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China to fund rice expansion

Workers harvest rice in at a paddy in Kandal province earlier this year
Workers harvest rice in at a paddy in Kandal province earlier this year. A loan from China will see facilities built to store more than one million tonnes of paddy. Heng Chivoan

China to fund rice expansion

China is set to loan Cambodia up to $300 million to build a series of warehouses aimed at assisting the Kingdom’s fledgling rice industry.

Mey Kalyan, senior adviser to the Supreme Economic Council, told the Post that China had approved in principle the Ministry of Economy and Finance’s loan proposal and that both parties are expected to sign off on the agreement early next month.

“For a year the government has been preparing for this loan scheme to resolve the rice industry’s working capital issues,” Kaylan said, adding that the loan amount could be reduced provided it does not compromise the proposed project.

The loan is to be used to build more than 10 warehouses equipped with dryers capable of storing at least one million tonnes of Cambodia’s paddy. The facilities will be located along key rural production areas, urban markets and ports along the country’s value chains, according to Kalyan.

Upon completion, farmers, millers and traders will be able to deposit paddy stock into the warehouses on a yet-to-be determined fee basis. An “independent” third party collateral manager acting on behalf of commercial banking firms is to be assigned to each facility to assess the paddy stock.

The collateral manager would then issue depositors a receipt for their paddy, which is to be recognised as a legitimate form of collateral by commercial banks. It is hoped that this new form of collateral will prompt the banks to provide loans to farmers, millers and traders, increasing the sector’s overall working capital.

“For farmers to borrow now, they must have land titles to provide as collateral for finance. And there has never been enough collateral to allow such access or industry growth,” Kalyan said.

“Now with the loan, we expect to see some action on this project from next year. There is a lack of infrastructure for the rice industry, and this will hopefully create stability in rice prices, improve economies of scale and resolve the bottlenecks the industry currently faces at the rice-milling stage.”

Cambodia’s rice industry has been long been plagued by storage, infrastructure and access to finance issues. Consequently, farmers are forced to sell stock quickly at bottom-dollar prices in an effort to reduce their cash-to-cash cycle.

Meanwhile, the Kingdom has failed numerous attempts to acquire rice contracts from nations such as the Philippines due largely to an inability to stockpile large quantities of the commodity.

“The idea is to be able to store these huge quantities to meet the demands of those countries and eliminate the rapid outflow of stock at low prices to buyers from Thailand,” Kalyan said.

The warehouse receipt scheme put forward by the Finance Ministry is a widely used tool among more developed banking and finance industries, according to David Van, senior advisor to the CRF.

Van said with Cambodia’s finance industry being overly conservative about its loan collateral demands and the vast majority of milling businesses not possessing proper book-keeping methods, access to finance for the agriculture industry is difficult.

“That’s why the [government, via the Finance Ministry] is trying to push for another concept – being Warehousing Receipt – using paddy or milled rice stock held as ‘collateral’ for banks to lend money,” Van said.

But, he added, "It must be worthwhile noticing here that our commercial banks still lack in-house expertise to do proper risk assessment for agricultural commodities and thus their reluctance and slow moving in embracing such a concept.”

While welcoming the Chinese loan and the new collateral scheme, Van urged both the government and its advisory partners such as the CRF to consider thoroughly the ethical credentials of the collateral managers assigned to each warehouse.

“Such hubs of collection in consolidating paddy procurement must be managed by ethical local partners … and the paddy procurement done with high ethics to ensure paddy purchased or stored in those warehousing facilities is according to specifications agreed upon and not sub-standard.”

News of the warehouses and the collateral scheme has pleased fellow industry representatives.

Lim Bunheng, president and CEO of Loran Group, a major rice miller, said up to 60 per cent of paddy is sent immediately abroad for milling due solely to a lack of capital and holding capacity in Cambodia.

“Until now, we don’t have government warehouse to stock paddy rice. We just have warehouse of individual miller that have small capacity to stock rice,” Bunheng said.

“In Thailand and Vietnam, they have many government warehouses to stock rice so their farmers are motivated to expand production every year. Thus, they can export rice in bigger amounts each year.”

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