Foreign-invested enterprises (FIEs) which have been licensed for export can only buy agricultural products from local traders, and are banned from buying directly from local farmers, according to a new law.

Moreover, those FIEs are also banned from organizing commodity purchasing networks in Vietnam for export, according to Circular 08/2013/TT-BCT of the Ministry of Industry and Trade.

The circular, which takes effect this Friday, aims to prevent those firms from manipulating the local market.

However, this policy may cause foreign firms to invest in infrastructure for the production and consumption of agricultural products for farmers.

These aforementioned provisions have been laid out in the context that FIEs are acquiring many segments in the local agricultural sector, thus offering them a chance to manipulate the local market and drive local firms operating in the field into a corner, said the ministry.

Losing out

According to the Ministry of Agriculture and Rural Development, in the field of animal feed production, FIE enterprises make up 70 percent of the local market share. Among them, CP Livestock Joint Stock Co is holding 40 percent, 50 percent, and 18-20 percent of the local market share of chicken, chicken eggs and animal feed, respectively.

In the Central Highlands, there are 12 FIEs buying and exporting 50-60 percent of the total coffee production of Vietnam. In the Central Highlands province of Gia Lai, the subsidiary of the Netherlands-based Louis Dreyfus Commodities Co Ltd alone accounted for over 40 percent of total coffee exports of the province in 2012.

In the pepper industry, purchasing and export by FIE enterprises accounted for 36.6 percent of total national exports in 2012.

Pham Quang Dieu, chief economist of Vietnam Economic Analysis and Market Forecasts Corp, told Nguoi Lao Dong newspaper that many FIEs are trying to evade the law by simply paying the high price to reap a harvest from farmers, while the law states that they have to invest in establishing farming areas for that.

Meanwhile, many domestic enterprises, which have to obey the law, have invested a lot, from seed to agricultural materials in farmers, but receive nothing as the farmers turn their back on them after the harvest and sell to FIEs.

In addition, the competition of farm produce purchases between FIEs and foreign traders has affected the planning of raw material zone and processing clusters.

Side effects

However, the new circular may discourage foreign-invested firms from investing in local agricultural infrastructures and ink off-take agreement with local farmers, said insiders.

Some 30 FIEs are cooperating with the Ministry of Agriculture and Rural Development in ramping up the national public-private partnership programs, Dr. Dang Kim Son, Director of the Institute of Policy and Strategy for Agriculture and Rural Development (IPSARD) under Hanoi Agricultural University, told Nguoi Lao Dong newspaper.

They are working with the state to set up infrastructure for agricultural production in some localities, investing in seed, technical training for farmers in the cultivation of a variety of crops and aquaculture, and supporting farmers' access to quality certification, such as UTZ and 4C for coffee, RA for tea, and ASC and BRC for seafood, he said.

If we ban FIEs from establishing a system to directly purchase agricultural products from farmers, they may no longer want to invest in farmers and the local agricultural sector, he added.

Philippe Bacac, CEO of Metro Cash & Carry Vietnam, said Metro is implementing a project on establishing clean seafood chain, in which aquaculture farmers are supported in environmental control, drug/chemical use and waste management.

If the provisions of the circular are implemented, the effort and investment will not be materialized in any benefits for the enterprises.

The circular goes against market rules, and creates monopolies for domestic enterprises in agricultural raw materials purchasing, thus disabling local farmers from selling their products at market prices, he said.

The balanced point

According to experts, the crux of the current problem is the lax relationship between corporate purchasers, processors and exporters with farmers.

In the chain of profit distribution, the farmers directly receive a very small proportion of the interest compared to the exporters.

In the long run, domestic firms have to set up close links with farmers towards sustainable production and consumption, said local experts.

"Indonesia is a very good learning model. They prescribed FIEs to invest in establishing the material zones and in the farmers to be eligible for direct purchasing of agricultural products. If in three years, FIEs fail to do so they will see their licenses offering them the direct purchase right revoked,” said a local expert who does not want to be named.

On the other hand, the majority of FIEs dominate the market thanks to strong capital and human resources, and this also helps to increase market competitiveness.

As a result, the state should encourage and support oriented business investment in the agricultural sector on the basis of harmony of interests between domestic firms, FIEs and farmers, they said.