regions in Vietnam To have a better understanding about how Seng Cu rice producers and the whole chain operate, please kindly find out our previously published papers (Bui et al., 2019; Bui et al., 2018) To start, the definition of contracting and non-contracting households needs to be clear We consider farmers associated with contracts to receive special benefits in terms of technical guidance provided by linking enterprises The first group is SC rice cultivators linking with the fertilizer supplier (input trade credit) and the second group associated with the T.P.C as (contract farming) as described above The study points out that contract farming results in increasingly commercializing of input used, higher farm-gate prices for many, and substantially contributing to growing up rice output, value addition and technical efficiency for almost households linked Obviously, their income is remarkably increased and Seng Cu rice production is the main generating income source of many households interviewed In addition, almost respondents desire expansion of the SC rice area in order to improve their livelihood Table depicts clearly about Seng cu rice production among three household groups: small, medium and large scale of cultivating area It can be seen that large scale producers tend to link with enterprises higher than smaller ones For instance, 82.5% of total large producers signed the contract with enterprise, meanwhile this rate at the medium and small group just 41.3% and 22.5%, respectively It is evident that, usually, the larger farmers have various socio-economic advantages, compared to the others They have higher educational levels; easier access to public services and likely more success in application technological advances (IPM); better financial availability (Bui et al., 2018) Table 3: Impacts of contract farming on Seng Cu rice production in Lao Cai Small scale HHs Items Medium scale HHs Large scale HHs Contract Non-con Contract Non-con Contract Non-con (n = 9) (n = 31) (n = 33) (n = 47) (n = 33) (n = 7) I/ Intermediate Cost (IC) - Seed (1,000 VND/ha) 2,220 2,445 N/S 3,224 3,141 N/S 3,457 2,736 * - Fertilizer (1,000 VND/ha) 7,233 6,073 ** 7,413 6,669 ** 6,546 6,517 N/S - Pesticide (1,000 VND/ha) 1,704 1,561 N/S 2,585 2,731 N/S 3,789 3,887 N/S 11,157 10,079 N/S 13,221 12,541 N/S 13,792 13,140 N/S - Productivity (kg/ha) 5,014 4,073 *** 5,303 4,578 *** 5,404 5,143 ** - Selling price (1,000 VND/kg) 14.94 14.49 N/S 14.92 14.23 ** 14.82 15.04 N/S - GO (1,000 VND/ha) 74,969 58,930 *** 78,926 65,039 *** 80,059 75,912 N/S - VA (1,000 VND/ha) 63,812 48,851 *** 65,705 52,575 *** 66,461 63,285 N/S - Technical efficiency score (%) 87.23 76.72 *** 90.18 81.71 *** 92.07 87.41 ** Total (1,000 VND/ha) II/ Output Source: authors’ calculation Note: HHs = households; Non-con = Non-contracted; GO = Gross Output; VA = Value added Concerning input management, contracted households improve the proportion of certificated seeds instead of using self-preserved rice varieties from the previous year because they were financed in advance from enterprises linked It should be noted that the quality of seed is the most important factor affecting on the quality of rice in term of its perfume Besides this, technical experts hired by the enterprise advice about the quantity of fertilizers and pesticides used based on the nutritional needs of rice plants at specific growth phase For example, almost lowland producers in the locality overuse the urea fertilizer and abuse chemical inputs, that hamper for rice plants and the environment as a whole Contrary, upland growers used mainly home-made agricultural input with much lower quantity compared to the dosage issued by the local extension (Bui et al., 2018) Based on these findings, there is a large room to improve the productivity and quality of paddy output Obviously, outputs and effectiveness always the most important indicators in agricultural production in particular as well as other economic performance in general Table continuously proves the significantly positive impacts of contract farming on Seng Cu rice production in terms of higher productivity and farm-gate price as well as larger value addition and technical efficiency Again, the series of likely reinforce and substantiate clearly the qualitative analysis of the role of internal linkages in the value chain, which is described in section 3.2 It is also consistent with the findings in the work of Maertens and Velde (2017) and Swain (2013), who conducted the study on rice value chain in Benin and South India, respectively More broadly, a vast of empirical evidence from researchers studied on other commodities have also confirmed the positive effect of contract farming (Ajao & Oyedele, 2013; Nguyen et al., 2015; Saigenji & Zeller, 2009; Wang et al., 2014) These findings, however, seem likely inconsistent with the several arguments of Rehber (2007), who show a lot of latent drawbacks of contract farming, especially small farmer, such as delays in delivery or payment, or both; bargaining power; and, regulations about marketable quantity of output and its selling price The study of Ho and Burny (2017) examined the contract farming between shrimp producers and enterprises in Ben Tre province, belonging to the Mekong River Delta of Vietnam It reveals that this model after a two-years application failed due to the floor price intervention, risk sharing, small scale of the output, and inefficient public administration Consequently, farmers still stay at the weakest position and the shrimp value chain also still under-developed compared with its potential and have not reached import markets The solution to overcome these bottlenecks suggested by Ho and Burny (2016) is a new appropriate governance in order to improve farmers' position and their income Finally, within each household group in Table 3, surprisingly, small scale farmers gained the highest margin if they participate in the chain and make a contract For example, compared to non-contracted farmers, small contracted producers got higher productivity at 941 kg/ha, meanwhile this increase at the medium and large scale group at 725 and 261 kg/ha, respectively This enhancement is relatively similar to the indicators of gross output (GO) and value addition (VA) Moreover, the remarkable influence of contract farming at the small scale group in term of technical efficiency is also very clear Participating in a contract with enterprise able help a small farmer, on average, increase 10.5% of effectiveness, whilst the rise in the medium and large scale group at 8.5% an 4.7% However, our result is a little differential in terms of technical efficiency with the study of Nguyen et al (2015), who indicated that the influence of contractual agreements on tea productivity was still ambiguous It is concluded in this case study that contract farming helps farmers to improve their agricultural production and income as a whole More importantly, contract farming plays an essential role in terms of the creation of economic opportunities and improvement their livelihood as well as poverty reduction and inequality in mountainous areas of Vietnam This is in line with the findings of many researchers (Miyata et al., 2009; Olomola, 2010; Saigenji & Zeller, 2009), who stated that small farmers and the poor also get more benefits from contract farming On the other side, the study of Guo et al (2005) in China expressed critics of contract farming, that only benefited large scale farmers, at the same time, push smallholder farmers out of the market as isolated among their rural communities Thus, contractual agreements likely cause inequality and exacerbate the level of poverty Luckily, in this study, Seng Cu rice is an attractive production and bring high economic value for producers, especially ethnic minorities and the poor, small households Moreover, contract farming still a good tool to boost agricultural production and strengthen the value chain working better for the poor (M4P, 2008) Conclusions and recommendations This study provides valuable insights into the financial mechanisms existing in the chain of special rice in the NMM region of Vietnam namely Seng Cu Operations of main participants in the Seng Cu rice chain made up of four main channels existing in lowland and upland areas of Lao Cai province Besides this, it also deeply examines the advantages and the challenges of each chain actor as well as the effects on their cost contributed and economical benefit gained The study focuses on two key chain actors, including (i) producers, who directly determine the quality obtained and quantity generated of paddy in the production phase; and (ii) marketing actors, comprising large collectors and two cooperatives, the TPC and the MKC These business units perform multiple functions in the post-harvesting phase (collecting, processing, trading, delivering) that directly affect the quality of milled rice and the value addition generated by each stage Qualitative analysis of Seng Cu rice chain proves that AVCF approach creates the financial ecosystem, significantly enabling all chain players performing effectively and coordinating rhythmically Based on this, agricultural products generated more sustainably and controlled better its quality along the marketing channels More broadly, the combination of internal and external financing in AVCF remarkably contributes to achieving the 3P triple bottom line (Planet, People, and Profit) The paper highlights the importance of technical assistance providing from enterprises and the contract farming established among them and farmers in the chain in the context public agricultural subsidies working ineffectively and/or costly Although there is not much difference in the costs of input used between contracted and non-contracted household groups, the structural transformation among what kind of input applied is significantly different More specifically, the contracted households were funded in advance high-quality and appropriate inputs for rice, which significantly improved yields and quality of paddy output In addition, they also receive a stable and better price with adjustments based on market price fluctuations at transactions occurring Finally, the important benefit of linking production and consumption is the risk-sharing as a commitment to delay debt obligation at the harvesting time and continuously finance in advance raw materials to farmers in the next seasonal cropping This is a great effort of T.P.C in building and developing input material zone for the processing industry However, the currently financial shortage and limited credit access is still the major obstacles of T.P.C in particular and agribusiness in general This hinders T.P.C expand the links with other farmers as well as undermines marginal profit because of high depreciation for a small paddy volume purchased Concerning solutions to overcome these drawbacks mentioned above and develop the agricultural sector, the authors propose a model of public-private partnership In Vietnam, the policy on the linking four partners (liên kết bốn nhà), including farmers (nhà nông), enterprises (nhà doanh nghiệp), scientists (nhà khoa học), government (nhà nước), has been issuing and encouraging many years ago However, the roles and functions of each component are unclear, and, even sometimes the intervention is unreasonable Furthermore, another key actor regarding agricultural investment, banks (nhà băng), has not participated in this cooperation Yet, sustainable the agriculture development requires the involvements and collaborations among five crucial players in order to share the mutual benefits, risks, and making-decisions Here, the concept of finance for agriculture needs the parallelism of specific levels as follows: (1) Central and local policy makers Assign the offices and persons responsible for detailed plan establishment and deploying of the activities of breakthrough strategy (S-O) and Protection strategy (T-W) Support and strengthen the performance of CIGs and its team leaders in terms of management capacity, responsibility and prestige to link successful business Exploit effectively the supporting packages in accordance with the concerned targets and players In which, building the productive infrastructure for agriculture development in rural areas is the most important component, that the private sector is nearly unachievable due to their limited finance More broadly, local authorities should determine and develop special agricultural products, like Seng Cu rice, temperate fruits, and vegetable, etc., that are strongly supported by natural endowment Obviously, farmer households involved in the local specialties are able to improve their income and living standard, therefore, the agriculture sector becomes an attractive economic activity itself without direct subsidies from the government (2) For CIGs and individual farmers: High awareness and follow of technical assistance for input management and other advanced farming practices as required by enterprises After signing the contract, they need to keep prestige in the production-consumption contract, not for immediate benefits It is important to note that the role of communal authorities plays a crucial role in their enforcement (3) For linked companies and other marketing actors It is necessary to reach other niche segments of both domestic and export markets in order to get high economic value for enterprises and the chain as a whole It is totally possible because Vietnam has signed a vast of regional and bilateral free trade agreements the worldwide and joined various concessions, such as ASEAN, APEC, AEC, WTO, TPP and EVFTA Almost large collectors need to enhance and/or replace the outdated machinery in processing phase to get higher quality of milled rice and improve the storing conditions to reduce paddy losses in quality and quantity Importantly, almost small and medium enterprises (SMEs) in general and business entities involved Seng Cu rice chain must improve the financial statement system, including accounting balance sheet, business performance, cash flows report They strongly influence how the application for a loan of SME is approved Addressing the financial shortages of both farmers and agribusiness is an entry point in the sustainable agricultural development under the value chain financing approach Acknowledgments The authors express deep gratitude to the anonymous referees and the editor of this journal for valuable comments and suggestions on an earlier draft of the article The authors would like to thank Dr Phan Thanh Noi, who is working at the Faculty of Land Management, Vietnam National University of Agriculture for his valuable help in mapping the research site (Figure 3.1.a) References ADB (2013) Agricultural Value Chain Financing (AVCF) and Development for Enhanced Export Competitiveness In A D Bank (Ed.): African Development Bank Tunisia Ajao, A., & Oyedele, G (2013) Economic efficiency of contract farming in Oyo state: experience from British American Tobacco Company International Journal of 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