CHAPTER 04 SUPPLY CHAIN: PADDY PRODUCTION (FARMING) Contract Farming – Improving Farmers’ Demographics Farmers Income and Strengthening Farmers’ Income the Supply Chain Farm Yield BOX ARTICLE 6: Yield – Between Countries Contract Farming in Paddy Cultivation Yield – Within the Country Policy Recommendation for Yield – 27 PPKs in MADA Contract Farming Cost of Production Chapter Key Takeaways Cost of Production – Between Countries Cost of Production – Between Granary Areas Cost of Production – MADA Cost of Production and Return on Investment – 27 PPKs in MADA Reducing Cost of Production – Economies of Scale & Farm Management CHAPTER 4 SUPPLY CHAIN: PADDY PRODUCTION (FARMING) MALAYSIA’S PADDY AND RICE SUPPLY CHAIN TRADE & STOCKPILE INPUT PRODUCTION MILLING & WHOLESALE CONSUMPTION The following segment in the paddy and rice supply chain is the farm/ production segment. Here, farmers purchase and utilise farm inputs to cultivate paddy plants over a period of 90 – 120 days. Once matured, the grain is harvested and sold to millers for profit. Given a large number of farmers and their association with the lower income group, this segment receives the most attention from the government and the public. Consequently, it is heavily protected by multiple intervention measures compared to other segments in the supply chain. This chapter will begin by describing the historical and current demographics of the farmers and their income level. It will then look into contributing factors that determine farm productivity102 and farmer’s income. This is followed by policy recommendations on improving the performance of this segment and strengthening its linkage to the next segment (midstream segment) which may have an impact on further improving farmer’s income. 102 Farm/agricultural productivity is the ratio of agricultural output acquired to the agricultural input used or “… ratio of index of local agricultural output to the index of total input used in farm production”. Shafi (1984) as cited in Dharmasiri (2012) 94 KHAZANAH RESEARCH INSTITUTE CHAPTER 4 SUPPLY CHAIN: PADDY PRODUCTION (FARMING) Farmers’ Demographics In 2016, there were 14 million employed persons in Malaysia. Out of this number, 1.6 million workers belonged to Category A (agriculture, forestry and fishing), which was 11.4% of the total labour force (Figure 4.1)103. This category had the third largest number of employed persons after Category G (wholesale and retail trade, repair of motor vehicles and motorcycles) and Category C (manufacturing)104. Given this large number of employees, policies related to agriculture, forestry and fishing are likely to have a large impact on the livelihood of many workers. Figure 4.1. Number of employed persons by industry, 2016 (million persons) Transportation and storage 0.6m (4.5%) Adminstrative and support service activities 0.7m (4.6%) Public adminstration and defence; 0.7m (5.3%) compulsory social security Education 0.9m (6.6%) Construction 1.3m (8.8%) Accommodation and food service activities 1.3m (8.9%) AGRICULTURE, FORESTRY AND FISHING 1.6m (11.4%) Others (Categories Q,M,K,S,J,T,B,R,E,L and D) 2.3m (15.9%) Manufacturing 2.4m (16.9%) Wholesale & retail trade, repair of motor 2.4m (17.1%) vehicles & motorcycles 0 1 2 3 million Persons Note: Percentages are from the total number of employed persons in 2016 Source: Table 12: Employed persons by industry, Malaysia/States, 1982 – 2017 (pg. 3), Labour Force Survey Time Series Statistics, DOS (2018) (Accessed 23 Oct 2018) Chart by KRI There has been a gradual decline in the share of employed persons in the agriculture sector out of the total employment over the years. The turning point was in 1992 when the total number of employed persons in the manufacturing sector became higher than in agriculture. In 1982, 1.6 million were employed in Category A from a total of 5.2 million employed workers (30.8%). In comparison, in 2016, the total number of workers employed in Category A was still 1.6 million people but out of 14 million employed workers (11.4%) (Figure 4.2). 103 DOS (2018) 104 ‘Others’ is omitted here as it is a sum of multiple categories KHAZANAH RESEARCH INSTITUTE 95 CHAPTER 4 SUPPLY CHAIN: PADDY PRODUCTION (FARMING) This decline is not necessarily a negative phenomenon. The rise in farm mechanisation and improvements in farm management and R&D mean that presently, fewer farmers are needed to produce the same, if not a larger harvest. This is seen in the improvements in paddy farm yield and total national paddy production as highlighted in Chapter 2. This is especially so with the nation experiencing a shift from an agrarian-based economy to an industrial one. There is a declining trend in the percentage of people employed in categories related to agriculture Figure 4.2. Employed persons in agriculture-related industry, 1982 – 2017 (percentage over total employment) 35% Agriculture, Forestry, Livestock and Fisheries 30 25 Manufacturing 20 Manufacturing 15 Manufacturing Agriculture, Hunting 10 Agriculture, Forestry and Forestry and Fisheries 5 0 1982 1983 1984 1985 1986 1987 1988 1989 1990 1992 1993 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Note: There were changes in the categorisation used, including the category related to agriculture in 2001 and 2010 Source: Table 12: Employed persons by industry, Malaysia/states, 1982 – 2017 (pg. 3), Labour Force Survey Time Series Statistics, DOS (2018) (Accessed 18 Oct 2018) Chart by KRI Closer inspection of the agriculture sector revealed that approximately 500,000 farmers are from the food production sub-sector. Within this sub-sector, around 200,000 are paddy farmers (Figure 4.3), located mostly in the granary areas (164,068 in 2015)105. These figures indicate the considerable size of paddy farmers and potentially explain the level of attention given by the authorities to the well-being and socio-economic status of farmers in this country. 105 Agrofood Statistics 2015, MOA (2015). The number of farmers in granary areas is not available in the Agrofood Statistics 2016. 96 KHAZANAH RESEARCH INSTITUTE CHAPTER 4 SUPPLY CHAIN: PADDY PRODUCTION (FARMING) Paddy farmers make up the largest portion of farmers in the food sub-sector Figure 4.3. Number of farmers according to crop type (food sub-sector), 2016 (persons) Fruits 142,314 (28.2%) PADDY 194,931 (38.6%) Others 20,968 (4.2%) Coconut 102,253 (20.3%) Vegetables 44,454 (8.8%) Notes: 1. Others include cash crops (maize, groundnut, tapioca, sweet potatoes, yam bean, sugarcane), spices, floriculture and herbs 2. The number of farmers are estimated based on the number of individuals cultivating each crop 3. A farmer may cultivate more than one crop Source: Jadual 2: Anggaran bilangan petani mengikut negeri (pg. 3), Statistik Tanaman (Sub-sektor tanaman makanan) 2017, DOA (2017) Chart by KRI A common observation in the farmers' demography is the prevalence of an ageing population. This was identified as far back as 1985 by the then Deputy Minister of Agriculture106. Three decades later, the demography remains in paddy farming. A socio-economic survey in Pendang, Kedah conducted in 2013 involving 150 respondents showed that the largest percentile of the respondents was 50 years old and above, at 23%107. Consistently in 2016, MADA Annual Report revealed that the average age of farmers in the MADA area is 60 years old108. It is likely that the current economic insecurity associated with farming and better employment opportunities in urban areas had led to this ageing scenario in rural areas109. 106 Goh C.T (1985) 107 Hussin and Mat (2013) 108 Laporan Tahunan 2016, MADA (2016) 109 Abdullah (2007) KHAZANAH RESEARCH INSTITUTE 97 CHAPTER 4 SUPPLY CHAIN: PADDY PRODUCTION (FARMING) According to Tauer (1995), it is commonly accepted that the productivity of a farmer improves through years of experience, and then, at a certain age, declines as physical limitations increase. The same author conducted a study of farmers across 10 US Department of Agriculture production regions and showed that farmer efficiency increases 5 to 10% every 10 years between the ages of 35 and 44, then drops at the same rate beyond 44 years old. The same scenario can be assumed in Malaysia whereby an ageing population of farmers with an average age above 50 may indicate a sub-optimal achievement in farm efficiency. The ideal scenario is that the ageing farmers’ population will gradually shift towards fewer but more productive younger farmers. With the adoption of farm machinery, technology and improvements in farm management, a smaller number of dynamic agropreneurs may produce the same output or better than the collective output of a group of ageing farmers. According to an agropreneur from Penang, older farmers tend to work on smaller land areas of less than 3 Ha for various reasons. On the contrary, the ideal farm size to achieve economies of scale is around 10 Ha. Over time, if there is a continued reduction in input subsidies, paddy farming in these smaller plots may no longer be economical for these ageing farmers. According to the interviewed agropreneur, it is predicted that the more productive farmers will take over and consolidate these lands and adopt new methods to ensure the best returns on investment for their paddy cultivation110. The challenge, therefore, is for the paddy and rice industry to attract younger farmers. Contract farming may be the first step towards this and is described in detail under the contract farming subchapter. 110 KRI engagement with an exemplary paddy farmer who is in his 30s from IADA Pulau Pinang 98 KHAZANAH RESEARCH INSTITUTE CHAPTER 4 SUPPLY CHAIN: PADDY PRODUCTION (FARMING) Farmers’ Income Previous agricultural policies were successful in the gradual eradication of hardcore poverty over the years, but farmers remain relatively poor compared to their contemporaries in other occupational groups.