Opening Myanmar's agriculture and forestry sector

The historic importance of agricultural production in Myanmar’s economy continues to hold strong in the wake of recent economic reforms and liberalisation. Indeed, the industry presents a number of industrial and productive opportunities that, if properly nurtured, could help the country regain and even surpass much of its former standing as a lead producer in the region. To do so, however, will require significant investment in the sector, greater mechanisation, the provision of better financing for farmers, as well as clearer land rights.

Agricultural Driver

While modernisation is still under way in Myanmar’s agricultural industry, the sector continues to play a major part in the country’s economic growth. Agriculture generates an estimated 24% of GDP, 24.6% of export earnings and employs 61.2% of the labour force, and while the country continues along its path of opening and reformation, agriculture will likely remain a significant engine for growth.

Indeed, the sector is expected to hold its own and play a key role in the country’s economic transformation. Industry players and economists expect that reform and investment will make Myanmar’s land more productive, improve the earnings of farmers and generate higher income. The headline percentages may decrease as they have been over time, but added value will continue to increase as efficiencies and investments begin to make a difference. In a 2013 report titled “Agriculture Plus Plus: Growth Strategy for Myanmar Agriculture”, the Institute of Developing Economies concluded the Myanmar’s agricultural production has time to make a comeback. “Although the agricultural share in GDP and employment usually declines as an economy grows, it is not a sunset industry in Myanmar,” the report concluded.

A Country Blessed

Myanmar is a country with an abundance of agricultural resources. It has twice the arable land per capita compared with the Asiam average and 10 times the per-capita water reserves of China or India, according to global accounting firm, KPMG. Historically, it has been a major producer and exporter of rice.

An estimated 54% of the crop-sown area in the country is used to grow rice, and the staple generates 80% of the country’s total agricultural value (see analysis). Myanmar is also a major producer of beans and pulses. An estimated 16% of sown land is committed to these products. Beyond this, industrial crops use 7% of the sown land, oil crops 21% and other cereals 2%.Overall, Myanmar grows 60 different types of crops, including wheat, corn, oilseeds, vegetables, pulses, potatoes, mangoes, bananas, rambutan and pineapple.

Need For Greater Investment

However, despite its strong base of agricultural resources, the sector at present remains underdeveloped. Indeed, the country’s agricultural landscape has suffered chronic underinvestment and as a result it remains undercapitalised and relatively inefficient. Farming incomes in Myanmar are some of the lowest in the world, with the average annual earnings per worker in the domestic sector resting at $194 in 2012, compared with $706 in Thailand, $730 in Indonesia and $507 in Bangladesh.

Productivity is also low; in a 2011 study that collated findings from the Food and Agriculture Organisation and Asian Development Bank, it was found that the sector generated $301 of value per person per year while the land generated $451 per ha per year. These figures compare poorly with Myanmar’s neighbours, with Vietnam earning $694 and $1978, respectively, followed closely by Cambodia ($712 and $627); Laos ($835 and $822); and Indonesia ($1666 and $1539).

In its second “Review of Myanmar” report, issued in early 2015, the OECD assesses that agriculture can play a vital and positive role in the economic development of Myanmar. Indeed, the sector is so large that it has the potential to become a key driver of consumption and investment. But to achieve progress, the OECD argues that a number of steps need to be taken across the board. This includes not only the improvement of land use rights, financing, skills and infrastructure, but also better food safety standards so that exports to developed countries can be expanded.

Financing

The country does have a financing system in place for the agriculture sector, though there is still much room for improvement. The main source of funding is the Myanmar Agricultural Development Bank (MADB), which was founded in 1953. According to the World Bank, the MADB does a good job of disbursing loans and the structure is innovative; while the bank does not require collateral from farmers, it does require farmers to collectively guarantee each other, spreading risk. Still, the bank does not effectively serve the sector, as it remains highly focused on loans to rice farmers and has a limited range of products. The financing system also lacks sophisticated risk management, depends on subsidies, has poor corporate governance and operates on a limited IT system. Most of all, the structure of its loan programme does not fully cover the costs of farming.

MADB will only finance up to 10 acres per farmer and limits its loans to MMK100,000 ($90) per acre for staple crops (and only MMK20,000, or $18, for other crops). Furthermore, it will not finance traders, transportation firms and other related companies, and does not at all support fruit or vegetable production. Machine loans are made, but they make up less than 1% of the total portfolio.

There are also some who question how sustainable the current lending practices are to local agribusinesses. The bank has subsidised the sector increasingly over time, with the interest margin falling from 9% in 1998 to 0.5% in 2012, while its capital is just MMK1bn ($900,000). In its recent report the World Bank recommends the MADB raise capital to MMK30bn ($27m) and re-price loans to reduce losses. It also recommends improvements in transparency and governance and more investment in IT and human resources. In additional the World Bank advises that the MADB reassess and better define its role.

Informal Means

Beyond that received from the MADB, farmers receive little to no support from the formal banking system, with the sector receiving only an estimated 1-3% of commercial bank loans. This drives many farmers towards alternative financing means. They may borrow from family, friends and related businesses, such as millers, or else turn to loan sharks, where rates can run as high as 20% per month. Such practices lead to endless cycles of debt and compound the farmers’ problems by forcing them to sell as quickly as possible into a crowded market for low prices.

“The main obstacles are high interest rates and poor access to the banking system,” U Nyi Nyi, director of agriculture at the Yuzana Group, told OBG. “The credit currently available is not enough for the farming family.” U Thadoe Hein, managing director of Myanmar Awba Group, added, highlighting the vulnerability of poor farmers who must resort to unregulated forms of financing. “There are limited funds available, so the farmers have to rely on loan sharks,” he told OBG.

However, remaining aware of the problems, the government and international donors are working to help with financing. In March 2015 the government said it would be investing nearly $1bn in the sector. According to press reports, a total of $928m would be committed to 16 projects and, of these, the government says that 12 will be funded by foreign aid. For its part, the World Bank has committed to supporting the sector with $100m of credit for 100,000 farmers. The project will focus on improving irrigation and reducing the volatility of the price of rice in the country. According to the bank, the heavy concentration of harvesting in just a few months (November and December) leads to price drops followed by price spikes early the following year.

Additionally, foreign investment is essential for the sector if it is going to develop. To get the right type and size of equipment, especially in for milling, and to achieve the overall economies of scale needed to improve efficiency and productivity, significant capital is needed – much more than can be provided by domestic institutions and the national government. Agriculture was ranked ninth out of 11 sectors for foreign direct investment (FDI) between 1988 and early 2015, with a total of $243m invested. In this respect, Myanmar has been working with the OECD to attract further investment. Among the subjects discussed were foreign ownership of agricultural land and a legal framework that will allow for contract farming.

Key For Development

A number of other areas need to be reformed and improved if the agricultural sector is going to thrive. One such area is trade, as over time exports have been declining. Overseas sales have suffered from low investment and policy decisions, in particular the use of rice export quotas. For a time, the country stopped selling internationally, with the exception of some exports to China. The lack of trade has had an impact on development and exacerbated existing problems. It has limited markets and opportunities for farmers, and made it difficult for foreign investors to justify participation in the market. As such, as part of its assessment and advisory efforts, the OECD is calling for Myanmar to implement more transparent agricultural trade policies.

In 2013 the EU started trading with Myanmar under “everything but arms” terms, allowing the country to export most products to the union free of tariffs and quotas. These preferential privileges came following the lifting of economic sanctions that had been in place since 1997. However, the programme has been slow to bring benefits to the country. To a great extent, this is the result of companies simply not knowing about the programme and what it offers. Myanmar producers have also been unable to meet the quality standards of buyers in the EU and are often unable to fill the large orders demanded by the union.

In particular, the value chain of Myanmar’s agricultural sector has been criticised. It has many links of weaknesses that raise costs for all participants. Mills are antiquated and transportation is poor. According to the World Bank, the cost of exporting a tonne of rice is among the highest in the world, at $66 in 2010. This price includes MMK28,800 ($25.92) of transportation, MMK8000 ($7.20) for labour, MMK16,000 ($14.40) for milling and processing, MMK8000 ($7.20) for packaging and MMK5800 ($5.22) for licensing and port fees.

Mechanisation is difficult for farmers for several reasons. Financing is the obvious problem, because farmers do not have the necessary cash and the banks are reluctant to lend. Furthermore, farmers who do have resources are unlikely to make the investment because they lack secure land tenure. Additionally, the size of the landholdings are usually too small to justify the use of tractors or other labour saving machines, and it is difficult to get servicing for equipment.

Land Use

The reform of land rights is of primary importance to the agricultural sector. One study published in 2009 found the country had 73 active land laws, some dating back to the 1800s. The British first established clear property rights with the Land and Revenue Act (1879). Subsequent laws distinguished between state and non-state land, and have, over time, refined the rights and obligations of landowners and their relationship to the state.

Much of this changed at independence in 1948. The new constitution established the state as the ultimate owner of all land in the country, and this was followed by the Land Nationalisation Act of 1953. In 1962, under the socialist government, rice production was also nationalised. A series of acts followed that brought agricultural lands further into state hands. The 1974 constitution reaffirmed the state as the owner of all land and made no mention of earlier guarantees of proper compensation for the taking of real property. The Transfer of Immovable Property Restriction Act (1987) limited the right to sell property to foreigners.

After the 1988 coup, the 1974 constitution was repealed and the State Law and Order Council required all rice be turned over to the state. In 1990, other crop lands were also taken over and the state mandated that more rice be produced. Later, in 1991, the Central Committee for the Management of Cultivatable Land, Fallow Land and Waste Land was formed. This committee was empowered to take control of large tracts of land for state enterprises and for the purposes of largescale agricultural development. The guidelines used by the committee, known as the Wasteland Instructions, in practice allowed for considerable foreign investment in agriculture.

Farmland Law

The Farmland Law, passed in 2012, changed the situation considerably. It created property rights for individuals by allowing for the issue of land-use certificates. Changes in the status of the land, such as when it is sold and mortgaged, must also be registered. Nevertheless, the government still maintains ultimate ownership of the land, and it can rescind the relevant usage rights for any number of violations. The law is also outside the legal process, as holders of the landuse certificates can only appeal to the administrators of the programme and not to the courts.

The Vacant, Fallow, Virgin Lands Management Law, known as the VFV Law, was also passed in 2012. The law is an update of the Rules for the Grant of Waste Land (1861) and the Wasteland Instructions. Under the VFV Law, tracts of land can be leased from the government for up to 30 years. A company or a person can acquire 5000 acres each purchase and can acquire a total of 50,000 acres. Agriculture use is included under the law, but the properties cannot be sold or leased onward without the permission of the government. Foreigners can participate in the programme, and rural farmers can apply for up to 50 acres.

Effectiveness

The Farmland Law seems to be less effective than hoped. According to press reports, the lack of rule of law and high land prices as a result of speculation have resulted in slow real investment in the sector. Inconsistencies with existing legislation appear to be limiting interest. The Foreign Investment Law, for example, permits 50-year investments but land leases are limited to 30 years. The OECD notes that the registration process remains long, slow and inefficient. It adds that the laws do not improve land security, as the provisions act as land-use rights in essence and not true ownership, meaning that the rights can be withdrawn at any time. The OECD also recognises that regardless of the laws, government priority remains large-scale farming. Further, the process of obtaining titles can be cumbersome. “If you need land, it looks easy, but it’s not. The process is long,” U Myo Thant, assistant vice-president of Myanmar CP Livestock, told OBG.

The government has been drafting a land-use policy since 2012. The main goals of the policy, as outlined in an October 2015 draft, is to protect the land use rights of individuals and to improve the way land is administered. It was hoped that the policy would be put into place before the 2012 election, but because of complaints from rights groups, the process was delayed. The groups said that they did not have enough time to read the policy and that the politicians had attempted to rush it through. The policy has already been released for two rounds of comments, one in November 2014 and another in June 2015 YIELDS: Myanmar committed itself to improving yields after independence, which led to significant success. The country raised production rates considerably, with yields for rice climbing from 1.69 tonnes per ha in 1961 to a high of 3 tonnes in 2000. However, production figures have dropped since, falling to 2.45 tonnes per ha of rice in 2010, before rebounding to 2.8 tonnes in 2014.

A report published in 2015 by the Ministry of Agriculture and Irrigation, the “Myanmar Rice Development Strategy”, found that the area in Myanmar covered by high-yield rice varieties peaked in 1990 (at about 55%) and has since fallen to under 50%. The lack of irrigation is seen as contributing to the yield problem. While great efforts were made in the 1980s, it has been difficult for the government to maintain what is in place due to its still nascent capacity and financial resources. As well, some systems are still tainted with seawater following the aftermath of cyclone Nargis, with many canals requiring repair and a need for new secondary and tertiary canals.

The Myanmar Rice Seed Development Strategy (MRSDS) was set out in 2013. It is the Ministry of Agriculture and Irrigation’s (MOAI) first effort to develop a rice strategy for the country. Under the MRSDS, the ministry hopes to introduce good agricultural practices to more farmers, add more hybrid seeds to the sector, boost the number of farms mechanised, increase irrigation and improve efficiency in the sector. It also aims to provide farmers with better access to financing.

The national seed law was signed in 2011 and came into effect in 2013. It calls for the creation of a national seed committee charged with developing a seed policy, conducting seed research and forming seed quality inspection bodies. Companies interested in introducing new plants or seeds must apply to the committee. In addition, seed testing laboratories will have to be certified by the committee, as will companies wishing to engage in the seed business. The goal is to improve the quality of seeds by controlling pests and genetic flaws and to control the distribution of seeds.

Pulses & Beans

The trade in pulses and beans first began when the British imported seeds and brought in growers from India. The segment has been highly successful but remains dependent on the Indian market for sales and pricing, as the country receives 74% of Myanmar’s exports. The segment also needs to develop value-added products from the raw materials; less than 10% of output is currently being processed domestically. Operating capital has also been identified as a key problem for the growers. Farmers could raise two or three crops a year but, because of financing issues, many are unable to fully utilise their land. In the World Bank’s 2014 report on agricultural development in Myanmar, it is reported that the MADB is willing to provide farmers with lower-interest loans, but the bank will disburse a maximum of MMK20,000 ($18) per acre, less than 10% of total funding required.

Because of the volatile prices, default risk is high. In 2011 Sein Nan Htike, a bean trading company, defaulted on MMK5bn ($4.5m) of payments owed to suppliers. Traditionally, business contracts in Myanmar are verbal (though officially the practice is banned). To reduce the chance of default, the Myanmar Pulses, Beans and Sesame Seed Merchants Association instituted a new system whereby traders in the commodity must place a 10% deposit at time of order, the exception being contracts executed in less than one month.

The flooding of 2015 affected production of beans and pulses, but it did not lead to the shortages and price hikes as seen with rice. Domestic consumption is relatively low, so the disruption did not have a significant impact on the market.

Forestry

Just under half of Myanmar is covered by forests, and 10% of the country is primary forest. However, rapid deforestation is a major concern, with the country losing about 1.2% of coverage per year between 1990 and 2010. Some estimates put the total forested area as low as 24%. Deforestation has by and large been the result of illegal timber trade undertaken by Chinese interests.

The sector is guided by a number of regulations, including the Forest Policy (1995), the Forest Law (1992), the Forest Rules (1995), the National Code of Forest Harvesting (2000) and the Environment Conservation Law (2012). Under the current policies, forest reserves are to increase to 30% of the overall land area, with protected forests increased to 10%. Permits are required for timber extraction, and practices must be adhered to that guarantee that the environment is not unduly disturbed. To protect forests and to encourage processing, a ban on the export of logs was instituted in early 2014. However, as most timber is sold illegally, it is not clear whether this ban can be expected to have much impact. “The government has banned the export of legal logs, but illegal logs are still being smuggled,” Pawan Sharma, country manager at Mayar India, told OBG.

Outlook

Myanmar’s agriculture sector is staging a comeback. After years of underinvestment and a near total drop in exports, the country is rewriting its laws and establishing initiatives to boost production and yields, and encourage foreign investment. Success is as much a matter of implementation as legislation, and it is not clear how quickly the reforms will take effect. But given Myanmar’s abundant agricultural resources and the role the sector can play in developing the country, it is likely that these initiatives will take priority.