BURMA: CRONIES PROVIDE CREDIT TO DELTA FARMERS

C O N F I D E N T I A L SECTION 01 OF 03 RANGOON 000412

SIPDIS

STATE FOR EAP/MLS, INR/EAP,
PACOM FOR FPA
DEPT PASS TO USDA
DEPT PASS TO USAID
BANGKOK FOR USDA/FAS
TREASURY FOR OASIA, OFAC

E.O. 12958: DECL: 07/06/2019
TAGS: EAGR EFIN ETRD PREL PGOV BM
SUBJECT: BURMA: CRONIES PROVIDE CREDIT TO DELTA FARMERS

REF: A. RANGOON 181

B. RANGOON 389

C. RANGOON 25

RANGOON 00000412 001.2 OF 003


Classified By: Economic Officer Samantha A. Carl-Yoder for Reasons 1.4
(b and d).

Summary
--------------


1. (C) Agricultural contacts confirm that the majority of
farms in the Irrawaddy Delta have recovered considerably from
the aftermath of Cyclone Nargis, enabling them to increase
rice production by 10 percent over April 2008 levels. In
many areas, soil conditions have improved, and NGOs, the UN,
and private Burmese citizens and businesses have provided
necessary inputs. While the UN and NGOs predicted in
February that lack of access to credit due to the financial
crisis would prevent Delta farms from rehabilitating,
contacts report that regime cronies have issued farmers lines
of credit under new contract farming schemes, providing the
needed capital. These contract farming programs have helped
boost production, with no reports of land confiscation or
loan defaults thus far. However, while Irrawaddy Delta
farmers have increased output, they are not necessarily
earning more: traders and crony companies continue to pay
wholesale prices for rice, enabling them to reap high profits
at the farmers' expense. End Summary.

Delta Rice Production Dramatically Improves
--------------


2. (C) During the first quarter of 2009, Burma's local rice
production exceeded local demand, enabling the regime and its
cronies to export more than 645,000 metric tons of rice to
Africa, the Philippines, and North Korea (septel). SGS
Consultants Managing Director U Kyaw Tin estimated that Burma
produced more than four million metric tons of rice during
the April harvest (the so-called summer crop, since it is
harvested during the Burmese dry season),approximately 25
percent higher than April 2008 yields. He noted that
production increased by 15-20 percent in Mandalay and Sagaing
Divisions due to higher-than-average rainfalls and use of
higher quality fertilizers and seeds. U Kyaw Tin estimated
that farmers in the Irrawaddy Divisions, particularly in the
less-affected areas, increased rice production by 15 percent
over last year's summer crop. SGS staff estimate Irrawaddy
Delta summer crop production totaled more than two million
metric tons.

How the Situation Changed
--------------


3. (C) WFP Country Director Chris Kaye explained that
overall rice production, particularly in the Delta, has been
much greater than projected as recently as February 2009,
when the UN and NGOs offered dire predictions that lack of
access to credit could devastate Burma's agricultural sector
(Ref A). According to a WFP March 2009 Food Security Rapid
Assessment of Bogalay and Labutta, 10 months after Nargis
more than 50 percent of farmers had access to land -- roughly
the same as before Nargis. The remaining farmers are

RANGOON 00000412 002.2 OF 003


day-laborers, who work on others' land for wages. Moreover,
according to WFP, soil conditions in the Delta have improved
considerably since the cyclone. Farms in the southernmost
parts of Labutta continue to have salinity problems; however,
Kaye pointed out that these lands are used more for salt
production than rice production. Farms in northern Irrawaddy
Delta are in far better condition, although the majority of
farmers in this region highlight that lack of access to
credit remains a significant problem. Nevertheless, FAO Crop
Specialist Leon Geows told us that the majority of farms in
the Irrawaddy Delta successfully planted summer crops, with
inputs provided by charitable donations, NGOs, the UN, and
private businessmen.


4. (C) Delta farms continue to need assistance from
international donors, Kaye emphasized (Ref B). While farmers
have successfully planted crops, they do not necessarily
benefit from higher production. U Kyaw Tin pointed out that
farmers are sometimes forced to sell their harvests to the
military at low prices (septel),which means they often find
themselves unable to cover the cost of production.
Increasing prices of inputs will place further financial
pressure on farmers. Until the GOB reforms the rice trade
system, farmers will work to produce more rice, but will
continue to struggle to make ends meet, U Kyaw Tin observed.


Contract Farming Aids Production, But Who Benefits?
-------------- --------------


5. (C) SBS Consultants' U Kyaw Tin asserted that contract
farming schemes in northern Irrawaddy Division have played an
important role in improving the ability of farmers to plant
rice, although they do not guarantee farmers will profit from
rice production. According to U Kyaw Tin, after Cyclone
Nargis the Ministry of Agriculture established a plan to
assist farmers who lost their cattle and/or lacked resources
to farm by pairing them with the crony company responsible
for reconstructing that area. Crony companies, including Tay
Za's Aye Ya Shwe Wa and Htoo Trading, Zaw Zaw's Max Myanmar,
and Steven Law's Asia World, participated in the GOB's
scheme, providing farmers with in-kind loans of farming
inputs (seeds, cattle, and fertilizer). Per the contract
farming terms, farmers were to repay the value of the inputs
after they sold the November 2008 monsoon crop (Ref C). U
Kyaw Tin noted that because world rice prices in November
were low, farmers did not earn as much as expected and could
not repay the loans. However, he observed that the cronies,
rather than confiscating the farmland as reportedly allowed
under the loan contracts, extended an additional line of
credit, enabling the farmers to plant a summer crop. Some
farmers have since repaid the loans by selling their most
recent harvest; others have taken out additional loans to pay
for inputs for the monsoon crop, which they will plant in
July.


6. (C) The GOB continues to push key businessmen and
cronies into contract farming in the Delta. In May, Htoo
Trading and Aye Ya Shwe Wa announced they would increase the
value of their in-kind agricultural loans for the 2009
monsoon crop, from 8,000 kyat to 50,000 kyat (USD 8-50) an
acre for farms in Bogalay and Pyapone. U Kyaw Tin confirmed

RANGOON 00000412 003.2 OF 003


that the terms of repayment for these higher loans are
different; instead of repaying in cash, farmers are to
provide companies a percentage of the rice crop and sell to
the companies an additional amount at wholesale prices. The
crony companies will then export this rice at expected higher
profits (septel). Although this scheme does not appear to
increase the profits of farmers, many are accepting the terms
of the loan because they lack other credit options.

Comment
--------------


7. (C) Rice production in the Irrawaddy Delta has recovered
surprisingly well from Cyclone Nargis, with international
donor and private Burmese assistance playing a key part.
Crony company loans, under the contract farming scheme, have
also contributed to the rebound in production, though the
terms of these loans appear to serve the companies' more than
the farmers' interests. If commercial credit remains scarce
and donor assistance to the Delta declines, more farmers will
likely see contract farming arrangements as their only viable
option. These farmers are essentially selling their crops at
cost and, at least in theory, could risk land confiscation if
they default on the loans. WFP Country Director Kaye urges
the international community to continue to assist farmers in
the Delta through donations of inputs as well as capital
through microfinance programs. He points out that such
assistance will help farmers increase production, cover their
costs, and earn the profits necessary to ensure their
livelihoods.
DINGER