Isaan under contract – a push for stronger regulation of contract farming

December 24, 2015

Contract farming is a common choice amongst farmers in the Northeast due to its low start-up costs and potential financial advantages. But farmers report that the system is ridden with problems and many producers involved find themselves to be in severe debt and feel controlled by the companies they work for. A recently proposed contract farming protection act pushes for more regulation and is supposed to be reviewed in January 2016.

Guest contribution by Elyssa Eull, Kaori Nagase, Lindsay Palmisano and Annie Sadler

The Khammi family started contract fish farming in 1998 when a representative from Charoen Pokphand Foods (CPF) came to their village and offered them to contract fish farm. Pictured are their fish baskets, roped off along the Chi River in Mahasarakham Province.

MAHA SARAKHAM – Shortly after the sun settled deep into the horizon on the other side of the Chi River, the sky turned to an inky black and the structures of fish baskets, corrugated tin shacks, and wooden walkways became shadows on the water. A pickup truck backed down to the river’s edge with two large water tanks filled with baby fish. Every family member quickly took up their position and the fish were scooped out of the tanks, weighed, and poured into baskets in the river all by the beam of a giant flashlight.

Wilaiwan Khammi, a second generation fish farmer, operates an independent fish farm with her extended family. For three years, they have been successfully selling their fish to an independent market vendor at the local market in their hometown, Baan Din Dum in Maha Sarakham Province.
But this independence is newfound. Ms. Wilaiwan and her family used to be contract fish farmers for Charoen Pokphand Foods (CPF).

Contract Farming – A Broken Promise?

Contract farming is a system in which agricultural production is based on an agreement between a farmer and an agribusiness company. Large firms, such as CPF, outsource their production to individual farmers, supposedly sharing both the risks and responsibilities associated with agricultural production.
Although contract farming is a common choice amongst farmers, the system seems to be ridden with problems.

It became popular in Thailand in the early 1980’s when CPF first began contracting outside farmers. All across the country, contract farmers are producing anything from vegetables and rice to cash crops and livestock. CPF claims on their website that there are 200,000 contract farmers nationwide, however other data suggests that this number is much larger.

A CPF broker visited Ms. Wilaiwan’s village years ago promoted contract fish farming as a profitable future. The company offered to cover the initial start-up costs including the fish, feed, and infrastructures in return for the producers to provide a certain quality and quantity of fish throughout the four month harvesting period.

This promise of a consistent buyer was appealing for the 300 – 400 people in the village who leapt at the chance to create a stable form of income.

For the first few years, low start-up costs and an increase in family income had the villagers under CPF’s spell. However, reality struck when the fish started dying. The cause of death remains unknown but many affected farmers claim that CPF sold them fingerlings (baby fish) of sub-par quality.

As the company refused to claim responsibility, farmers were uncompensated for these losses, and were unable to sell the entirety of the fish that they had paid for at the beginning of the season.

Ms. Wilaiwan paid 130,000 baht on average for 10,000 fish, which would last her a season. But the price of fish feed from CPF was consistently more expensive than other companies. CPF charged her 600 baht for one sack of fish feed, while other companies would sell one sack for just 400 baht, Ms. Wilaiwan claimed.

Contract fish farmers are often tempted to sell to other contractors, who offer higher prices. But many felt restricted by the contract that kept them from making their own business decisions.

Farmers report that they were verbally threatened that if they are caught breaking contractual regulations, the company can refuse to supply them another shipment of fingerlings.

Despite this, Ms. Wilaiwan said that she and her fellow producers “were not afraid, but frustrated. We felt sad because there was this option to make more profits for our families, but we couldn’t choose it. You have to sell to CPF even though you’re not happy or satisfied.”

After growing nil and tap tim fish under contract with CP for several years, Wilaiwan Khammi found a fish seller that did not require a contractual agreement, which prompted her to begin preparations to start her own fish farming business.

Fish farmers, who had not signed a contract but had only a verbal agreement with the contractor, were able to leave the contracting system once they stopped experiencing success. Today, of the once 300 – 400 contract fish farmers, only five or six producers remain in Baan Din Dum village.

Ms. Wilaiwan was able to end her contract with CPF and pay off her debt of 1 million baht by seeking out financial assistance from her extended family. This help also provided her the funds to start her independent fish farming business.

As the average debt of contract fish farmers is 300,000 baht ($8,400 USD), this ability to have an immediate, full financial release is unusual. Many other producers in the village had to return to rice and vegetable farming to pay of their debt and cut their ties with CPF.

Push for Regulation

Ubon Yuwah, a coordinator of the Alternative Agriculture Network (AAN), is leading efforts to create more protection for contract farmers, as the current lack of governmental regulation leaves much room for farmers to be exploited, he said.

Earlier this year, he submitted a proposal to the government for a contract farming protection act that was drafted in partnership with several organizations. The act is supposed to increase government regulation, which would in turn boost fairness for all parties involved in the system.

But passing such a law faces many difficulties as there are different types of contract farming systems and varying levels of exploitation that the farmers are subjected to, Mr Ubon said.

The proposed legislation will require written contracts – verbal agreements are common in the contract farming business – and a registration with a local government office. The binding nature of the contract is supposed to help strengthen compliance on both sides of the agreement while clearly outlining farmers’ rights and consequences for breaching the contract.

Passing the Burden to Their Children

In Khon Kaen Province, contract chicken farmer Phikul Rongbutsri pulled back the blue tarp tucked around the doorway of a tin building that extends to the far end of her property. Within the darkness of the building, rows of metal cages slowly come into sight, lit by light bulbs hanging from the ceiling. The sound of 25,000 chickens ruffling their feathers fills the room, as the chickens packed tightly in each cage come into sight.

After signing a contract with Sriviroj Farm (SF), a large agribusiness corporation that works in partnership with CPF, Ms. Phikul’s father started contract chicken farming by taking out a 700,000 baht (over $19,400 USD) loan from the state Bank for Agriculture and Agricultural Cooperatives (BAAC). It covered the construction of open-air chicken barns and the first shipment of chickens and chicken feed from SF.

The operation seemed to run smoothly and its profits allowed Ms. Phikul to slowly chipped away at the debt from her father’s original investment. But after a few years, her business turned into an endless source of debt.

Phikul Rongbutsri, raises 50,000 chickens every season in two identical barns on her property in Khon Kaen Province.

Ms. Phikul was told to upgrade her chicken barns into closed buildings with a cooling system and new cages, an investment of four million baht ($112,000 USD). SF threatened to not send her new chicks if she would not upgrade her barns at costs that would have spiralled her debt out of control, she said.

“Farmers here don’t dare to speak up for themselves because they’re afraid of the company,” says Suwit Innamma, AAN representative and Coordinator of the Nongbua Subdistrict Chicken Farmers. Mr. Suwit educates farmers of their rights, and collects data from farmers to present to policy-makers.

Ms. Phikul did speak up herself but now “the company now sees her as a radical and a violent person because she’s asking for her rights,” Mr. Suwit said.

Lacking the money to pay for the system, Ms. Phikul claimed she was forced to offer her land title as collateral, which the company used to take out a loan on her behalf and construct the new building in her backyard.

“I know that they are taking advantage of us, but at this point, I just cannot do anything” she said. “Once you step on a tiger’s back, you cannot get down.”

In their 2014 Sustainability Report, CPF states that seven percent of their contract farms were “successfully transferred to the successive generations.” On their website the company advertises that the contract farming system provides farmers with increased stability and a chance to build a farming business worthy of passing on to their children.

Indeed, Ms. Phikul’s farm will be passed on into the hands of her children. But rather than passing down a proud family business, she is passing down the burden of debt to her children.They have few other options but to work as chicken farmers in order to pay off the family’s debt, she said.

“I’ll have to train them. After school, I’ll have to ask them to help me to farm so they learn how to do it,” she shared with an air of heavy disappointment.

Ms. Phikul blames her dire financial situation on the lack of transparency about the contract and the loans she was forced to take out. She claimed that SF manages her loans and deducts payments from her profit whenever they buy her chickens, without specifying how much.

It takes about 57 days for the chicks to mature to selling size, and Phikul Rongbutsri receives a load of them from Sriviroj Farm, a large agribusiness corporation, four times per year. This barn holds 21,000 to 23,000 chickens in the hot season and 25,000 chickens in the cool season.

“I have no idea. They come, pick up the chickens, they carry them and transport them to weigh somewhere else,” she said when asked how much profit she had made from selling a day’s worth of chickens.

This was not always the case; employees who came to pick up her chickens used to weigh them right in front of her eyes. Once she started to notice that the numbers on the receipt did not match up with her notes, the company abruptly stopped weighing them in front of her, she claimed.

There is a host of literature written by NGO’s and academics that make recommendations on how to improve the contract farming system. Multiple reports state that farmers should have the right to be present at the time of weighing.

Ms. Phikul was also not given a formal agreement with protection clauses because the company is “afraid that farmers will have the rights and check on each part,” claimed Mr. Suwit.

Unmentioned Risks

Contracting companies also seem to have mislead fish farmers by failing to mention the difficulties farmers might encounter in the contract farming scheme.

Uthai Chaihan, a past fish farmer in Maha Sarakham, raised fish on a contractual basis with CPF for just one year, and claimed that, “the salesmen just promoted contract fish farming, and the company didn’t say anything about the risks.”

He invested 200,000 baht ($5,600 USD) but after three months all of his fish died, he claimed. “I still have debt and still worry,” he said advising anyone who intends to invest in fish farming to “be independent and invest on your own.”

“The company and farmers could share the risk and responsibility, if there’s any loss or damage,” Mr. Uthai said adding that a formal contract with clearly laid out terms would be beneficial to farmers.

Mr. Ubon from the Alternative Agriculture Network (AAN) puts his hopes on the contract farming protection act that is expected to be reviewed in January 2016. If the new legislation passes, the contract farming system may be regulated in a way to provide farmers with sufficient information about their rights and prevent companies from taking advantage of misinformed producers.