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China rubber demand stretches Laos

Chinese investments in rubber plantations in northern Laos will be ready for their first big returns in 2011, with nearly all the raw material scheduled for harvest then set to be exported to Chinese markets. What began as a modest way for upland Lao farmers to supplement their incomes has blossomed into a fast-expanding agro-industry, albeit one surrounded by mounting concerns of the lack of governmental regulation and controls.

Rubber exports are becoming big business in communist-run Laos, one of Asia’s poorest and most economically insular countries. Every province in the country, apart from Hua Pan in the northeast and Xieng Khuang so its south, had rubber

plantations in place last year or plans to plant, according to the National Agriculture and Forestry Research Institute of Laos (NAFRIL). Almost all of the production is being driven by Chinese demand.

China is projected to consume 30% of world rubber production by 2020, with an annual need for 11.5 million tonnes of natural rubber by that year, after passing the United States as the world's largest consumer at 3.45 million tonnes, or 18.2% of total consumption, in 2002. At present it can only produce 4 million tonnes annually. Much of the demand is being driven by the country's booming automobile industry, where the number of vehicles is estimated to increase to around 200 million by 2020, from 10 million in 2005.

That demand is helping to drive up global prices. Rubber prices in Tokyo, up 8% this year, have increased more than threefold since 2001. Demand from China will rise 35% to 6.83 million tons by 2010, according to the China Rubber Industry Association, Bloomberg reports.

To meet its needs, China has become the largest investor in Laos, outpacing neighboring Thailand and Vietnam. Most of that investment has come in the agribusiness industry, in particular rubber. An individual with knowledge of the Lao rubber industry who requested anonymity reported that the Chinese accounted for an estimated US$20 million in investments in northeast Laos, out of a total $26 million invested.

Rubber cultivation is new to northern Laos, with the first plantation established in northern Laos in Hat Nyao village in 1994 by ethnic Hmong refugees who had fled to China during the Indochina War and later returned from exile with substantial rubber growing expertise. Major expansion of the crop began around 2002, with substantial foreign commercial interest making inroads into northern Laos in 2004. Today forest areas are being cleared in ever-expanding areas across the country to make way for new plantations.

Luang Nam Tha province in the northwest has the largest amount of total hectares under rubber cultivation, while plantations are sprouting up in other northern provinces such as Udomxai and Pongsali and especially in Bokeo, adjoining Myanmar, along the almost finished Route 3 that will connect southern China to northern Thailand. A 2006 survey by the Forestry Research Center found nationwide a total of 11,778 hectares was already under rubber tree cultivation, with a total of 181,840 ha in new plantations planned.

One knowledgeable source estimated that at present more than 10,000 hectares of rubber had been planted in Luang Nam Tha province, compared with 400 hectares in 1994 according to NAFRIL. The number of hectares in nearby Vieng Poukha, including a 3,000 hectares spread granted by the government to a Sino-Lao consortium, and Na Lae districts is also growing rapidly.

Lao farmers earn anywhere between US$6,000 and $8,000 per hectares per year from rubber growing, considerably more than they would earn through traditional rice farming, non-timber forest products and even eco-tourism. The average rubber plantation in 2006 produced 1,360 kilograms of latex per hectare for a profit of around US$880, according to NAFRIL. In comparison, rice yielded 1,500 kilograms per hectare for a profit of $146 and opium 8 kilograms for $903 profit.

Division of labor
This has made rubber cultivation very attractive to poor, previously subsistence Lao farmers. Rubber investment in Laos largely falls under three general schemes: individual farmers, farmer associations and rubber companies. Individual farmers who grow rubber generally provide all the inputs and labor themselves, seek out their own markets and bear all the risks if the crop fails or world prices fall. Most of these farmers in Laos have relatives on the Chinese side of the border who have invested in plantations, provide technical knowledge and help access Chinese markets. Generally these plantations range in size anywhere between three and 25 hectares.

Under the farmer association scheme, each farmer is contracted by an association based within the village to work a piece of land. The labor is shared and at harvest farmers are paid for the amount of rubber received from the land they worked, minus a fee to the association. Rubber companies operate under government concessions or on contract with individual farmers or farmer associations. The largest operations involve land concessions granted either through the Lao government or the army.

Rubber companies seeking concessions of under 100 hectares make agreements with district officials, while those over 100 ha are made with the provincial officials, though these concessions are sometimes guided by connections with government or army officials in Vientiane. All the inputs are provided by Chinese companies and local villagers are hired to work the land at an average of 20,000 Kip or US$2 per day. The companies pay a concession fee of about US$6 per hectare for the use of the land.

Another system has Chinese companies forging agreements with farmers or farmer associations, sometimes after establishing deals with local Lao authorities as to which villages they can work in. Under this contract-farming scheme, villagers plant and care for the crop under the supervision of a Chinese specialist. Seeds and other inputs, technical support and guaranteed markets are provided by the Chinese company. At harvest, the profits are generally split between the villagers and the company on a 30:70 ratio if some form of salary has been paid, or 60:40 if the farmers receive no salary and only provide land and labor.

Chinese investment, while bringing guaranteed markets, technical help and capital investment, comes with substantial downsides. One complaint is that land concessions granted by the government to Chinese companies are not always voluntary on the part of the farmers. Sources with knowledge of the situation claim that some of the land granted actually belonged to villagers who are simply told by the government or army that it now belongs to a Chinese company.

A general lack of land title deeds and the country’s communist system means that the exploited villagers have little if any legal recourse. In many cases, no compensation is paid by the government, although some villagers have been able to negotiate 10,000-15,000 Kip, or $1 to $1.60 per hectare from the companies. Although the villagers are allowed to work on what once was their land, they are only paid one-third of what a Chinese worker generally receives.

Chinese companies say that they are not completely to blame for the imbalances, arguing that they are only doing business and it is the Lao government that should be responsible for setting appropriate standards and controls. Rubber investment has been largely decentralized, with district and provincial authorities able to make deals without having to consult the central government.

This has reportedly allowed Chinese businesses with political or military connections to manipulate the system and some say has encouraged corruption among poorly paid local officials. Without a clear government policy and central control of investment procedures, rubber-related investments are almost completely unregulated.

At the same time, contracts agreed to with Chinese companies are often of little legal value, underscoring the risks to both sides. According to NAFRIL, contracts written by Chinese investors ''fail to meet any internationally recognized standards and are woefully inadequate by every measure''. Some are informally signed with no involvement by local authorities, while others are legally signed with the involvement of local authorities.

In both cases, the terms are often vague and without sound legal reasoning. Many of the farmers who sign the contracts have no real knowledge of the law and their rights. Indeed, many of the upland villagers are illiterate in the Lao language, much less Chinese. In some of the more egregious agreements, farmers have later learned that they in effect signed away their rights to their land for an extended period of time and cannot change to another crop if their rubber trees fail or world prices drop.

Flawed model
Although China’s experience with rubber cultivation is being used widely as a blueprint for rubber plantations in northern Laos, there are many glaring flaws in the Chinese model. Chinese rubber cultivation began in its southwestern Yunnan province in a protected environment, wherein markets were guaranteed and prices fixed. This is not the case in Laos, where the industry is not protected and markets guaranteed only as long as demand exists and high prices hold.

The Chinese model also shows the dangers of environmentally unsustainable practices. A 2005 report by the German Organization for Technical Assistance and Cooperation (GTZ), a non-governmental organization, found that rubber cultivation in Yunnan had resulted in severe erosion, which would severely affect the long-term ecological sustainability of the area.

According to environmentalists tracking the situation, growing and extensive mono-crop rubber cultivation in Luang Nam Tha will have other dire consequences. The loss of biodiversity due to the conversion of natural forests to rubber will cut harvests of non-timber forest products that so many villagers rely on. The Nam Tha and Sing river valleys will also likely experience a reduction in size and diversity, they say.

The Lao government has failed to provide technical help to farmers in line with the increase in investment in rubber plantations. Nor has there apparently been any official research conducted into rubber or into which varieties are best suited to the growing and climatic conditions of the country. All of the technical knowledge and inputs, including seeds, bud grafting material and tapping equipment come unregulated from China. This has quickly made Lao farmers highly dependent on Chinese inputs.

Nor have there been any substantive controls placed on the areas under rubber cultivation. The Land Use Planning and Land Allocation law was instituted by the Lao government to encourage farmers to protect land and use it more effectively through delineating land-use areas and village boundaries. The law, however, has not been effectively implemented or enforced in a majority of villages. One aspect of the law, which stipulates that land left fallow for more than three years reverts to community ownership, has resulted in farmers planting rubber on the land, whether it is suitable or not, simply to retain the land-use rights.

In some areas, protected areas and conservation forests are being encroached upon. In particular, the growth of rubber plantations has recently become a direct threat to the Nam Ha National Protected Area (NPA). The NPA, which spans 222,400 ha in Luang Nam Tha province, has been declared an Association of Southeast Asian Nations (ASEAN) natural heritage site and has become increasingly popular with globetrotting eco-tourists, with 49,258 arriving in 2005 and a projected 79,916 by 2013, according to the Lao National Tourism Administration.

Despite this, until recently there has been very little protection of the area against the breakneck expansion of rubber, which breaches Prime Ministerial Decree 164 issued in 1993 and the Forestry Law of 1996, which set forth that the purpose of the protected areas was to conserve biodiversity, protect watersheds, maintain ecological stability and protect the scenic beauty of the area for research and tourism. One source said he felt ''the NPA will be gone in 10 years'' due to growing rubber cultivation.

This year, the government instituted a modest program to better protect conservation areas. Teams from the Luang Nam Tha Provincial Agriculture and Forestry Department have been posted in three to four villages with the purpose of regulating the spread of rubber plantations, especially in the NPA. The impact of the teams will not be known for a few months. At the same time, the province is beginning to enforce better zoning and land use in some areas.

A prime ministerial order handed down in 2006 called for a moratorium on granting foreign land concessions. It is unclear what impact if any this has had since at least one Chinese company has since been granted land concessions in Muang Long district. Another prime ministerial order which in future might have more impact called for an increase in the number of people involved in forest protection.

The large amounts of money involved in the business argues against progress. The Lao Army and high level political leaders are known to have invested heavily in rubber plantations and grass roots dissenting views on the crop’s expansion are seldom, if ever, heard.