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INEFFICIENCIES IN LOGISTICS AND EXPORT PROCEDURES HURT RICE EXPORT.

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Cambodia's price for nonaromatic milled rice is increasingly out of competition with its neighbors. While Cambodia has significantly cheaper production costs than Thailand and Vietnam, higher milling costs and margins render its ex-mill prices uncompetitive.

This is further exacerbated by high domestic transport costs (both formal and informal), expensive and time consuming export procedures and port charges, and less competitive overseas freight costs. As a result, Cambodian rice is unattractive to overseas buyers given that Cambodia has not established itself as a reliable supplier yet.

In stating this, the World Bank, in a report titled: "A MORE DETAILED ROAD MAP FOR CAMBODIAN RICE EXPORTS", it stated that Cambodia needs to export both fragrant and nonfragrant rice at lower prices to achieve its export goals.

Rice in Vietnam is cheaper primarily because their milling and transportation costs are nearly half of those in Cambodia. This dims down Cambodia's potential to sell its non-fragrant rice to Asian markets like Indonesia, the Philippines or China.

Although the government buyers in both Jakarta and Manila are interested in diversifying their purchases and include rice from Cambodia, they won't buy until the prices and quality are comparable to those in Vietnam or Thailand.

Thai producers' Hom Mali is quoted slightly higher than Cambodian rice, but it has very high brand recognition and stable market share regardless higher price.

More investments are needed in milling, transport and export sectors to increase competitiveness of Cambodia's rice export Cambodia has reduced its milling costs but more needs to be done to improve competitiveness of its rice export.

Milling costs are being reduced at factories that are installing rice husk gasifiers which convert the rice husks to fuel and slash diesel costs by up to 75% or save almost $15/ton.

Cambodia also needs to encourage the adoption of this cost-cutting technology by extending credit to rice mills and promoting private sector investments in new storage infrastructure, which would be a good bases for collateral based financing.

Larger rice mills and polishing factories are needed to facilitate break bulk shipments. While there has been a doubling in the milling capacity of relatively large modern rice mills in the last two years, more investments are needed to improve the quality and capacity of mills.

To encourage such investments, the government should provide tax holidays etc for qualifying investments. Exporters would benefit from quicker and cheaper export procedures.

Although there have been significant improvements, the Cambodia's export documentation process remains complicated and nformal costs unacceptably high. The government needs to further remove bureaucratic hurdles and lower expenses by inter alia setting up "single stop service" offices.

The government needs to intensify its export facilitation efforts to increase its rice exports. The capacity of Cambodia's logistics system from mills to ports is inadequate to accommodate large-scale volumes. All of Cambodia's rice exports are shipped in containers from Phnom Penh and Sihanoukville ports.

Unless the government obtains a transit access to Saigon Port via the Mekong River for containerized milled rice, it is unlikely that Cambodia will export even 500,000 tons by 2015.

Cambodia needs to export both fragrant and non-fragrant rice at lower prices to achieve its export goals.

Cambodia has set a rice export goal of 1 million tons of milled rice in 2015, which will require exporting both aromatic and non -fragrant rice. Outside of the E.U. and Russia, the brightest export prospects in the near term are for the fragrant rice.

The Philippines, for example, is the world' largest buyer of 25% broken rice, a quality that Cambodia can produce. Therefore increasing export of aromatic rice should be the first focus of the government of Cambodia.

The export target of 1 million tons cannot be reached by exporting only fragrant rice given the finite size of that market (less than 3 million tons) and popularity of Thai Hom Mali.

Private sector members of the Rice Technical Working Group should form an advisory group for the government.

The working groups should gather representatives of the five largest rice exporters and meet ever y quarter to advise the gover nment in ident if y ing ongoing hurdles and overcoming problems as they arise.

Membership of the group should be selected from companies based on their recent export volumes as recorded by either Camcontrol or GDCE.

Key Findings

1. Given the size of the different segments of the world rice market, Cambodia cannot reach its 1.0 million ton export goal without exporting both fragrant and non-fragrant rice.

2. Thailand is Cambodia's principal competitor for fragrant rice, while Vietnam is the key competitor for nonfragrant rice.

3. Cambodia has significantly cheaper production costs than Thailand and Vietnam, but it s prices for nonaromatic milled rice become increasingly uncompetitive ex-mill, FOB the port, and delivered to the overseas destination.

4. The rapid growth in exports since 2009 is due to import duty preferences granted by the E.U. and, to a lesser extent, Russia. Lower prices will be needed to penetrate other key markets such as Indonesia, the Philippines, and China.

5. While there has been a significant improvement during 2011 in the turnaround time involved in getting documents approved, Cambodian export procedures remain highly bureaucratic and informal costs unacceptably high. Combined formal and informal costs add $17/ton to FOB prices.

6. The government should promote wider adoption of rice husk burning equipment that can reduce milling costs by 70%, almost $15/ton.

7. Uncompetitive local and international freight costs and high port charges can be "solved" by negotiating transit agreements with Vietnam and Thailand. An existing pact with Vietnam provides a framework for the barging of containerized milled rice down the Mekong River to waiting break bulk vessels. A bilateral agreement between Thailand and Laos, which allows the latter to use Thai ports, could be copied.

8. Because of the size of the individual mills, Cambodia only exports rice via containers. The exclusive reliance on containers could result in exports stalling at about 250,000 tons per year. This is due to domestic logistical con st raint s and because major importers in West Africa, the Philippines, and Indonesia primarily import rice carried on break bulk vessels. The proposed bilateral transit accords provide a "work around" to these twin hurdles.

9. Depth limitations currently preclude larger vessels from loading in Sihanoukville.

A viable road map to increase Cambodia's exports should take into account the realities of where the surplus is located, its composition by type of rice, and the competitiveness of the different varieties.

Cambodia's exportable surplus can be divided into aromatic, native nonaromatic, and IRRI varieties. The aromatic production is centered in the northwestern provinces that border Thailand, while the IRRI varieties are grown during the dry season in southeastern Cambodia in the provinces bordering Vietnam.

In the ten months since the ambitious 1 million ton export target was established, only limited progress has been made in grappling with the complex, inter-related issues, which hamper Cambodia's competitiveness of rice exports.

If the government desires to quickly replace a significant share of the paddy leaking into Thailand and Vietnam with formal exports of milled rice, it is suggested that proposed measures are considered as a package.

The planned rehabilitation of the railroads and the modernization of Phnom Penh and Sihanoukville ports are medium-term remedies, which will only partially alleviate the Kingdom's high logistics costs and bottlenecks.

According to several key exporters, these hurdles could result in Cambodia's exports stalling at less than 250,000 tons. Even with urgent and concerted efforts, exports may only reach half of the export target by 2015 albeit still a significant achievement.

Cambodian government should give its highest priority to getting Vietnam's agreement to allow the barging of uncontainerized milled rice down the Mekong River as a transit good to waiting conventional vessels in Saigon Port.

This would help to overcome the current problem that even Cambodia's largest mills are too small to individually supply coastal vessels carrying 5,000 tons on a timely basis.

Initial shipments could be made on barges carrying 250 tons to 1,000 tons where they could be combined on the waiting ships with much larger tonnages of Vietnamese rice.

As the size and sophistication of Cambodia's rice milling, processing, and exporting sector grows, the size of the export sales could be gradually increased until it reaches the point where entire vessels of Cambodian rice are loaded.

This solution" lowers both Cambodian transport and export costs not only for rice, but al so for ot her Cambodian exports.

Also, it ensures that competitive FOB mill milled rice prices remain that way on a CNF basis.

Encourage private investments in larger mills and rice polishing factories with capacities of at least 30 tons/hr4 by providing up a tax holiday up to five years for qualifying foreign and domestic firms.

These facilities offer the best opportunity for increasing rice exports in the near term. The government could use its tax incentives to encourage overseas or domestic investments in the milling sector, which are able to meet export requirements.

The government would need to further remove bureaucratic hurdles and lower export processing expenses although considerable progress has been made in the last year in reducing the turnaround times for issuing Camcontrol, SPS, and customs certificates.

This could be achieved through expansion of the single stop ser vice" for export approvals in order to minimize the time cur rent ly spent get t ing document s approved.

It is suggested that centralized single stop service" offices be opened in addition to Phnom Penh, also in major milling centers of the country.

Independent of this effort, it is suggested that Camcont rol staff its office in Battambang and in the other major milling centers with rice inspectors to facilitate the inspections upcountry.

Further, its inspectors should be increased so that they are routinely available outside of regular office hours.

In order to further streamline and simplify export processing functions, it is suggested that Camcontrol take over the inspection duties currently performed by the General Department of Customs and Excise and the issuance of SPS certificates for rice from MAFF.

The government has a scope to reduce export costs by reducing fees charged for export documentation (rather than increasing official fees for SPS and customs certificates), and equally important, further slash port costs.

To assist the government in identifying on going hurdles and overcoming problems as they arise, it is recommended that the private sector membership of the Rice Technical Working Group (RTWG) be reconstituted to consist of the five largest rice exporters and that regular quarterly meetings be held to advise the government.

Membership of the group could be based on recent export volumes as recorded by either Camcontrol or GDCE. This RTWG would provide a cross section of the Cambodian rice sector millers, polishers, and exporters without factories.

Membership of the group could be based on recent export volumes as recorded by eit her Camcont rol or GDCE . This RTWG would provide a cross section of the Cambodian rice sector millers, polishers, and exporters without factories.

Every two years the private sector membership could be changed based on the most recent export performance records.

It is suggested that MAFF urgently undertake a series of scientific studies to prove that rice in the Kingdom is pests and GMO free.

After the these studies are reviewed and referenced in a recognized scientific publications, MAFF can issue a blanket certification that the Cambodian rice crop is pest and GMO free, eliminating additional test ing requirement s for ex por ters, although continuous surveillance may need to be continued.

It is suggested that MAFF also redouble its efforts to eliminate insects and noxious weeds that are of concern to targeted export destinations such as China.

SPS issues are increasingly likely to become a major constraint. China, for example, will not allow Cambodian rice to be imported unless the government can certify that the milled rice exported to China are free from the following quarantine pests of Chinese concern: Leptochloa chinensis, Striga asiatica, Apenlenchoides besseyi, Ditylenchus angustus.

Each batch passing inspection will be issued an official Phyotosanitary Certificate demonstrating that it has fulfilled the Chinese requirements and specifying the origin of production.

The EU, Cambodia's largest export market is very sensitive about importing GMO-free food and there are no labs in Cambodia to test the goods.

Presently, the ex por ters must ship a sample to Vietnam for testing, which costs $150 per test and takes several days to perform.

The world rice market is a thin, segmented, and imperfect market in which governments are key actors. World trade has averaged just over 30 million tons during the last three years. Most of the rice moving in world commerce is fully milled and shipped as bagged cargo on break bulk vessels, while Cambodia is only using containers.

There are very distinct markets based on different rice types, qualities, and methods of processing which preclude perfect substitution.

In the world market, considerable emphasis is placed on grain length and on the percentage of broken as criteria of quality. In addition, the kernel shape (length/ breadth), the chalkiness, and translucency are considered.

The absence of chalkiness and high translucency in the rice endosperm are quality characteristics associated with good grain appearance. Uniformity of quality is also important to rice buyers.

There are basically four types of rice: glutinous, aromatic, Japonica, and Indica. The tenderness and stickiness of cooked rice are inversely correlated with the amylase content of the starch. Glutinous or sticky rice (a very low amylose rice) is typically used in desserts and only about 300,000 tons is traded each year in the world market.

5.7 million tons of aromatic rice were traded internationally last year. Japonica type rice, having fairly low amylose content, is semi sticky and moist when cooked. Japonica is a round-shaped grain.

The amount of Japonica rice traded internationally varies widely. Usually, however, about 1.5 million tons of Japonica is traded annually.

With an intermediate to high amylose content, Indica or long grain rice cooks f luffy and shows high volume expansion as well as grain separation.

Indica accounts for all but about 6.5 million tons of the 30 million tons that enters international trade channels.

About 2.3 million tons of the 23.5 million tons of Indica rice traded is shipped as rough rice or paddy.

Broadly speaking, the world market for milled long grain can be divided in to parboiled (a process where the rough rice is soaked and steamed before milling) and reg ular milled or white rice. Just as there is only limited substitution bet ween Japonica and Indica rice, there is also ver y limited substit ution bet ween regular milled and parboiled rice.

World trade in parboiled rice is typically about 5.5 million tons. The market for regular milled rice is annually approximately 15 million tons.

It can be sub-divided further into high (less than 10% broken), medium (10-20% broken), and low (more than 20% broken) quality based on the broken content.

The volumes moving in each class can vary dramatically from year to year depending on which countries have major crop shortfalls and the relative price spreads between qualities.

Cambodia's need to secure China as a rice export destination is becoming increasingly urgent, with China's multiple pending ag reement s w ith other count ries in Southeast and South Asia, said industry insider David Van.

China recently signed a deal with Thailand for 1 million tons of rice, with another million in a pending agreement before the end of the year, according to Mr. Van, a senior advisor with the Bower Group.

He added China would also sign a deal with Laos for 300,000 tons. It also plans to import more non-Basmati rice from India.

We have tougher competition for the China market," Mr. Van told Khmer Times. As the Chinese vice president stated candidly earlier this year at the last China-GMS meeting, Cambodian rice is too expensive and still relatively unknown.'"

China is the world's largest rice importer, taking in 4 million tons every year and the amount keeps growing. Negotiations are ongoing to reestablish an import quota from Cambodia after last year's 100,000 ton quota expired in April.

The Cambodian Ministry of Agriculture and the Chinese Chamber of Commerce weren't immediately available for comment on Thursday.

Need to Diversify

China is the biggest single rice importer from Cambodia, but the combined EU countries still account for most of Cambodia's export market, according to the Secretariat of One Window Service for Rice Export Formality.

Cambodian exporters are worried about the EU's free trade deal with Vietnam, which would eliminate Cambodia's tarifffree advantage. They say that Cambodia needs to up its exports to China and other regional players, including Malaysia.

The Kingdom's low margins and high shipment costs make it difficult to turn a profit, especially with non-fragrant rice, according to Song Saran, head of Amru Rice, a top exporting company. Mr. Saran said that between 60 and 70 percent of Cambodian exports to China consist of long grain white rice.

We are concerned about the supply chain. We spend a lot on fertilizer and our production and harvest cost is very high," said Mr. Saran. Other challenges are electricity and milling costs. And another challenge is logistics, because we have high costs in freight from our ports."

Currency Issues

The recent fall of many Asian currencies, including the Chinese yuan, Thai baht and Vietnamese dong against the dollar may further eat away at Cambodia's status as an exporter.

"Our competitiveness will erode," if the pattern persists," said Chan Sophal, director of the Centre for Policy Studies and agricultural economist.

Focus on Branding

Mr. Van said Cambodia had failed at its goal to produce 1 million tons of rice by this year and has to focus on more realistic goals that actually take its high value jasmine rice to the regional market.

I'd rather focus on developing and branding our own high value jasmine or fragrant rice, where the margin would be far more sufficient," he said.

Cambodia produces award-winning Phka Rumduol rice, which is similar to Thailand's jasmine rice.

According to the UN's Food and Agriculture Organization, fragrant rice fetches some of the highest prices in the world.

As of March, Thai fragrant rice was worth $1,082 a+ ton, while non-fragrant varieties ranged from $300 to $600 per ton.

Cambodia must do a better job of promoting its native variety to the global market, Ngin Chhay, chief of the rice department at the Ministry of Agriculture, Forestry and Fisheries, has previously said.
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Publication:Cambodian Business Review
Geographic Code:9THAI
Date:Sep 30, 2015
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