Sunday, September 6, 2009

Fear the Dragon Head?

In earlier decades, Chinese economic planners adopted the concept of the “dragon head enterprise” (longtou qiye) as a strategy for connecting small-scale farmers with modern markets. To westerners, the “dragon head” sounds sinister and menacing, but in China the dragon is a benevolent creature. The concept comes from the dragon dance where the leader wears the head of the dragon and the rest of the dancers follow him in a line, making up the body of the dragon. Thus, the “dragon head” leads (daidong) a long line of farmers where they need to go—selling to markets (instead of for own consumption or to neighbors) and getting information about markets, new techniques and standards. Some English translations use the words “leading” or “flagship” enterprise instead of a literal translation.

The dragon head enterprises have been a key component of the “agricultural industrialization” strategy. The government has designated hundreds of dragon head companies at the national, provincial, and county level. One government official’s speech recently said about half of agricultural exports come from dragon head enterprises.

Recently, there have been some misgivings about dragon head enterprises. Surveys of farmers found that the dragon heads seldom functioned as advertised. There are lots of stories of broken contracts and exploitation. There have been rumblings for years, but now the official line seems to have shifted. This coincides with a new push to get farmers to join cooperatives, which are seen as an alternative (although many are actually run by dragon heads).

I recently came across a story from November 2008 in a Guangxi newspaper that looks at the experience with poultry dragon head enterprises in a particular county in Guangxi Province from several points of view: a disgruntled farmer, a happy farmer, and the company itself. This seems to be a rare example of balanced Chinese journalism. The following is mostly a direct translation of the article:

Voice 1: Poultry Farmers Have a Similar Fate; Most Cry Loss

In the Wuming County area, over 1300 farms have been recruited to cooperate with companies since 2002. Last November, the reporter spent a few days in Wuming County visiting poultry farmers and companies to investigate problems with the “company + household” mode of operation. According to most of the farmers, they don’t receive the advertised benefits. Companies also complain that they often lose money doing this business. A professor Shao Fahuan said companies and farmers need to form a community of shared interests.

Huang Lijin [every farmer in this article is named Huang!] he was recruited in early 2007 by a technician from a company who said he could get a profit of 1.5 yuan or more per bird if he raised poultry. Huang took out a loan of over 20,000 yuan from the rural credit cooperative and invested all of his savings, a total of 60,000 yuan. He built a chicken farm according to the company’s requirements on “responsibility land” outside the village.

Since then he has raised 7 batches of chickens and earned basically earned no net profit after deducting costs of chicks, feed, medications, interest, transportation, hired labor, and winter heating costs. This year, on November 15, Huang delivered his last flock of birds to the company. The company doesn’t want him to raise any more on the grounds that he always came to the company to make trouble. Now Huang is left with a broken dream, a chicken farm that cost several tens of thousands of yuan, a 20,000 yuan loan due to the credit cooperative in December and 10,000 yuan of other loans.

On November 19, the reporter went to Huang’s home where he stood by the abandoned chicken farm. Huang said before raising chickens he had no loans from the credit cooperative and didn’t borrow from anyone else. After raising chickens he is deep in debt and feels regret: he should have gone out to find work in the city instead—he could have earned 30-40 yuan per day instead of losing money raising chickens.
He’ll have to use earnings from wage labor and crop planting to repay his loans. He and his wife worked morning to night feeding chicks, cleaning the chicken coop, carefully taking care of the birds…why was there no profit? His daughter is working in Nanning city, earning over 1,000 yuan each month. The two of them worked so hard, but earned less than their daughter.

Huang thinks working with the company doesn’t pay, since he bought medication and feed at relatively high prices from them. He shows the reporter receipts for 52 yuan per bottle paid for medication and 130 yuan per bag for feed. Another villager raising chickens on his own pays 114-119 yuan per bag for feed, and it’s delivered to his home.

Huang said he had to ask people to load each batch of chickens on the truck, and he paid the workers and transportation fee himself. He had to heat the chicken coop in the winter, which cost 3000 yuan. There were also water and electricity fees.
In Heqi Village, Huang Rongkang [a different Huang] is recognized as the best chicken farmer. On the afternoon of November 19, the reporter visited Huang Rongkang’s chicken farm and there were still a batch of chickens that Huang and his wife were tending. Huang said these chickens will be slaughtered in a month.
Huang Rongchang started raising chickens for the company in March 2005. Like others, he spent over 60,000 yuan to start his chicken farm. He has already paid back his loan and still has a 10,000 yuan debt that he expects to pay back within a year. He relies on financial subsidies from the company of .2 yuan per bird. If the company stops giving this subsidy he can’t continue. Winter is coming and he will need to buy some coal to heat the chicken house with a few days. Coal prices are rising so he doesn’t dare buy it.

Huang Rongkang digs out a company account form from 2006 to show the reporter. He said, after 2006 the account statement was taken back by the company and this year’s statement will also be taken back, but he told them he had lost it. On the statement, this was recorded for the batch of chickens on May 13, 2006: final value of 15,815.94, less chicks, feed, medications, interest and deposit, left Huang Rongkang with a net of 4867 yuan. But after deducting transport, heating, electricity, water and labor, actual earnings were virtually nil. From the statement it appears he’s making money, but actually not.

Voice 2: Different Companies; Different Treatment

Villager Huang Zhaoxian raises chickens for the Wuming County Department of Kuidong Company of Nanning. He said the Kuidong company started investing in Wuming in August 2005. He naturally gravitated toward cooperation with company. He thinks Kuidong is good compared with other companies. Although the company supplies medications, the required medicines are all posted on the wall; you can decide what kind of medicine to give. The company subsidizes heating costs at 7 fen per bird per day. Last winter he raised 9,000 birds and got a 3,000 yuan “subsidy” (butie). If you use feed beyond the company’s quota, some companies will give you a discount price. The company sends a truck and pays the cost, weighs the birds on site, and the farmer can go directly to the company and collect his payment--very convenient. The most he earned was 2 yuan per bird, but he also lost as much as 2000 yuan on one batch that were too small. Over the long run he makes more money than he would growing crops.

Huang Songhui previously raised chickens for another company. He has raised chickens for Kuidong Company since 2006. He now has 3 farms, each with 8000 chicks. Huang Songhui said, Kuidong’s deposit is 4 yuan per bird. If you don’t pay enough deposit, the company can charge interest [don’t quite understand this arrangement, but another article I read noted that many companies are making farmers pay a deposit to ensure they sell to the company when birds are finished]. Now his chicken farm has raised 7 batches of chickens. He made money on 5 and lost on 2. If losses are due to disease, the company will collect less deposit. His best earnings on a batch of chickens were 2.6 yuan per bird. His chicken farm investment is pretty much paid back now. He’s unhappy that one time his chickens got sick. He called the company’s technician, but the technician had 5 chicken farms of his own -- he refused to come look since he was afraid of carrying the disease back to his own farm. All his chickens died and he lost over 30,000 yuan.

Voice 3: Raising Chickens on Your Own is More Cost Effective

Huang Songru started raising chickens with the company in 2005, but he quit this year, and started raising them on his own.

Huang Songru received chicks, feed, medications from the company when he worked with them. The price was fixed by the company. The market price of chicks was only 1 yuan, but the company charged over 3 yuan. You have to pay 0.5 yuan per bird for medication even if they don’t get sick. If you do lose your chickens to disease, the farmer bears the loss. For example, in 2007 he lost an entire flock of 8000 birds that were slaughtered at the request of the company to prevent avian flu. The company only agreed to give him 2000 yuan, just enough to pay for the coal used to heat the chicken house. Finally the company promised 4000 yuan, but the company was not willing to sign. They finally gave him only 2000 yuan.

Now he does it himself. The cost of feed, medicines are lower. The market price he receives is sometimes higher, sometimes lower. In February 2007, when avian flu was hitting Nanning, chickens from Guangdong were being sold here and he lost 10,000 yuan. But he has made a big profit on his latest batch. Huang Songru says, “I think it’s better to do it yourself.”

The Company: Farmers Sell Chickens on the Side; The Company also Faces Risk
The reporter went to visit Ning Chengdong, the Chairman of Kuidong Company, on the afternoon of November 23. He said the company has five service departments in the Nanning region, one of which is the Wuming branch. He said the operations of the Wuming branch are presently OK, but not as good as some other branches. On average, chickens from the Huang County branch sell for 0.4 yuan more than chickens from Wuming. This year the Wuming branch had losses. However, the company hasn’t been operating there for long. Other companies have problems as Kuidong does. For example, farmers sell company chickens on their own into the open market. Sometimes, anticipating a market downturn, the company postpones the delivery of finished chickens; farmers worry about rising costs of keeping the chickens longer and sell chickens privately.

When farmers sell company chickens into the market, Kuidong Company’s experience in Yulin region is for the local chicken association to monitor or the local police to watch for it. The company will stop supplying chicks to farmers who do this. It’s hard to determine whether or not this constitutes fraud. Private selling causes losses to the company, so the company can’t sit idly by. The reason farmers bear the risk of raising chickens is that they have differing abilities in raising chickens. Quality and survival rates vary by farmer, so the risks are borne by the farmers to encourage them to do a better job. Although contracts specify that farmers bear risks of weather or disease loss, when ice storms and other actual disasters occurred, the company gave farmers some help and reduced their deposits.

Mr. Ning said, if farmers earn little money they won’t want to raise chickens which doesn’t help the company. The company will reduce the deposit to keep farmers who raise good quality chickens.

Regarding chicks, medicines, and feed prices being higher than market prices…Mr. Ning said this is consistent with higher prices paid for chickens. For example, the market price for chickens is about 15 yuan per kg, but the company pays 20 yuan. Typically, the farmer can earn a net profit of about 2 yuan per chicken. The heating and other costs are not the company’s responsibility. Company workers tell farmers to read the entire contract before signing it. Most farmers are not careful about it.
Mr. Ning also said, when the company and farmers have a problem, it is the company’s own doing. From the point of view of the company…the market fluctuates, if chickens can’t be sold on the market the company will delay taking delivery of chickens out of self-interest. The effect on farmers cannot be avoided.

Expert’s suggestions: Establish a system that spreads benefits equally

Zhao Fahuan, Professor of commerce in the Guangxi University, is an expert on agricultural industrialization. On November 22, he said this mode has brought opportunities to farmers since its inception and has advanced the industrialization of agriculture, but it has had some issues in its implementation, mainly because of the unequal standing of companies and farmers. Contracts, distribution of benefits are decided by the company. Farmers are in a weak position. Companies dominate everything. Farmers come last in production, marketing, etc. For example, companies’ publicity doesn’t always match the actual distribution of benefits. Publicity is misleading; the commitments promised are not honored. Contracts between companies and farmers are unilaterally set by the company for their benefit. Farmers lack awareness of operational and legal matters, which the companies take advantage of, and disputes inevitably arise.

Professor Zhao offers the following suggestions. First, companies need a new operational philosophy that doesn’t see farmers as an adversary and shares benefits with farmers, jointly bears risks, the formation of a community of interests to protect profits of three parties: company, sellers, and farmers for mutual benefit. Farmers need a stronger awareness of legal matters and clear understanding of contract provisions and their responsibilities and rights to understand and maintain their own interests. From the government’s point of view, departments should standardize and urge both parties to establish a mutually beneficial system. If the government fails to supervise, bad companies will have a chance to deceive farmers. Government supervision is especially important to protect farmers’ interests.

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