FOREIGN TRADE UNIVERSITY FACULTY OF GRADUATE STUDIES ….…….***………… GROUP ASSIGNMENT Course: Agriculture Trade Negotiation and SPS/TBT Class: Master in International Trade and Policy 4 DISCUSS THE ECONOMIC AND THE WTO – LEGAL IMPLICATIONS OF A PUBLIC RICE RESERVE (STOCKPILE) IN VIETNAM Group: Le Thi Huyen Trang 1606060038 Duong Thanh Trung 1606060039 Phan Thi Ngoc Tu 1606060040 Ton Nu Thuc Uyen 1606060041 Tu Thi Thanh Xuan 1606060042 Ha Noi, Feb - 2017 i TABLE OF CONTENT 1. Objective.......................................................................................................................................3 2. Size ................................................................................................................................................3 3. Cost/ Financing ............................................................................................................................4 4. Market interventions ...................................................................................................................5 5. Condition for purchase and release ...........................................................................................6 6. Legal base .....................................................................................................................................7 7. Pros and Cons ..............................................................................................................................8 ii 1. Objective Rice is, without no doubt, the single most important food/agricultural commodity in Vietnam. Given its uncontested position as the most important staple crop, “food security” is often, equated to “rice security”. And the public stockpiling of staple grains is one of the earliest strategies used to mitigate food supply instability. Several objects can be met through successful public stockpiling policies. Some of these include: first, stability of food supply 6and physical access to food (during emergencies and/ or otherwise); second, market price stabilization and assure access to affordable food; third, increased incomes for farmers in agricultural economies so as to incentivize greater production. Every year, the Vietnamese government announces calls for national stockpiling of rice. During 2014- 2015, Vietnam experienced slight losses of a share of the world’s rice market to Thailand and India. Thus, governments adopting stockpiling policies need to be acutely aware of its implications, on both domestic and international levels, and be prepared to mitigate potential risks. 2. Size Vietnam has 2 state owned companies VINAFOOD 1 and 2, which govern the public rice stockpile. VINAFOOD 1 in Hanoi looks after supply and availability of rice for the Northern regions of Vietnam. VINAFOOD 2 in Ho Chi Minh City manages rice production in the Mekong Delta (Southern regions). In 2014, Vietnam public rice stockpile reached 2 million megatons for 90,7 million people. At present, Vietnam Government is planning to increase its public stockholding capacity from 2 million megatons to 4 million megatons. This means that by 2020, it is likely that Vietnamese government may have stocks of about 4 million megatons at any given point in time (or between 15-20 percent of total annual domestic consumption). As 2014, estimated stockpile per person is around 22,050 tons of rice for each person. As calculated from National Nutrition Institution, one person eats 12 kg rice per month. No need to make a comparison, stockpile in Vietnam in 2014 is enough for food aiding and redundant for additional exporting. 3 Table 1: Public Stockpiling of Rice Snapshot 3. Cost/ Financing The rice reserve in Vietnam has been implemented for many years and is adjusted based on the legal basis, which is Vietnam’s national legal system and WTO’s legal system such as the AoA. Direct participants in the grain storage business include traders, farmers and the Vietnamese government. In fact, the Vietnamese state’s fund is insufficient to carry out the procurement of temporary storage, which leads to reserve circulation primarily implemented by enterprises to with State’s support. Such enterprises will invest their own money to purchase rice from 4 citizen’s reserves but these funds will be subsidized by the state bank of Vietnam. Typically, the state budget will support 100% mortgage interest rate for the purchase of paddy and rice with the maximum interest support of 4 months from the purchase date of temporary storage. Thus, the cost of rice reserve of Vietnam is both financial autonomy from the rice traders and indirectly subsidized through the government's interest rate. This policy is designed to ensure profits for farmers and limit supply to help stabilize domestic prices as well as export. The Ministry of Finance has issued Decision No. 434/2014 on the maximum purchase price for the rice stocks in 2014 at 6,300 VND / kg. This is the maximum purchase price including VAT for imported rice qualify assigned state stockpiles in warehouses State Reserve Mekong region, the South West and Ho Chi Minh City. the government's goal is to ensure that 30% of the profits for farmers as grain purchasing policy to implement the rice reserve. Moreover, the Government of Vietnam shall comply with its commitment to the WTO agricultural subsidies as follows: Agricultural subsidies are divided into 2 groups: • Group policy of domestic support; • Group policy of agricultural export subsidies. (Prohibited) Currently, due to limited financial resources, the major form of agricultural subsidies of Vietnam is investment in construction of agricultural infrastructure (irrigation, transportation, seed manufacturing systems...), the prevention of epidemics and natural disasters, scientific research, agricultural extension, programs to improve crop varieties and livestock breeds, etc. 4. Market interventions In 12008, in the face of rising world prices for rice, Vietnam imposed an export ban from March 25th to the end of June over concerns for food security and a desire to stabilize the domestic price of rice. Together with a ban imposed by India, the world’s third largest rice exporter, earlier on, and near-panic purchases by rice importers, especially in the Philippines, Vietnam’s rice export ban contributed to pushing the world rice price to its peak 5 in May of 2008 (Timmer, 2008). Every year, the Vietnamese government announces calls for national stockpiling of rice. The government want to set up a stable market, stable price and stable quantity so that consumer will be happy when the price is stable. However, this is a quite dangerous policy because it eliminates the competition, and does not encourage farmer to produce. The 4food price crisis affecting almost all countries in the world led to a new phase of regional reserve cooperation in Southeast Asia. The ten member of ASEAN countries partnering with China, Japan and Korea agreed on ASEAN plus Three Emergency Rice Reserve (APTERR) which entered into force since July 2012. However, APTERR has hardly been tested in practice. It can be seen that the agreement was signed, but not working because the mechanism is not clear. However, to some extent, it has influenced the size of stockpile. Domestic rice prices fluctuate due to the following factors: the available supply of rice at different times of the year, demand for exports and stocks at the end of season. In general, rice prices are often reduced to the lowest level two times in years: the peak harvest period of winter-spring (March-April) and during peak harvest of the summer-autumn (June- July). Rice prices also depend on stockpiles, especially the reserves in last season, compared with leisure time. Therefore, to avoid the seasonal fluctuation, with the help from banks, farmers have enjoyed the price insurance and weather insurance. 5Currently, all of Viet Nam's foodstuff products are not sold directly to businesses but must go through traders. Our businesses are not competitive enough to organize a business chain that buy on the fields. The farmers also cannot dry the rice and transport to companies. 5. Condition for purchase and release The stockpiling policy has been instrumental for Vietnam’s rice exports. It is well- organized public and private cooperative mechanism which ensures continuity of exports. The price of rice tends to slump during the Winter-Spring harvests (around March). In order to mitigate the sudden shock to farmers' incomes, the government often stockpiles rice through the private firms in order to ensure the 30 per cent profit margin for the farmers. 6 Export enterprises receive a quota for temporary storage at 20% export capacity. There also seems to be pressure on the part of the government and private traders to export the Winter- Spring stockpiled rice as soon as possible since firms have to start anticipating and planning for the Summer-Autumn rice stockpiles. Vietnam Food Association is on behalf of the State to designate bidding transactions or signing focused export contract for member companies based on government contracts; control commercial contracts; and monitor the export price based on the minimum price fixed by VFA from time to time. In the 2014-2015 winter-spring crop, VFA has set the target allocation for provinces in Mekong Delta for the temporary storage of 1 million tons. State Bank of Vietnam approved 17 commercial banks to grant loans for temporary rice storage procurement. The lending is implemented under current regulations on lending by credit institutions to clients. Lending rate will be agreed by commercial banks and customers, but not exceeding 7%/year. Thus, up to now, the State Bank as well as Credit institutions have had 6 years of credit operation implementation for the rice temporary storage, but 2015 is considered as the first year for the most active nature for timely deployment before the paddy harvest. 6. Legal base Here is the list of legal bases. Firstly, according to the AoA annex 2 paras 3 and 4 - WTO 2Para 3: Public stockholding for food security purposes. It states that “Expenditures (or revenue foregone) in relation to the accumulation and holding of stocks of products which form an integral part of a food security programme identified in national legislation.3Food purchases by the government shall be made at current market prices and sales from food security stocks shall be made at no less than the current domestic market price for the product and quality in question”. Para 4 about domestic food aid, shown that “Expenditures (or revenue foregone) in relation to the provision of domestic food aid to sections of the population in need.2Such aid 7 shall be in the form of direct provision of food to those concerned or the provision of means to allow eligible recipients to buy food either at market or at subsidized prices.” Secondly, one of policies on stockpiling is the Vietnamese Government Decree 109/2010 which regulates minimum stock amounts for rice exports. The Decree states that “a rice business must have a warehouse capable of stocking at least 5,000 tons of rices, and a rice husking plant with a 10 tons per hour capacity, to be eligible to export their product. Besides, Vietnam's government issued many guidelines of funding enterprises in rice reserve, such as Decision No. 850/QD-TTg dated 04 Jun 2013 about guiding commercial banks to perform loans for buying rice stockpiling in autumn- summer season 2013, Decision No. 373a /QD-TTg applying in spring- winter season 2013-3014, and for spring- winter season 2014-2015 according to Decision No. 241/QD-TTg of the Prime Minister dated 24 Feb 2015. And that Decree also states that “rice-export business traders must constantly maintain a minimum circulate reserve equal to 10% (ten percent) of the amount of rice exported by traders in 06 (six) months earlier”. 7. Pros and Cons In the near future, the public rice reserve is still a good solution for Viet Nam because of some reasons as follows. First, actively accommodating the market and controlling stability of the rice prices in domestic market. By this, it could indirectly support farmers and enterprises, for example difficulties in price changes of international market. Over the years, while our rice production is in the harvest season, Thailand sells off their large quantities of rice at low prices. It leads to grain purchasing prices of Vietnam slowdown and falling. In 2013, the State purchased 1 million tons of rice for public rice reserve helping farmer to overcome difficult periods in that season. Moreover, State’s infrastructures are better than farmers’. Farmers now do not have warehouses and lack of facility to reserve rice. They sell fresh rice on the field. Meanwhile, rice enterprises who carry out processing are mostly SME and lack infrastructure. 8 Second, public rice reserve is one of policy requirements for food security. However, the public rice reserve still remains disadvantages and has not recently achieved the goal as required by the Government. For example, in 2013 Mekong Delta area had output of 25 million tons of rice. With lacking of planning strategy right from the beginning of the year, the reserve was not efficiency. The ambiguous procedures regarding enterprises who are allowed to shell rice for stockpile also affect the Government’s objectives. In the long term, Viet Nam should consider the stable solutions for rice production and supply. The most important one should be the development of a value chain with connection of state, farmer, business and scientist in order to ensure stable quality, quantity, prices and markets for Vietnamese rice. 9