Dalat Hasfarm extension services GCF archive number: Archive number
HQM/MBM Date Agenda item no. Agenda number
1. Executive summary This paper recommends that GCF supports Dalat Hasfarm in a project to extend farming and export marketing services to local flower growers in Dalat.
The aim of this project is to assist the local flower growers to bring up their quality through quality management system and thereby increase price and income. At the same time, Dalat Hasfarm plans to reach agreement with the local growers on various supports from cultivation techniques, technology, production planning, processing and packing to sales and marketing.
The weakness of the local growers is particularly post harvest quality treatment, therefore investment in facilities to improve on that aspect is essentials. However, the majority of this investment is from Dalat Hasfarm (DHA) while GCFs contribution is more for the training and consultants costs.
The project budget is VND 2,962,319,507 (USD 185,145) for a term of two years which will be co-sponsored by GCF and DHA. Of the total budget, DHA will contribute 59% of the budget, totaling VND 1,740,751,372 (USD 108,797) while GCF is contributing 41%, equal to VND 1,221,568,135 (USD 76,348).
The project will provide a sound development of the cut flower industry, where local growers can gather as a group to exchange experience on cultivations, productions and other relating matters. The quality improvement will bring more value to the products and therefore better prices and stable income to the growers.
The fact that all growers associate into a group will strengthen the market leading role of Dalat flower products, increase the competitiveness and maintain healthy supply to all markets.
For the first 2 years from 2006 to 2008 it is targeted that the flowers supplied by this group will be expanded in the domestic market. Gradually during this period, the flowers will be tested for export to countries with easy entry conditions e.g. Laos, Thailand, Cambodia, Taiwan, Singapore, Russia etc.
2. Primary and secondary target group The project will bring direct benefits to the primary target groups being the flower growers (including DHA). The aim of the project is to bring up the quality management by selecting the reliable farmers who have potentials in production management, quality concept and understanding and good faith to flower industry.
Other relating business sectors such as packaging producers, chemical and fertilizer suppliers and transportation companies will also benefit from the project as they can expect to increase their sales to flower farmers.
3. Needs of target groups in flower sector in Lam Dong The local flower farmers in Lam Dong have a number of strengths, which include
Diversified product range Fast adoption to market demand Low overhead cost Potentials to improve quality and efficiency
However, there are also a number of weaknesses:
PROJECT AGREEMENT PAPER Dalat Hasfarm extension services GCF archive number: Archive number HQM/MBM Date Agenda item no. Agenda number
Low investment in facilities No planning for production/planting Lack of information of the market Lack of quality management, no cool chain handling Quarantine problems if export No breeders licenses, causing problems to export
Local farmers are very restricted in making production plans and management, which is the cause for unstable quality and thus income for the farmers. There are few growers who are conscious about quality matters but their improvements are not done in proper ways. Overall, the local flower industry faces difficulties in gaining access to domestic market and export market.
4. The proposed project
Background The flower industry in Dalat is considered the largest one in Vietnam. However, local farmers start planting flowers very spontaneously on different small areas without any sales plan. Additionally there is no guidance on cultivation or advanced technology. No connection to the market or to the market information is set up, which makes the farmers very dependent on traders in term of price and continuity.
DHA has been dealing with local growers to supplement to the supply of own production and to introduce customers to a wider range of local flowers. However, this activity has been on a somewhat ad hoc basis, where DHA will put out demand requests on various flowers together with quality requirements. The suppliers who can meet the standards and price can sell flowers on a one time supply contract.
This interaction does allow farmers to sell flowers to DHA at higher prices, but there are a number of disadvantages to the method, such as strong fluctuations in prices and supply and inconsistent quality of flowers.
Proposed support and activities The project to be supported by GCF will based on a long term commercial contract - strengthen the relationship between DHA and local flower farmers. Where the market interactions between DHA and local flower farmers so far have been ad hoc, the interactions will now be regular and deepened.
Under this method, DHA and a group of local growers sign a long term contract under which the following terms are agreed
DHA selects suppliers and carry out inspection on planting facilities, quality awareness, technology update, flower variety DHA provides standard quality requirements and test delivery from selected farms DHA provides demands in which quantity and delivery frequency is mentioned. DHA scouts on regular basis to keep traits on quality Delivered flowers go through quality check and grading Rejected flowers are returned to the farms
On the other hand, DHA is obliged to provide the following:
planting materials such as rooted cuttings or so forth PROJECT AGREEMENT PAPER Dalat Hasfarm extension services GCF archive number: Archive number HQM/MBM Date Agenda item no. Agenda number
planting plan and estimated harvesting time others supports regarding cultivation techniques, other technicalities regular scouting to discover problems and advise on fertilizers, pesticide, etc. purchase all flowers grown from the cuttings supplied
This engagement includes some higher risk and responsibility for DHA in terms of supply quantity, quality stability and sales, but allows on the other hand DHA to expand its production area. The local growers provide only land and get a good chance to work with an expert flower producer. Furthermore, local growers do not need to also tackle the challenge of sales and marketing. A weal point is that local farmers need to have proper facilities to sustain a high rate of standard quality flowers.
Specifically, the project will undertake the following activities:
Organizational support DHA will play the leading role in organizing the group of farmers. DHA will call for interest of farmers to join the group and explain the objectives of the project and the benefits the members will get. DHA will carry out the audit on the growers facilities; check the readiness of the farmers by questionnaire. DHA will set up criteria to select members and then make a profile of each member.
This is to ensure that farmers are informed about the importance of joining the group and to ensure that the group consists only of interested farmers who meet the forth-set criteria are selected and are willing to commit to the operations and activities of the association.
Administrative support DHA will discuss with farmers and advise what crops and when the flowers should be grown. DHA will give training on how to plan the production from first stage of planting till harvest time.
Technical support and quality management training Based on the first audit, DHA will recommend investments in facilities to produce quality. DHA will organize training for member farmers about the cultivation know-how and how to manage the quality through out the production and delivery process. DHA will introduce and set up the quality standard that is first applicable to domestic consumption and then to export market. DHA will set up specialized team for doing scouting at the farmers farm. This includes various activities from problem discovery, cultivation techniques to solution recommendations. For some cases, DHA will supply to a certain degree, planting materials such as young plants or rooted cuttings.
Post harvest and processing support Member farmers are trained on the post harvesting know-how including post harvest preservation. DHA carries out post harvest audit to maintain the system. Investment can be done for a separate, but proper processing house for the flowers delivered from member farms. Farmers can plan to invest in processing to add more value to the products.
Marketing and Sales supports DHA takes responsibility of sales during the first phases. Flowers are distributed through existing distribution system which is already set up through out Vietnam market such as HCMC, Binh Duong, Buon Me Thuot, Da Nang, Hanoi and supermarkets. Besides, marketing activities will be incorporated with current marketing implementation of DHA, by which flowers can gain more markets domestically and later in the export market
PROJECT AGREEMENT PAPER Dalat Hasfarm extension services GCF archive number: Archive number HQM/MBM Date Agenda item no. Agenda number
Personnel support DHA administration staff will co-ordinate with farmers on planning. DHA scouting team will co- ordinate with farmers on problem discovery and solutions and quality management. DHA logistics and liaison team will co-ordinate with farmers on communications and delivery and transportation. This kind of support will also include trainers, experts or facility auditors.
Financial support DHA can give loan on planting materials i.e. young plant cost is set off against harvested plant payment. DHA can arrange to combine the local growers purchase of fertilizers for better cost. Depending on the progress of the project, DHA can recommend for the loans required for further investment.
5. Description of Implementing Entity AGRIVINA LTD. Dalat Hasfarm (DHA) is a 100% foreign owned company with more than 10 years of operation in flower industry. DHA aims to ensure a high quality of the products and backs up this aim with production planning and rigorous discipline in treating of flowers. Together with proper investments in hi-tech facilities, cultivation technology and workers consciousness, DHA is able to ensure that optimal products are sent to consumers.
With 3 farms at different altitudes ranging from 1000 to 1500 meters above sea level, DHA is able to grow year round a wide assortment of cut-flowers, cut-foliage and young plants. Established in 1994, DHA has been constantly expanding its production area. At present total greenhouse area amounts to 39 hectares.
72% of DHAs flowers are exported to Japan, Australia, Singapore, Indonesia, Taiwan, and Cambodia. The other 28% finds its way to the domestic market of Vietnam for which a wide and stable distribution network has been established throughout the country.
Key data: Company name: AGRIVINA LTD. Trade name: Dalat Hasfarm Investment license No. 365B/GP, a 100% Foreign Joint Venture Company. Total number of employees: 700 6. The long term vision of the project DHA will expand in size and activities. More staff will be recruited and staff with specialized functions will be assigned full time to work on the relationship with the farmers. The mission is to ensure the good corporations of all members then the smooth flow in implementing the objectives and deliverables of the project and to develop with the development of DHA.
PEST analysis PROJECT AGREEMENT PAPER Dalat Hasfarm extension services GCF archive number: Archive number HQM/MBM Date Agenda item no. Agenda number
Political The political environment is ideal and supports the implementation of the project. GOV in general and Lam Dong in particular have recognised the potential of the industry and have been directing more efforts and budget to develop the sector.
At the same time, political environment is getting more open, allowing association and encouraging private-to- private initiatives.
Production areas/regions are planned to increase high specialization
The project also take cares of some ecological and environment problems by setting criteria for membership, e.g. only those farmers who have legislative rights on lands and cultivation can access the project.
Besides, other activities to brand the flowers from Dalat one of which is flower festival, are organized and therefore together with the quality upgrade that the project is providing would bring the flower industry to higher class.
Local government is also looking into building up infrastructure for agri-products such as high-tech warehouses, auction centers or trade platforms. Economic Vietnam economy is growing at high speed, which increases the demand for flowers. Shopping at supermarkets or department stores will become increasingly trendy. The increased use of advanced sales methods such as B2B or e-commerce will mean that only branded flowers can enter.
The cut flower sector is also booming with more regions cultivating flowers. This means harsher competitiveness but also opportunities for growers who invest in quality.
In Dalat, cut flower industry has been boosted to be one of the leading industries for economy direction. Besides, chance is open widely to expand the overseas market apart from the traditional markets
Seasonal fluctuations in sales may be an issue that can be overcome by better production planning. Additionally, when the flowers are to the export standard, sales can be made to countries whose flower production or special event sales are on the opposite harvest time period.
Upon WTO access, there will be higher import flow of flowers from countries such as China that faces import duty barrier. However, local growers still have strength on the location, on the distance and on the market information. Social The flower industry is experiencing a rapid change in life style thanking to the economic growth. The wish to decorate home and offices with fresh flowers continues to develop. Practice of offering flowers on special occasions are maintained with even more western events as well as more local festivals being added.
There is a need to improve awareness of quality to critical consumers. Consumers tend not to be loyal to any group of products and therefore wider assortment is needed and is already one of the projects deliverables.
Other aspects from social point of view such as demographics and law changes do not bring negative influence on the implementation of the project since the changes are either not significant or immediate. Technological Adequate technology is needed to control quality and therefore meet customers requirements. However, new cultivation techniques, new facilities as well as new breeds are brought in on a very slow speed.
The local authority is encouraging research into new breeds or breeding. However, it is required to have inputs from all different relevant bodies to get new technologies transferred to growers.
Within the scope of this project, existing technologies that are suitable and mature enough to the conditions of local growers can be applied. Additionally, the foreign expertise in the project will ensure a quicker spread of technologies than what normally can be expected.
7. Projects adherence to specific criteria
There are eight criteria that guide selection of projects under BSPS 3.3. Each criterion is rated on a scale from 1-5, 5 being the highest degree of fulfillment.
Criteria 1: Private-to-private activities All activities are concerned to directly involved parties which are DHA and the member local growers. Some government bodies may take part in under roles of advisors only. Degree of fulfilling the criterion: 5
Criteria 2: The immediate benefit goes to groups of enterprises PROJECT AGREEMENT PAPER Dalat Hasfarm extension services GCF archive number: Archive number HQM/MBM Date Agenda item no. Agenda number
Both DHA and the group of local farmers (about 15-20) are the beneficiaries of the project. DHA will increase capability in supply and product range and local growers will obtain training, new knowledge, skills about growing leading to stable output and higher income. The expansion of the project member will be done gradually. Degree of fulfilling the criterion: 5
Criteria 3: Cost-sharing (demand-driven) and cost-effective DHA would incur the cost of administration, logistics, processing, sales and marketing while the growers incur all the cost relating to production. Local growers will also be encouraged to partake in the investments for the processing facility to show commitment to the project. This contribution can be considered as loan and be depreciated during the life of the project. GCFs contribution to the project is .. % and the cost-sharing is thus very reasonable. Degree of fulfilling the criterion: 5
Criteria 4: Innovative Differentiating from individual supply, flowers distributed from a group of growers will bring a new trend with more advantages not only to the growers who want to avoid unnecessary competition but also to customers who want quality and stable supply.
The project will strengthen functions and essential facilities (especially for post harvest treatment) which is the current shortcoming of the local growers. For DHA, the project requires more and dedicated personnel. For the growers, they would need to have additional workers to ensure proper perception of new techniques. Degree of fulfilling the criterion: 4
Criteria 5: Activities should be market-strengthening, not market-controlling By selecting farmers, the project does not aim to control the market, but to deepen the commercial relationship between DHA and local farmers. The relationship will help spread the prestige of the DHA quality within the domestic market and then to access export market based.
All parties concerned are updated with market supply and demand information which is then useful for planning. The pricing structure will be differentiated for a higher quality level and the project will thus also help establish a clearer market for various qualities of products. Degree of fulfilling the criterion: 5
Criteria 6: Capacity building of national and target province business services The services undertaken by DHA in the long term contract are a typical example of embedded services, i.e. services that are included in a commercial relationship that has a broader scope than the specific service. The main issue for both parties is the buying and selling of flowers. The services delivered by DHA are to ensure that DHA can buy flowers of good quality. Nevertheless, the service is new and necessary to the industry, rooted in a strictly commercial relationship and the capacity of DHA to deliver this will be strengthened through the project. Degree of fulfilling the criterion: 4
Criteria 7: Financial sustainability Both DHA and the local growers are expected to earn a profit by selling the flowers grown during the project. However, this profit will be small in this pilot phase as DHA staff needs to learn how to timely and cost-effectively deliver the extension services embedded in the long term contract. However, the capacity of both DHA to deliver these services will be strengthened by the training and practice of DHA employees undertaking during the project. This will bring down the costs in the subsequent phase.
PROJECT AGREEMENT PAPER Dalat Hasfarm extension services GCF archive number: Archive number HQM/MBM Date Agenda item no. Agenda number
On the other hand, the local growers will receive training and advice from DHA during the project and their needs for these services will thus be less in the subsequent phase. Also this will bring down transaction costs and allow for a larger and sufficient profit margin in the future. Furthermore, the project is expected to demonstrate the benefits of undertaking the strict quality control and future transactions should thus not need the underwriting of risk of doing new things that GCF to some extent also is providing in this project.
It is therefore expected that both parties will continue the relationship on strictly commercial terms after the GCF support. Degree of fulfilling the criterion: 5
Criteria 8: Consideration of cross-cutting issues The project provides more work opportunities to local people, especially females, who want a regular and stable income. The environmental aspects of producing flowers will receive more attention due to the strict quality requirements of DHA. Degree of fulfilling the criterion: 4
The result of this project will be monitored by the projects achievements on the following indicators.
Indicators Baseline (situation today) Target to be achieved by (date) Output BSPS 3.3 Immediate objective BSPS 3.3 No. of local farmers joining the project 0 20 (Nov-06) No. of farmers able to apply post harvest technology (PHT) 0 15 (Apr-07) % of flowers of grade A (based on DHA standard) around 20% 65-70% (Jul-07) % of products that can be exported 0% 45-50% (Oct-08) Sustainable delivery of new and relevant business support services
Improved access of businesses to relevant and sustainable support services
8. Risk Factors
Loose management on the quality lead to negative influence on DHA own products. Therefore, DHA will closely monitor the growing and handling of flowers by local farmers.
Disloyalty from the farmers or misunderstanding the project objectives can cause unbalanced supply flow from the project. This can be limited by management and also by some commitment from all parties in term of investment.
The Vietnamese market could be slow to accept and pay for - higher value flowers. DHA will PROJECT AGREEMENT PAPER Dalat Hasfarm extension services GCF archive number: Archive number HQM/MBM Date Agenda item no. Agenda number
consequently
Export market set high entry requirements. Therefore, markets with low entry barriers are targeted.
9. Conclusion and recommendation Dalat Hasfarm is the leading producer and exporter of flowers from Vietnams leading flower growing province, Lam Dong. Local flower grower find it difficult to export their flowers due to low quality and inexperience with foreign market requirements. The proposed project will enable Dalat Hasfarm to extend its knowledge to local farmers in return for a right to buy the farmers flowers.
The project is an innovative way to strengthen the commercial interactions between Dalat Hasfarm and local flower farmers and is as such contributing to the growth of a commercial market for agricultural extension services. It is therefore recommended that
GCF support Dalat Hasfarm for a project to provide farming and export marketing services with VND 1,221,568,135
Provided that
Dalat Hasfarm contributes at least VND 1,740,751,372 to the project.