Mills under construction in Sihanoukville and Kampot
A new rice export institution is in the process of being formed in an effort to coordinate rice growers, millers and exporters called Alliance of Rice Producers and Exporters of Cambodia (ARPEC).
According to one of the founders, David Van of Mekong Oryza, ARPEC is the clustering concept that is being initiated with diverse membership including nine provincial rice millers’ associations across the country, some individual mills, one logistics firm, one Micro Finance Institution and some other business people including fertilizers distributors.
Another founder is Van’s associate, Hun Lak of rice conglomerate Mekong Oryza. They hope to break down barriers among others in the field and create the conditions of common purpose to rally behind the government’s effort so that Prime Minister Hun Sen’s goal of a million tons of Cambodian exports can be realized in 2015.
Existing similar associations include the Federation of Rice Mill Associations and the Rice Exporters Association. But Cambodia lacks a more professional rice entity to be able to cluster and ensure big tonnage ability to commit with international buyers on more serious tonnage shipment, according to Van.
“ARPEC would also be in a position to provide small financing facilities to its member for a start and hopes to expand the volume of such facility as the institution matures.”
Van, who serves as Business Development Director at Mekong Oryza says the winning concept includes all aspects of the value chain, from “Seed to Shelf” or S2S.
Mekong Oryza Managing Director Hun Lak, who just returned from a visit to Taiwan to see their high tech rice growing operations, says Taiwan rice technology is high tech and high yield.
“The only concern we have is whether the seeds in Taiwan are adaptable to the climate here, so the only way is to have a nursery with a pilot project and find out,” Hun said.
Where to invest in the rice sector depends on which segment of the value chain you choose, from seedling down to farming techniques, milling process and logistics flow, Van said.
“That’s why it comes down to working capital, (i.e. cash flow).A hundred million dollar investment is not just equipment. If you invest in a rice mill, it has to do with cash flow so that you can procure consistent paddy (unmilled rice) to run your mill.”
One of the problems Cambodia faces in meeting the Prime Minister’s goal of a million tons of rice exported in 2015 is that an estimate of upwards of 50 per cent of Cambodia’s rice crop is milled in adjacent Thailand and Vietnam, giving those countries the value-added benefits for their own mils.
Van says a minimum of $1.03 billion is necessary to keep the surplus of paddy of 4.5 million tons in Cambodia.
“Trade finance is all about obtaining facilities. In Cambodia, the banks are still learning the process and it is coming up gradually.The bank wants to lend you the money but they will want to know how profitable your company is.”
But the problem is that most of Cambodia’s business people are small and medium sized businesses which are not accustomed to bookkeeping.
“If the bank does not have the tools to assess you, how do they lend you the money? They can show some flexibility, but at the end of the day, it is how they are able to assess the majority of the companies.” It boils down to basic corporate management.
That’s why Van advocates a multi-tier approach.
“You cannot solve the problem in one go. You need a gradual, step-by-step approach,” he said.
Another investment potential in the rice value chain is logistics, according to Van.
Last year, Mekong Oryza shipped out just less than 6,000 tons of long grain white rice, mainly to Russia, with barges down the Mekong River to Ho Chi Minh City and there to the European ports. Some of the rice went to Sihanoukville by container.
“Normally when you close a deal, there’s a contract, a sales agreement. The buyer will either give you a down payment or open a Letter of Credit (LC). With the LC you go to the bank try to negotiate some kind of facilities. Some banks will lend to you 60 to 70 per cent of LC value, depending on your relationship with your banker, which you can use to purchase the paddy,” Van said.
“We are already a rice export company, but what we want to do is vertical integration, from seedling to milling, and eventually to export warehousing.Right now we have some cash, but that would not be sufficient if we want to implement the entire strategy. Now is the two track approach. One is to start commissioning expertise to put up nurseries, silos and mills. The second track is to look for joint venture partners,” Van said.
Managing Director Hun Lak said they will start a pilot project for rice seedlings in May and the company is scouting for an appropriate location. At the moment we are reviewing places like Kampong Thom and Prey Veng provinces but we will decide on the final location soon.
Mekong Oryza is also building a rice processing unit this year on Road 51 in Udong to be used as a consolidation facility between the railroad and the waterways.
Some of the other bigger rice millers in Cambodia include Men Sarun, which supplies the Cambodian army and the domestic market, the Baitang Company and the Loran Company in Battambong.
Van said that in Thailand the government provides the pure seeds for the rice farmers, something that Cambodia ought to look into but is facing necessary capital in this respect.
“The whole chain of the rice business must be from the pure seeds.”
The 1st generation of seed would provide you the best yield which goes down as you use subsequent 2nd generation, 3rd generation and so forth.
An organization involved in the development of rice seeds is called CARDI, the Cambodian Agricultural Research and Development Institute, located on National Road 3.
“They can’t cope with the demand. They only supply at maximum 20 to 30 per cent of the domestic supply required, and only 2nd or 3rd generation seeds” Van said. The miller goes and bids for the seeds and gives it to the farmer on a contract agreement whom has to sell back the output to the miller at prevailing market rate,” Van said.
Two big rice projects now under way are a $100 million investment for a rice mill located inside Sihanoukville Port, a J/V between a local conglomerate group and a Chinese provincial investment entity from Yunnan and a similar size Thai –Khmer J/V investment with Asia Golden Rice from Thailand, located in Kampot.
“By 2013, these two mills will be up and running. There are a lot of investments, whether they are foreign or locals setting up big capacity mills in Cambodia. All these mills will be up and running by the end of this year, and early next year,” Van said.
“When you look at the amount invested into that sort of mill, $100 million, it does not go all into the equipment. Setting up a mill takes only 20 to 30 million. The rest is about working capital to purchase the paddy rice,” he said.
“If you do not have the capital to buy the paddy you cannot achieve consistency in output, i.e. the milled rice.”
Van said that on some derived products from a first run of milled rice, at the moment these products command a more premium price in the domestic market than the export market.
“That’s why so many people don’t export. Selling into the domestic market enables quick cash and lesser headaches and cost in export documentation and stringent quality inspection to meet export standard.
“With all these big capacity mills comes another challenge which is consistency in paddy procurement. When we talk about paddy procurement, then comes another potential business which is the silo.Silo means you get the wet paddy, dry it, and store it in the silo, and wait until the market price is right and then just sell it to the rice mill. A full rice mill will also normally include a silo. You can also go into the silo business without owning a mill,” Van said.