# IFPRI, 2009.

**The second symptom is the lack of irrigation facilities** . Approximately 7 percent of crop land is irrigated, the lowest in all of South-East Asia. The dependence of the agriculture sector on rainfall subjects the sector to weather vulnerability. A lack of irrigation facilities also restricts the majority of producers to a single, rain-fed rice crop per year, discouraging diversification of local farming systems. Again, the returns to irrigation are very high: the cost benefit ratio – the additional revenue per hectare from irrigated area divided by the unit cost of irrigation – ranges from 1.5 in the Tonle Sap zone to 1.9 in the Plain zone in 2004, and is above 2 in 2007.

**The third symptom is the weak system of research and extension** . Cambodia has no national research system and only a few focused research institutions. There is a disconnect between the information and technology that is available at the Cambodian Agricultural Research and Development Institute (CARDI), and that used by small holders. Consequently, farmers use unimproved seed for their crops or use weak seed from too many crop generations; too little fertilizer; too small (or occasionally too large) applications of farm chemicals. In addition, the absence of standards (and other trade instruments, such as geographical indication) weakens incentives for diversification.

**The fourth symptom is the poor rural infrastructure** . Because rural farmers are not well informed about market conditions (and prices can vary on a daily basis), Cambodian rice farmers are not in position to negotiate a better farm gate price for their paddy. Efficient and adequate rural infrastructure reduces agriculture production costs and increases farm gate prices by bringing people closer to market and opportunities. Again, access to market and telecommunications has a significant impact on yields. For instance, if the distance to a permanent market is reduced by 1 percent, the wet season paddy yield could be increased by 0.01 percent.

**The fifth symptom is the rudimentary credit system** . Apart from the ACLEDA Bank, the formal banking sector lacks capacity and is reluctant to lend in rural areas given the higher costs of reaching dispersed and small-scale clients, the difficulty of assessing credit risks, and the absence of reliable collateral. For most farmers, a need for cash during an emergency tends to leave them with only one option: to sell their produce stocks at a low price.

**The potential for growth in agriculture is significant** . For instance, it is possible to raise Cambodia’s rice yields to the levels of its neighboring countries, if proper technology (fertilizer, irrigation) and infrastructure (market, road, electricity, telecommunications, education, and health) are provided. Given the high responsiveness to fertilizer, farmers could considerably increase their yield and revenue from more market sales. CDRI (2008a) concluded that if the mid-2008 high prices stay after the next harvest, farmers will see 5080 percent higher net margins, despite the higher input costs they are incurring now.

**To realize this potential, the constraints for agriculture appear to be as follows** :

- _Coordination (and public goods) issues_ . There are four different gaps. First, the lack of research and extension translates into poor information on price, technology, and marketing. Second, the absence of a mechanism to develop and enforce standards both distorts the input market (e.g. quality of fertilizers) and reduces the incentives to move toward higher value chains. Third, coordination among private actors is difficult, even for simple value chains like rice, while it is known that food value chains can be complex (World Bank, 2008c). The fourth gap is the lack of land titles and proper land planning for new areas. Low usage of modern technologies, poor quality of fertilizers, high positive impact of education on yields<sup>18</sup> are all symptoms of these four gaps.

- _Appropriation_ . Like all sectors, agriculture suffers from the difficulty farmers face in getting the returns out of their investment (in turn, this gives them an incentive not to invest). Although they are probably less faced with bribes around regulatory processes (since they are mainly informal activities), they face costs while transporting their output. Finally, coordination issues (previous point) put the farmers in a weak position to get the best information on technology and price. These concerns most likely explain a great part of the credit rationing that agriculture faces (see also para. 36).

- _Rural infrastructure_ . While only electricity seems to be truly a binding constraint across the economy, rural roads and irrigation seem also to constrain agriculture.

- _Risks_ . Another important factor is the risks associated with the weather, which are compounded by the lack of irrigation coverage. Combined with poor land titling and limited capacity for precautionary savings, this contributes to credit rationing and weakens incentives for productivity and innovation. Recently inflation in the prices of inputs has also considerably increased risks, <u>possibly creating the case</u>

> 18 See regression analysis in IFPRI, 2009.

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