(IAP ’14) Zech Lung, G

Zech Lung (G, Management, zech@mit.edu) Zech researched smallholder rice farming in the Philippines over IAP and tried to answer two questions: first, why are these farmers poor? And second, what strategies exist for helping them out of poverty? During his visit with Chris Tang (another PSC Fellow), they met a premium integrated rice producer that did a solid job of raising incomes of smallholder farmers while also creating a nutritious product. The duo visited government ministries, a social agribusiness incubator, the Filipino and International rice research institutes, as well as a high-altitude sustainable coffee plantation


5 Jan 2014, Sunday

Outside my window, the setting sun paints a beautiful vermillion swash on the horizon. Despite the low roar of the jet engines within the cabin, it is a pristine moment, almost like the silence that rings in the dead of night when the world is asleep. In two hours, I will finally be landing in Manila, and I’m excited about what the next three weeks will bring.

My name is Zech, and I am currently a Management Studies graduate student at MIT Sloan. Over the past four months, I have been working with fellow Sloanie, Christopher Tang, on our grand plan to raise the income of people who still live on less than USD2.50 a day – a plan inspired by Paul Polak’s “The Business Solution to Poverty” and emboldened by the examples of many who have gone ahead of us.

Why am I doing this?
Having grown up in Singapore, I lived a privileged and comfortable life compared to many millions who lived within a few hours travel of my country’s borders. But I loved visiting neighboring countries and immersing myself in the cacophony of people just going about their lives, the rich flavors and endless variety of food, and especially the smiles and warmth of people, some of whom lived under such simple conditions. While I have travelled to many countries around the world, no other region draws me the way South-East Asia does, and I hope I can put my business knowledge and my energy to help the under-served in this part of the world that I call home. It is an added advantage that both Chris and I would both like to live in South-East Asia upon completing our respective programs at MIT Sloan.

Why Rice in the Philippines?
The Philippines was a suitable place for us to focus initial efforts because Philippines has one of the largest incidence of poverty in South-East Asia. At the same time, many Filipinos are able to speak English, which would make it easier for us to obtain information within the short three week span we have to conduct research over our Independent Activities Period (IAP). We are also focusing on rice as a means to better understand the agriculture industry on a whole, and also because rice farmers are some of the poorest people within the Philippines.

One of the main problems is that many of the poorest farmers have to sell their produce to middlemen, who buy at unjustly low prices, and who capture a lot of the value because farmers do not have the knowledge and assets to take the produce to the market directly, leading to the situation where farmers typically capture less than 40% of the wholesale price of their produce. This also creates a situation where farmers make so little money that they are unable or unwilling to invest in tools that will improve their farming yield, as the cost of traditional farm productivity tools are prohibitively expensive to these farmers.

There is therefore much potential for empowerment of farmers if they are able to access the information and tools to increase their productivity, such as being able to plant more than one crop a year, or increasing the crop yield per unit area of land per crop. Farmers will also be able to improve their living conditions if they are able to raise the farm-gate prices of their existing produce through improved access to markets for their rice.

Chris and I will be spending our next three weeks travelling around the northern part of the Philippines speaking with farmers, rice traders, rice mill owners, wholesale and retail market players, NGOs, and government officials, to better understand the rice value chain in the Philippines.  It has taken four months of work to prepare for this trip, and being here will go a long way in getting a good feel of the ground, understand the issues first hand, and designing a solution to unravel this poverty puzzle. I can’t wait to get started!


8 Jan 2014, Wednesday

First few days in the Philippines! Chris and I hit the ground running with a whole slew of visits to rice retailers and meetings in various parts of Metro Manila. I went in ready to be turned down as I approached these busy rice retailers for an interview, but I was definitely taken aback when I was not turned down a single time. In fact, the shopkeepers were extremely patient and candid with entertaining our questions, even sharing information on their cost of doing business.

IMG_0786Above: Maria’s Rice, Pasig City.

IMG_0792aAbove: Joseph (centre) the owner of Maria’s Rice

A retailer typically has 8-12 suppliers, from whom they buy their rice, and their customers range from regular customers who stream in at irregular intervals buying small 1kg bags of rice, to larger restaurant customers who order a few 50kg bags (referred to locally as a ‘kaban’) of rice at a go.

As retailers in the commodity business, their gross margins are relatively thin, and they have to rely on selling higher volumes to make a decent earning. However, rice supply in the Philippines is not stable because its agricultural sector is heavily affected by typhoons and irregularities in climate. This represents a significant risk to the rice retailers.


Above: Understanding the rice retail market at Vanity Rice Store, Marikina Market

We met with the Philippine Business for Social Progress, which applied private sector funds to poverty alleviation projects, and the Department of Agriculture (DA), where we were briefed on the World Bank-funded Philippine Rural Development Program. There seemed to be a strong focus on farm mechanization, though we did not at this meeting get to learn of how the mechanization program could be holistically implemented. The meeting was very well attended by DA staff, and we were once again surprised to be on the receiving end of so much hospitality.


Above: Chris and I at the Department of Agriculture, whose signboard was curiously patterned with paint.


13 Jan 2014, Monday

I just returned to Manila from a week at the Gawad Kalinga (GK) Enchanted Farm, in Angat, Bulacan. Chris and I made a trip out here to learn about what some of the local organizations have been doing in tackling the poverty problem, as well as to explore organizations we can possibly work with in implementing our plan to support smallholder farmers.

The GK ‘way’ sees poverty not as an economic problem, but as a behavioral problem that has economic circumstances. We got to spend quite some time with GK’s founder Tony Meloto, or Tito Tony (Uncle Tony) as he is more affectionately known. In Tito Tony‘s words, “Poverty is not a lack of resources, but a lack of caring and sharing. It is a resource distribution problem, between the rich and the poor.” Therefore, by giving people dignity through a safe and supportive environment, and giving them hope of building a better future, GK believes that it can model the solution to poverty for others to follow.


 Above: Chris and I with Tito Tony (centre) at GK Enchanted Farm

The GK Enchanted Farm builds upon GK’s community-building model and provides an incubator for the development of enterprises that contribute their income to the GK community and at the same time provides employment for many of the beneficiaries living in GK villages. ‘Bayani Brew’ was one of the highly promising start-ups that was developed in the Enchanted Farm, adapting a traditional tea brewed with lemongrass and pandan leaves into a commercially produced ice-tea.


 Above: Chris and I with the Bayani Brew team at their ‘backyard’ production facility

The Enchanted Farm also has an agricultural unit called ‘Agricool’ that grows crops to provide the GK social enterprises with raw ingredients for their products. The crops are all grown organically. In this way, the supply chains of the enterprises arising out of the GK Enchanted Farm are vertically integrated – the quality of the ingredients can be easily controlled, and the supply of the raw ingredients can be planned in tandem with the growth of the enterprises. This would be an ideal design for an agribusiness, though it will be more difficult for such integrated operations to scale rapidly in the short-run.

The Enchanted farm has somewhat of a utopian flavor to it, where every activity in the village fits so well into Tito Tony’s vision. The people who lived in the village took great pride in their work, keeping the village grounds very neat and clean. I dropped a pouch with my passport and a good number of thousand-peso notes in it by accident, and more than an hour later someone actually returned it to me. This demonstrates the level of trust that can be found within the GK villages. We spent our time in the GK Enchanted Farm speaking with the social entrepreneurs to understand more about their businesses as well as the GK model, and we put our hands to work to in farming – planting and harvesting peanuts and a variety of vegetables.


 Above: Harvesting ‘Pechai’ vegetables at the GK Enchanted Village, Centre for Bayanihan Economics


20 Jan 2014, Monday

This post marks the end of our second week here in the Philippines. We have established a good rhythm of making a trip out of Metro Manila every week, and coming back for more meetings in the city and consolidating our thoughts. We just returned from our visit to the Philippine Rice Research Institute (PhilRice) in Nueva Ecija, and it went very smoothly. The PhilRice staff was very hospitable, and arranged a great line-up of rice value chain participants for us to visit. This is especially important to us, as we consider our interviews with rice value chain participants on the ground to be the ‘meat’ of our research in the Philippines. We also got to speak with their Executive Director, Dr Eufemio Rasco, on the challenges of smallholder farmers.


Above: Chris and I with Dr Rasco (centre) at PhilRice

Thanks to PhilRice’s arrangement, we met with Tilah Seeds, which sells inbred and hybrid seeds and fertilizers to farmers, which provided us with the valuable understanding of the rice value chain from the input supplier’s perspective. This will constitute a crucial piece of our final plans, as smallholder farmers often cannot afford to buy their own inputs, and exploitative middlemen often use this knowledge to lock farmers into a loan agreement with very high interest rates.

We also met with the Bagong Buhay Mabini Cooperative, a well-run 365-member cooperative of mostly rice farmers. At the time of our visit, the cooperative had just purchased larger rice dryer and milling equipment on government funds that would allow them to start selling their own brand of rice and access the highly value-adding links in the rice value chain, instead of having to sell un-milled rice to traders. In our earlier conversations with experts on the Philippines, many expressed a lack of enthusiasm for the cooperative model, as many cooperatives were poorly managed. But the Mabini Cooperative was a great example of a well-run cooperative that enabled its member farmers to earn a higher income over time.



Above: (from left to right) Myself, Mr. Fernando D. Garcia (our PhilRice guide), Mr Florencio Sudoy (chairman of Mabini Cooperative), and Chris

While our meetings in Nueva Ecija allowed us to see first-hand some highly promising models of successful rice enterprises, it was also difficult to ‘seek an audience’ with the owners of large commercial mills, all of whom declined or were unavailable for meetings with the two of us. Also, we were not able to speak with poor small holder farmers, as most of the farmers in Neuva Ecija were able to make a relatively good living.

Back in Manila, we met with a promising agribusiness, SL Agritech, which supplies hybrid rice seeds to farmers, such as those in the Mabini Cooperative. SL Agritech also produces and manages an in-house rice brand called Dona Maria, a premium rice that the company also supplies to export markets. The farmers who supply palay (unmilled rice) to SL Agritech are able to earn a higher price per kilogram of rice they produce because it is of a premium variety. This rice is collected from a fragmented supply base through rural consolidators, and the company only buys palay and not milled rice as it owns its own postharvest equipment to process the rice. In this way, they are able to monitor the quality of the rice from each source and ensure consistent quality downstream for its customers. I was highly excited by SL Agritech’s model as a viable way for smallholder farmers to raise their income.


Above: (from left) Chris and I flanked by Dona Lim & Dr Malabanan of SL Agritech


Chris and I have put a considerable amount of time putting together all we have learnt and rallying around a few different strategies to tackle the poverty problem of smallholder rice farmers. Some of our key takeaways so far are summarized below:

  • The rice grown by smallholder rice farmers is a low-value crop. To help smallholder rice farmers raise their income, they either have to intensify their farming or diversify to a different kind of crop, which includes other produce such as coffee, cocoa, mangoes, or even the premium rice variety produced by SL Agritech.
  • Most agricultural by-products are put to productive use – rice husks are used to power heating devices, rice bran is used for chicken and duck feed, and broken grains are often incorporated into feed for pigs.
  • There is a lot of potential for farming cooperatives to improve the situation of its members, but management of these cooperatives is an issue, as few farmers have the training and not all have the aptitude for managing organizations.
  • Provision of farm mechanization equipment is in itself not a solution in itself, as farmers need training, technical support, and access to markets as well. If any of the other elements are missing, the equipment will quickly fall into disuse.
  • There is a growing ‘bayanihan’ movement in the Philippines, where Filipinos at home and abroad are turning their attention to working together to improve the country and the lives of their fellow countrymen. This can be seen in the emergence of social entrepreneurship within the last two to three years in the Philippines. This could mean a ready source of young and talented entrepreneurs who can assist with developing the concept and taking our ideas forward.


28 Jan 2014, Tuesday

Today is the last day of an amazing three weeks here in the Philippines. It’s been three weeks of continuous meetings in the day and brainstorming and discussions in the evening, and I am very happy with how our study to raise the income of smallholder rice farmers has gone.

In the final week of our time in the Philippines, Chris and I finally made our way down to the International Rice Research Institute (IRRI) in Los Banos, where we met with representatives from the postharvest division of IRRI, whom we had been in constant contact with since we began work on the project from Boston. We also met Mr Casiano Estrella, a cheerful 70-year old smallholder farmer who was also the chairman of the Banca Banca Cooperative.

Mr Casiano lives about 15 minutes’ drive away from IRRI, and though he owns a small 0.5 hectare farm, he has clearly benefited greatly from the knowledge shared by IRRI. As the cooperative chairman, he is also responsible for sharing rice-farming knowhow from IRRI with other farmers in his cooperative. The fact that he is doing so well is testament to the viability of smallholder farmers making a good living if they have the knowledge and support from organizations like IRRI.


Above: 70-year old Mr Casiano Estrella (left) and his 74-year old brother

From Los Banos, we made a buttock-aching ride up north, to the Baguio region to explore the potential of a promising crop – coffee. To my surprise, Philippines used to be amongst the top five exporters of coffee worldwide, but it is an industry that has since declined and many of the coffee plantations in the Philippines have fallen into disrepair. While South-East Asian neighbors such as Indonesia and Vietnam are producing large quantities of cheaper coffee, the Philippines still has the potential to grow specialty coffees that fetch a higher price in the global coffee market.

Fruits of the field

Chris and I came in search of opportunities to help smallholder rice farmers in the Philippines to raise their income. There are a few challenges that private sector efforts in this area will inevitably come up against. Rice is a highly politicized commodity subject to price distortions from government control and rice smuggling. There also exists an inadequacy of road and irrigation infrastructure to support the optimal development of the rice industry, leading to generally lower productivity levels compared to other rice producing countries. Moreover, the establishment of the ASEAN free-trade area will lower the import tariffs that have shielded the domestic rice market by 2015. These challenges result in a situation that makes any development of the low- to medium- quality segment of the domestic rice industry particularly difficult and unpredictable.

It seems apparent that the most promising opportunities for private sector participation lies in the higher-quality end of the rice market. An ideal set-up might include the following:

  1. A premium rice brand that has a higher value per kilogram, and can access export markets
  2. Supportive contract farming, where farmers or their cooperatives are engaged through rural consolidators, and they are provided with credit and guaranteed buy-back of their crop
  3. A vertically integrated value chain, that realizes efficiencies in production

That said, it may be worthwhile to look at other crops instead for raising the income of smallholder farmers. Other rice growing areas benefit greatly from the higher productivity that comes with mechanized operations, and this is most effective when farm plot sizes are larger. Still, it may be of benefit to some smallholder farmers to move away from growing rice, and instead focus on higher value crops whose production is inherently more labor intensive, such as fruits and vegetables. Coffee and cocoa are other viable crops that can be explored.

Closing thoughts

The constraints facing smallholder farmers is daunting, but the examples of locally-active NGOs such as IRRI and PhilRice have demonstrated that smallholder farmers given the right resources can still do very well. And it is not only NGOs that are capable of bringing this kind of meaningful impact to smallholder farmers. Surely there is great potential for the private sector to participate and put the power of market forces to bring scale to the successful initiatives. Not as part of  ‘Corporate Social Responsibility programs’, but rather, as a matter of running a profitable and sustainable business based on inclusive business principles. The challenges of developing an agribusiness in the Philippines are not trivial, but the opportunities are commensurate with the difficulties, as evident from the success of SL Agritech.

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