Food Markets

Food Imports

Although official figures indicate Cambodia is self sufficient in rice production, the country remains a net importer of rice, indicating that part of household rice requirements is met through external markets. According to FAO data, rice imports have almost doubled from 2000 to 2004, rising from less than 40,000 MT in 2000 to more than 70,000 MT in 2004. However, import figures could be misreported given the cross-border trade between some surplus rice-producing areas, such as Bat Dambang, and Thailand, where paddy is reported to be exported and milled on the Thai side of the border and then imported back into Cambodia.

Figure 2.16: Imports and Exports of Rice (2000-2004, MT)

Source: FAOSTAT

Food Market Structure

Markets play an important role in addressing food insecurity, although the fact that hunger exists does not necessarily mean that markets are inefficient. Factors limiting access to adequate quantities of food include: 1) market imbalances between supply and demand, 2) difficulty in physical access to markets, 3) inadequate purchasing power or 4) price shocks.

There are various intermediaries in the chain from paddy production to rice consumption: farmer, paddy collector/trader, miller and consumer (domestic and export). Farmers sell their produce to paddy collectors/traders, millers or directly to consumers. The small scale household production system leads to low bargaining power when it comes to selling the un-milled paddy at the end of the harvest (December-February) and low farm-gate prices. Reportedly, financial needs (credit repayment, labor hiring for harvest, school fees, etc.) during the harvest season and lack of storage facilities lead farmers to sell their rice at harvest time at a low price [1] . Farmers represent the lowest link on the marketing chain, and therefore, do not capture high cash returns on their production. Meanwhile, the mark-up earned by intermediaries can reach 10 to 15 percent of the market price (UNDP, 2004).

The knowledge about the current structure and functioning of domestic food trade remains weak, despite recent efforts undertaken by the government with support of donors. The Ministry of Agriculture, Forestry and Fisheries (MAFF) has set up an agricultural market information system (MIS) to collect and publish wholesale prices of local food commodities on a monthly basis. However, both the MIS and the National Institute of Statistics (NIS) price collection systems have limited coverage as they concentrate on market prices collected in urban centers. In cooperation with the Japan International Cooperation Agency (JICA), an open paddy market (OPM) has been established by MAFF to provide an advance payment system to paddy farmers aimed at reducing distress sales during the harvest season. Further partnership has been reached with the Canadian International Development Agency (CIDA) to improve agricultural marketing information in Cambodia.

The key market failures that ensure smallholders cannot participate in the spot market are in the areas of (Patrick 2003, pp. 6-7):

1. Credit. Production of high-value non-traditional commodities is generally much more costly than traditional commodities and is more likely to require credit. Credit markets are often missing or imperfect.  In the absence of formal credit-channels households have to rely on informal access to credit with higher interest rates.

2. Insurance. Non-traditional crops tend to pose a higher income risk on smallholders because of the higher production costs. They are also riskier because they are more susceptible to pests making both yields and prices variable. High transaction costs keep firms from offering insurance policies in rural areas of developing countries and informal insurance mechanisms are limited due to a number of costs. This lack of a safety-net also results in most farmers being reluctant to grow others crops instead opting for rice or maize. The net effect being more than 90& of agriculture is devoted to the mono-cropping of rice.

3. Information / Lack of extension. Production efficiency depends on information on appropriate technology, on the quantity and timing of input application and on desirable crop characteristics. Missing markets for information can slow or inhibit the flow of information to smallholders. Since 2005 – 07 the government has increased agricultural extension activities. A prime example being the advocation of Systemic Rice Intensification (SRI) programs. SRI promotes utilization of less chemical fertilizers and more organic manure. This can reduce the cost of production as compost is readily available for most farmers, with farm animals being an integral part of their farming system (UNDP, 2007).

Lack of Physical Access to Market

Although considerable efforts are currently being made to rehabilitate and develop the national road network, the internal transport network is still a constraint for effective market functioning, especially in remote areas. Some provinces (e.g. Preah Vihear, Banteay Meanchey, Battambang, Pousat, Kaoh Kong, Kampong Thum and Kampong Chhnang, Rotanak Kiri, Mondul Kiri) have comparatively low road access from urban centers to rural areas, resulting in high marketing costs (WFP, 2007). Reportedly, this situation is compounded by unofficial road and waterway check-points which demand an “unrecorded tax” or payment to permit travel (EIC, 2006). CSES 2004 data reveals that remoteness contributes to the incidence of poverty. In remote areas, lack of access to basic economic and social infrastructure limits overall development and exacerbates rural poverty.

Household Dependency on Food Purchase and Sales

Households’ participation to markets is relatively high on the demand side. On the supply side, the majority of small farmers sell only very limited food surpluses due to the subsistence nature of the rice farming activities. Although subsistence farming is complemented by the cultivation of cash crops, livestock rearing, handicraft production and trade activities, poor household food needs are mainly met through domestic production and purchases from the market. As shown below (table 2.7), food purchased from markets accounts for at least 60 percent of household food consumption (CSES, 2004). Therefore, food price increases since 2003 would inevitably cause further difficulty for household food access among the poor.

Table 2.7. Rural households' own food production and food purchasing patterns, by quintile

Source: CSES 2004

From the above analysis, it can be seen that individual household and community food access is adversely affected by the increase of rice prices since 2003 which reduces purchasing power, the absence of social support structures and relatively high transfer costs which impede market functioning.

Food Price Patterns

The national consumer price index (CPI) indicates an upward trend of food prices from 2000 to 2005. On average, food prices increased faster than the overall inflation rate since 2003. This can be explained as a result of production shortfalls in several provinces caused by drought in 2004 and 2005, as well as the inflationary effect of the distorted trade regime. As a result, market prices for rice have almost doubled, implying that informal and official imports have only a limited stabilizing effect on food prices.

Figure 2.17 . Cambodia, annual average Inflation rates (2000-2005, in %)

Source: National Institute of Statistics.

In a normal year, rice prices would generally increase from 600 to 900 Riel/kg during the dry season (April-May) and the lean season (August-November) and decrease from December to March (harvest and post-harvest seasons). However, in years of significant production shortfall, the rice price increase can fluctuate between 1,000 and 1,500 Riel/kg, especially during the lean season (WFP, 2007).

Looking at prices of rice in Cambodia and comparing between spatial price differences and transport costs suggests inter-provincial trade is constrained by high transfer costs (table 2.8). Aside from agricultural productivity, the main costs explaining the difference between surplus production areas and deficit production areas, i.e. consumption markets, are transport costs, unloading costs, processing costs, interests to be paid on loans, margins and losses. Transport costs are the main component of transfer costs. In the absence of other cost components, it is considered as a good proxy indicator of transfer costs. Considering Phnom Penh as a major distribution center to provincial markets, the spatial price difference (between Phnom Penh and the province) is compared with WFP transport costs of rice from Phnom Penh to other provinces. The table below indicates high price correlation, but higher transport costs are more significant than the spatial price differences between Phnom Penh and other provinces, especially for the lower quality rice consumed by poor households. This implies that the inter-provincial rice trade is constrained by high transfer costs. However, annual average price differences hide seasonal variations. Transfers between markets can be cost effective when the price gaps exceed transport costs, during some seasons of the year. However, addressing this seasonality issue would require an analysis of monthly transport costs. Furthermore, market integration analysis requires greater provincial coverage of price data and transport costs. Limitations in available data, both by season and by province, do not permit such analysis at this time.

Figure 2.18 Real retail price of rice (yearly average 2002-2006, in constant terms of 2000)

Source : National Institute of Statistics (NIS) price data.

Table 2.8. Spatial price differences compared to transport cost (Riel/Kg)

Source: NIS price data and WFP transport cost, Author's estimates

The poorest households are likely trapped in a vicious cycle of debt as they borrow rice from traders with a 100 percent interest rate and pay back these loans, in cash or in-kind, after the next harvest season. Following consecutive years of drought and production shortfalls, such a practice increases vulnerability and reduces resilience to shocks.

Cross-Border Trade of Food and Trade Regime

Informal trade via Cambodia's borders with neighboring Thailand and Vietnam has an influence on Cambodia's food supply, but distortions in the formal trade regime keeps prices high on the domestic market. There are no quantitative restrictions on imports into Cambodia, such as import licenses or quotas, except on certain prohibited items, such as arms [2] . Tariffs on goods consist of Ad Valorem duties, based on the value of goods when they arrive at customs, including insurance, freight, and other duties and taxes. In addition, these goods are subjected to a ten percent value-added tax (VAT)[3] . Currently, food imports are subject to a 7 percent tariff, constituting the lowest category of a four-band import tariff system. Cambodia also restricts exports of rice, imposing a 10 percent tax on raw materials and 5 percent on processed products (including rice) (CDRI, 2005). The combination of tariffs and export taxes creates a higher effective rate of protection and a greater incentive to sell domestically because of the higher prices prevailing in the domestic market [4] .

Informal cross-border trade between Cambodia and Thailand is reported to be thriving (S. Leung, 2006). Imports consist of food products such as rice, fruits, vegetables and processed foods and equipment (kitchen utensils, bicycles, spare parts for water pumps, ploughs and hoes) [5] . Border provinces involved in cross-border trade are Bat Dambang, Bantey Mean Chey, Kaoh Kong and Pousat on the border with Thailand, Preah Veaeng, Takaev, Kracheh, Mondol Kiri and Svay Rieng on the border with Vietnam.

Reportedly, very few official exporters are involved in the rice marketing channel due to high entry costs and restrictions on rice exports. Storage, milling and transport costs are reported to account for 5-10 percent of the price. The level of resources needed to enter the export market is also increased by time-consuming procedures to get export licenses[6] .

Vulnerable Household's Dependence on Food Purchases or Sales

Households’ participation in markets is relatively high on the demand side. On the supply side, the majority of small farmers sell only very limited food surpluses due to the subsistence nature of the rice farming activities. Although subsistence farming is complemented by the cultivation of cash crops, livestock rearing, handicraft production and trade activities, poor household food needs are mainly met through domestic production and purchases from the market. As shown below (Table 2.9), food purchased from markets accounts for at least 60 percent of household food consumption (CSES, 2004). Therefore, food price increases since 2003 would inevitably cause further difficulty for household food access among the poor.

Table 2.9 : Rural Households' Own Food Production and Food Purchasing Patterns

Source: CSES 2004

From the above analysis, it can be seen that individual household and community food access is adversely affected by the increase of rice prices since 2003. This increase has a number of consequences: purchasing power is reduced and relatively high transfer costs impede market functioning. The absence of social support structures further increases vulnerability. Given the weakness of price data, the retail prices of food should be monitored in combination with short term income sources such as casual labor to provide a primary indication of the patterns of the purchasing power. The coverage of the current monitoring systems (analytical tools and capacities) implemented by NIS and MAFF could be expanded to all the provinces in order to improve the knowledge of marketing systems and related impacts on food security.