Unlocking potential to raise productivity and increase exports in Myanmar's agricultural sector

Myanmar’s fertile soils hold significant potential to lift the country’s economy from a basic grain producer to a high-value goods exporter. However, the evolution of farming has long been stifled by limited public spending, a legacy of unconstructive land policy, partial infrastructure gaps and limited access to finance. In addition, many farmers still lack modern cultivation techniques, sowing and harvesting by hand. All of this has translated into low yields per hectare and poor-quality crops within the sector.

Economic Mainstay

However, even after a lengthy period of stagnation, agriculture remains the cornerstone of the economy. While official statistics differ, the World Bank estimates the sector to contribute 38% towards GDP and 23% towards exports, while employing over 60% of the workforce. Although the expansion of the economy since 2011 has seen urban wages rise significantly, at least in the formal sector, investment in agriculture lags behind other industries, and as such, rural incomes are among the lowest in South-east Asia, with around a quarter of the population living below the national poverty line, according to the Asian Development Bank (ADB).

The agriculture sector is in major need of structural and policy reform. The first-ever democratic government under the National League for Democracy recognises agricultural development as an important catalyst for economic stability. In July 2016, four months after taking power, the government released a 12-point economic plan aimed at creating a market-orientated economy. Under the strategy, the government aims to bolster farming production, enhance food security, increase exports and boost living standards of the rural population, most of which rely on farming as their primary source of income. In order to achieve these targets, the government has set out to reform the laws governing the sector.

During military rule, various policy measures relating to which crops could be produced, and by whom they could be traded, significantly hindered the development of the agricultural value chain. Likewise, unfavourable land rights and poor access to credit remain major roadblocks to the farming community.

Land Rights

Laws governing the land in Myanmar continue to be one of the most contentious issues, with land grabbing and displacement of rural people being one of the most technical dilemmas the administration has to solve. Policies targeted towards land rights, crop production and marketing have shifted in direction since independence was granted in 1948.

From 1948 to 1952 policy was to a certain degree favourable: private ownership of land was permitted, farmers had freedom of choice as to which crops they could grow and private traders had the right to market products. Then came the ill-timed Land Nationalisation Act of 1953. While farmers still had the right to choose which crops they produced, and private traders still had authority to promote agricultural products, the state nationalised all agricultural land and made land transfers illegal. The state’s grip on the sector tightened during the socialist era ( 1962-87). The right to decide which products were farmed, when to produce them and at what price to sell, now belonged to the government. Likewise, the state monopolised domestic and export marketing. This period led to significant decrease in farmer incentive and expedited the decline of the sector.

Liberalisation

The first signs of policy easing came in 1988 when the government decided to liberalise the trade of pulses and maize. This was a step in the right direction, though the state continued to control supply by enforcing a cropping plan for procured crops such as rice, cotton and sugarcane. Minor adjustments were made in 2003, when the government limited enforcement of its cropping plan to paddy areas with reasonable irrigation facilities. At the same time, the government’s paddy procurement was abandoned and private rice export was allowed. Liberalisation of trade gained further ground in 2011, when any registered trader was allowed to apply for a rice export licence and export tax was reduced from 10% to 2%. A further significant step was taken in February 2013, when the government under U Thein Sein, announced that agriculture commodities, except rice, did not need export permits.

The vital political reforms which took place in 2011 were soon followed by the Farmland Law (2012) and the Vacant, Virgin and Fallow Lands Management Law (2012), and with these, new provisions that allowed for the transfer of land and gave farmers the right to contest land confiscations in court.

While progress has been made concerning land ownership, tenure security remains an issue due to a lack of information or even conflicting documentation. This has led to a minimal compensation being awarded to those who were required to relinquish land under reasons of “national interest”. As such, whereas the Farmland Law has improved the documentation process to some degree, full implementation and resolution remain a significant hurdle.

Access To Finance

According to a 2012 survey conducted by Livelihoods and Food Security Trust Fund (LIFT), a multi-donor trust fund that improves the lives and prospects of the rural poor in Myanmar, access to finance is the biggest constraint that farmers face in trying to improve production. The limited availability of capital stems directly from the absence of secure tenure, as formal financial institutions require collateral to issue loans. Although the arrival of microfinance providers has eased this constraint by offering loans capped at rates of 2.5% per month, their reach is geographically limited and financing depth per loan rather shallow (see analysis).

To fill the financing void, the Myanma Agricultural Development Bank (MADB) and Global Treasure Bank, formerly known as Myanmar Livestock and Fisheries Development Bank, have ramped up efforts to improve access to finance, so that farmers can afford to purchase inputs, such as fertiliser and seeds, which were identified in the LIFT survey as the second- and fourth-largest obstacles to productivity, with the third being severe weather conditions.

The MADB has the power to lend MMK150,000 ($122) per acre (0.4 ha) of rice for a maximum of 10 acres. Interest rates on these loans were raised from 5% to 8% in 2016, compared to 13% offered by commercial banks. According to a report in the Myanmar Times, the MADB had MMK60bn ($48.7m) available to disperse during the rainy season. Alternatively, Global Treasure Bank can offer loans of MMK500,000 ($406) per acre of aquaculture and can use fishing boats as collateral. Commercial banks such as Myanmar Apex Bank are also chipping in, as they have been given authority to use exiting land tenures as collateral for loans of up to MMK420,000 ($341) per acre.

According to Sean Turnell, associate professor at Macquarie University and economic advisor to the government, improving access to affordable finance is critical. “Myanmar’s farmers lack such access, and, as a consequence are forced into the arms of informal moneylenders,” Turnell told OBG. “Impairment of agricultural productivity has been the inevitable outcome of problems originating in financial sector dysfunctions,” he continued.

With informal money lenders offering rates averaging 20% per month, many farmers go without finance, with the unsurprising consequence that yields suffer due to the inability of farmers to afford vital inputs. As a result, rural communities have been entrenched in a so-called low-level equilibrium trap, driven by low productivity and minimal revenue (see analysis).

Supply Shock

In addition to land and finance shortfalls, Myanmar is the second-most-vulnerable country in the world after Honduras, according to the Germanwatch’s Climate Risk Index. During the monsoon months, heavy flooding can cause rice supply shocks. To combat flooding, irrigation facilities were extended in the 1980s. However, in 2008 cyclone Nargis damaged many of the existing systems, which are still in need of major repair and upgrading. Evidence of the country’s failing irrigation network was made clear during 2015 when 11 of the 14 states were flooded. This in turn amplified rice scarcity and escalated inflationary pressure, which peaked at 16% in October 2015, according to the World Bank. Considering the lack of crop insurance, and farmer’s reliance on credit, the probability of over-indebtedness to money lenders is high, a risk that is receiving careful attention from policymakers (see analysis).

According to U Thadoe Hein, managing director of Myanma Awba Group, which works across the sector, yields could grow two-fold with the right infrastructure. “Irrigation developments and road access will reduce logistics costs. Promoting infrastructure is essential to stimulating investment in agriculture.”

Lay Of The Land

One area that agro-economists all agree on is the abundance of arable land, much of which still remains untouched by modern cultivation. With a total land area of 67.6m ha, Myanmar is the 40th-largest country in the world and the second largest in South-east Asia. Its diverse topography and ecosystems consist of the Himalayas in the north and the Andaman Sea to the south. The country is divided into three distinct agro-ecological zones: the delta and coastal zone, the dry zone and the hill regions. With a total of 12.8m ha, cultivated land accounts for 19% of the total land mass.

According to “Myanmar Agriculture Sector: Unlocking the Potential for Inclusive Growth” report published by the ADB in 2015, cultivation has the potential to expand to more than 18m ha, a 50% increase, and more than a quarter of the entire country.

As it stands, 46% of the country’s population live in the delta and coastal zone. Rice and fish dominate rural incomes in this area, which benefits from an abundant supply of water. The dry zone is home to 23% of the population, and unlike the delta and coastal zone, its upland crops and paddy fields have to rely on river valleys, many of which are tributaries from the Ayeyarwady river, which spans an impressive 2170 km in length. The hill regions, on the other hand, are sparsely populated and dominated by rain-fed tree crops, including highly sought after timber (see analysis). The hill regions also produce horticulture products along with rice, maize and pulses.

Access to water is a clear competitive advantage, but is not being utilised. There are four main river systems that supplement the country’s agro efforts. They are the Ayeyarwady, Sittaung, Chindwin and Thanlwin. Together with other smaller rivers, these supply more than 19,000 cu metres per capita of renewable fresh water each year, five times that of Vietnam and six times that of neighbouring Thailand, which by comparison has 15.76m ha of arable land.

Crops

Myanmar produces more than 60 different species of crop including rice, corn, oilseeds, pulses, vegetables and fruits. Historically, Myanmar has been a major producer and exporter of rice in the region, so much so that it was once considered the rice bowl of Asia. Following the military coup in 1962, public investment across most sectors fell, at a time when the rest of Asia’s agriculture revolution was gaining momentum. While there was a lengthy period of increased rice production from 1.69 tonnes per ha in 1961 to a high of 3 tonnes in 2000, quality declined. During this era, land rights, crop production and marketing was tightly controlled by the state. This came at a time when neighbouring countries were diversifying their crops and diets, in turn generating more revenue at the grass-root level. On the other hand, Myanmar’s agriculture sector stagnated, and the trading power of the nation’s rice fields gradually became a shadow of their former self.

According to the ADB report, rice accounted for 34% (8m ha) of total crop land in 2010. Production increased by 134% from 13.7m tonnes in 1990 to 32.1m tonnes in 2010 thanks to the introduction of high-yielding varieties. Despite this impressive increase, Myanmar ranks second-lowest in rice yields in Asia, mainly due to a weak value chain stemming from limited access to finance and poor infrastructure which leads to high post-production costs. In addition, poor water management and the improper use of fertiliser limit prospects.

Fortunately, access to finance and inputs are improving. Similarly, mechanisation programmes are gaining momentum and infrastructure is high on the priority list of government and development agencies. These efforts are expected to significantly reduce production costs and promote better yields.

According to the Ministry of Commerce (MoC), 578,200 tonnes of rice and broken rice, worth around $199m, was exported by October 28, 2016, for the fiscal year (FY) 2015-16. This signifies a drop of more than 200,000 tonnes, compared to the same period the previous year, due to monsoon rain falls which caused heavy flooding throughout the country.

Beans & Pulses

While rice occupies the majority of cropland, pulses are the top foreign exchange earner among agricultural commodities. According to the Myanmar Pulses, Beans and Sesame Seeds Merchants Association, the total export value of beans and pulses averages $1bn per year, with 1.4m tonnes expected to have been exported in the calendar year of 2016. Some 80% of this was destined for India. Spurred on by the liberalisation of trade policy in 1988, beans and pulses have grown in popularity with farmers over the years due to their low production costs and higher return in comparison to paddy.

Another benefit is that they are predominantly grown between January and March and are therefore not subjected to the risk of flooding during monsoon rains. Beans and pulses are sown in all of the agro-ecological zones, predominantly in the central dry zone. A study released by the US Department of Agriculture’s Foreign Agriculture Service in February 2016 found that black matpe, green mung and toor whole beans accounted for 80% of the varieties exported.

The potential to generate more revenue from pulses is clear. At present India pays on average $1500 per tonnes of mapte, which reached its peak of $1800 in a decade in India in 2015-16. Speaking to the Myanmar Times, U Tun Lwin, chair of Myanmar Pulses, Beans and Sesame Seeds Merchants Association, said that the export price could easily reach $2000 per tonne given the growing demand from the Middle East, EU and US. According to the Overseas Agro Traders’ Association of Myanmar, strengthening the agricultural value chain is critical. This can be achieved by improving outdated mills, which will also raise the quality of yields and promote the incomes of farmers.

Oilseeds & Sesame

Accounting for 16% of cultivated land, oilseeds take up 3m ha, of which 43% is occupied by sesame. Statistics from the Ministry of Agriculture and Irrigation suggest that in 2011 sesame oil represented 37% of all edible oil produced, making it one of the world’s largest sesame oil producers – in some years holding the top spot – alongside India and China. Myanmar produced some 890,000 tonnes of sesame in 2013, representing close to 20% of global production. The bulk of exports go to China, which bought 77% of the 63,800 tonnes sold in FY 2012/13.

Sesame has for some time been subjected to unfavourable policies. Private exports were banned in 1998 in an effort to strengthen domestic supply and support self-sufficiency. Myanmar Agricultural Produce Trading was given exclusive trading rights until 2004. As a result, there was a 30% (average) decline in price, causing a drop in production. Between 2004 and 2011, private companies were entitled to export white and black sesame but prohibited from selling mixed sesame, such as the red, brown and yellow varieties. Following the end of military rule and easing of sanctions in 2011, the MoC removed restrictions and made all colours of sesame available for export.

Livestock

Livestock and dairy production is increasing steadily. ADB research indicates that chicken is the fastest-growing meat produce, accounting for 51.3% of all meat in 2010, followed by pork and beef. Around 85% of milk is produced by small-scale farmers, according to a report by the local research firm Frontier Myanmar. This illustrates significant potential for development, considering demand far outweighs local production, resulting in large imports from neighbouring countries, particularly Thailand. Myanmar imported dairy products worth $113m in FY 2014/15, most of which was ultra-high-temperature (UHT) milk. As of late 2016 no significant investment into dairy farming or a domestic UHT facility had been announced.

The fisheries and aquaculture sector is likewise expanding rapidly. With a mixture of marine and inland fisheries, the country is well positioned to capture international demand. According to the Ministry of Livestock, Fisheries and Rural Development, Myanmar exported aquaculture products to 29 countries in 2013 at a reported value of $653.8m.

Moving Forward

The food segment has focused on supply-led yield increases, and not a demand-led approach determined by market forces, which has restricted the development of supply chains. A white paper published by USAID and the National Economic and Social Advisory Council in April 2016 entitled “From Rice Bowl to Food Basket: Three Pillars for Modernizing Myanmar’s Agricultural and Food Sector”, identifies that an important factor for Myanmar to create a successful agriculture sector is to apply lessons learned from other Asian countries that transformed their agro-economy. The white paper suggests that success was achieved by focusing on the modernisation of small-farm production through input markets, whilst at the same time strengthening output markets and supply chains. However, putting this into place will require investment, policy reform and harmonisation between the government, the private sector and civil society.

U Thadoe Hein says more needs to be done in terms of knowledge-sharing. “Local farmers lack the understanding of how to penetrate markets,” he told OBG. “More focus needs to be directed to education and research and development (R&D), so that local farmers can capture markets in the US and EU.” According to the Ministry of Agriculture and Irrigation, education and R&D have received 1% and 0.1% of the agriculture budget, respectively, in recent years.

Foreign Participation

Unclear regulation and restrictive policies have historically hindered foreign investment in the agriculture sector. According to the Directorate of Investments and Company Administration (DICA), the country received $9.4bn of foreign direct investment (FDI) during FY 2015/16, of which just $7.2m was channelled into agriculture. Previously, between 1988 and 2015, $243m was invested in Myanmar’s agriculture sector, with $215.5m (88.7%) of that flowing in since 2010.

“The sector suffered for many years under a government regime that did not commit a significant budget to foster sustainable growth, leading to an inefficient farming yield, which has hindered investor appetite in the sector,” U Aung Zaw Oo, chairman of Aung Naing Thitsar Group of Companies, told OBG.

However, investment in the sector is more than worthwhile given the country’s natural climatic advantages and topography. Rural progress is also an important opportunity for the new government to simulate inclusive growth and ease the strain of urban migration. In order to enable farmers to capitalise on the country’s favourable conditions, land rights and finance options are gradually evolving as the government works to remedy past wrongs.

The lifting of economic and financial sanctions, coupled with the passing of the long-awaited Myanmar Investment Law on October 18, 2016, which combines the Myanmar Foreign Investment Law and the Myanmar Citizens Investment Law into one overarching legislation, is expected to promote FDI into the once overlooked sector. Furthermore, it will encourage the entrance of previously hesitant investors by placing them on the same playing field as local ventures. More enticement is expected when the new Myanmar Companies Act, which as of mid-December 2016 was still under ministerial review, is approved, replacing the 1914 Myanmar Companies Act.

According to Cheah Swee Gim, director of law firm Kelvin Chia Yangon, the new act is expected to bring the country’s corporate law concepts in line with international best practice. “The willingness to invest in Myanmar’s future is much different from the cautious wait-and-see attitude which was prevalent in 2015, brought on by the then forthcoming first free general elections,” she told OBG. “Now, more than ever, Myanmar’s doors are open to the world.”

While there is still much ground to cover to implement these reforms, the intention of the government to create a fair and competitive investment – a key ingredient that has been missing in the agriculture sector environment – is clear. Additionally, by removing uncertainty surrounding land rights, investor appetite is almost guaranteed to increase.

Supporting Growth

Although the fertiliser sector was liberalised in 1987, few investors were willing to distribute these products because of low domestic demand and unclear importing procedures. Now that demand is increasing, foreign investors from Japan and Thailand are setting up operations to tap into the rising number of fertiliser users. In early 2016 Japanese conglomerate Marubeni Corporation announced it was investing $18.5m in a facility that manufactures and repackages fertiliser in the special economic zone (SEZ) at Thilawa. Two Thai firms have also been given approval to set up manufacturing facilities in Thilawa SEZ,investments worth $23m.

To increase access to inputs, the International Finance Corporation granted a $10m convertible facility to Myanma Awba Group, a leading local agriculture company, in September 2016. The funds will be used to expand the company’s production base, which is expected to meet up to 50% of the demand for crop protection chemicals in the country.

Outlook

The agriculture sector is already gaining ground from relaxed trade policies. Future potential, however, will depend on the ease of its transition from a supply-led industry to one determined by demand. For the short term, Myanmar will rely on consumption trends in India and China. Longer term, prospects are strong, given the government’s direction towards trade liberalisation and structural reform.

It is unclear how long it will take the country to successfully penetrate international markets outside of Asia, although the process to get there is more than apparent. In line with this objective, local and international investors, with the support of the government and development agencies, are accelerating efforts to promote farming inputs, improve productivity and strengthen supply chains. Furthermore, improvements in hard and soft infrastructure will reduce logistical costs and promote efficiency in the value chain. All these factors, combined with the modernisation of cultivation techniques, will strengthen the sector and stimulate the livelihoods of rural people.

 

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The Report: Myanmar 2017

Agriculture & Forestry chapter from The Report: Myanmar 2017

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