Mekong Capital is a Vietnam-based private equity firm and the owner of Loc Troi (previously An Giang Plant Protection, a re-branding revealed exclusively here), Vietnam’s largest distributor and manufacturer of crop protection chemicals.
Chad Ovel, partner at Mekong Capital and deal leader Thu Ha talk about the challenges of agri investing in Vietnam, the role of China in driving demand and the next stage for Loc Troi.
What are the challenges of investing in agri in Vietnam?
Thu Ha: The sector is very fragmented and the issue of land ownership is complicated. Land law in Vietnam states that land belongs to the people with the state acting as the owner’s representative and uniformly managing land. No one can own a significantly large piece of land. That’s why agri enterprises like An Giang Plant Protection in Vietnam need to cooperate with farmers to create the “big field”.
Chad Ovel: There are some exceptions to that – for example the more plantation-orientated crops like eucalyptus or coffee there are some larger scale landowners but for the most part, especially for seasonal crops such as rice, it is dominated by small landowners. For companies, partnership with farmers is the best solution.
How does An Giang Plant Protection (AGPPS) work with farmers?
TH: AGPPS works with more than 1,200 technicians and agri experts to provide inputs and technical solutions to our farmers. At harvesting time the farmers have option to sell their product to the company – they aren’t required to. However more than 95% choose to because we have fostered long-term relationships and there is a high level of trust.
I hear you are making some changes at An Giang?
TH: Yes. Firstly the company is changing its name to Loc Troi Group, to reflect our new corporate vision until 2045. The company is committed to transforming into a world class food and agricultural company, providing safe, quality products to consumers, focused on a sustainable value chain. Loc Troi will also invest heavily in R&D to research high quality seeds and continuously improve planting technologies to increase the value of its products. The company will continue to work closely with farmers, offering them total solutions to ensure high yields and minimize chemical use, (with the goal of) heading towards an organic farming model.
Given the huge agri potential in Vietnam, why are there so few product success stories?
CO: In Vietnam we are missing modern downstream processing techniques. Vietnam is still exporting the majority of products in raw unprocessed form. Take Robusta coffee beans. Vietnam is the second largest coffee exporter in the world but it is not exporting anything beyond green beans. There is no roasting, no packaging and no branding. The same goes for pepper, rubber, rice. The opportunity is there but until we start seeing heavy investment in processing this won’t change.
TH: Another reason is consistency of product quality. Most farmers cultivate in small fields without consistency of seeds and cultivation techniques and because of this it’s hard to ensure consistent product quality.
Is food safety in Vietnam also a brake on this potential?
CO: The concerns about traceability are warranted. There is very little need for the farmer to have any accountability in terms of inputs around the product. At Loc Troi we promote traceability of products and strong enforcement. Large organised companies prefer orderly markets. Informal cross border trade with China on all product categories and unclear origin means a potentially unsafe product and it causes difficulties when pricing.
How is the informal cross border trade with China disruptive?
CO: This year the Chinese government blocked unofficial routes to market – the so called inland model. In emerging markets it is common for governments to change enforcement from month to month and year to year. Laws get enforced for a period of time then they get relaxed, and the private sector responds to this with a route through official channels.
Has this crackdown impacted rice demand?
TH: We saw demand from China (Vietnam’s biggest rice export market) increase in 2014 and begin to fall off in 2015 as the authorities closed down inland routes. But there is no evidence that the trend will change because consumer demand hasn’t changed – it is still going up. And for companies like Loc Troi which prefers stable, orderly markets, it is beneficial when rules are enforced.
What about Vietnam’s fabled privatisation programme. Has that reached the agri sector?
TH: Unfortunately the government’s privatisation programme only extends to the manufacturing sector, not agriculture. So you have to build very strong relationships with farmers and with small holdings. The government is providing support in other ways to boost investment into the sector such as preferential lending policies and tax incentives.
What impact would the proposed Trans Pacific Partnership (a free trade agreement between several Pacific Rim countries) have on the sector?
CO: TPP will help Vietnam export to Japan. The import duties into Japan for rice are currently 700%. With TPP these duties will drop substantially.
TH: Issues around traceability might prevent some agribusiness companies in Vietnam taking advantage of this, given the exacting safety standards in Japan and other countries. However at Loc Troi we are already exporting some rice products, such as rice powder, to Japan despite the very high threshold. This free trade agreement will also help Vietnam to increase the sale of agricultural products into the market of TPP signatory countries.
What will it take to see world renowned food products come out of Vietnam?
CO: People need to take a gamble on building brands. There is only one food product I can think of being produced from Vietnam that has become world famous, and that is Marou chocolate, an award-winning chocolate brand started from Vietnam by two French entrepreneurs. They are succeeding because they have gone the extra step to research and develop a quality product and sell to retailers globally.
TH: Vietnam has been under a central economy for so long that entrepreneurship is low and people think they can’t start a business like this. But the potential is there.