University of the Philippines Los Baos

Department of Agribusiness Management and Entrepreneurship (DAME)

College of Economics and Management (CEM)

Keys to Inclusion of Small-Scale

Producers in Dynamic Potato
Market in Thailand

A case study submitted in partial fulfillment of the requirements in

ABME 207 under Prof. LOIDA E. MOJICA

Submitted By:
Charmyne de Vera Sanglay
MM ABME

April 13, 2016

Background

Potatoes were introduced as a cash crop to Thailand about forty years ago.
Two types of potatoes are cultivated: processing variety (Atlantic) and table
variety (Spunta), accounting for 90 per cent and 10 per cent of total
production respectively. The production of both types is mainly concentrated
in specific locations in northern Thailand. Potato growers in Chiang Maia, the
first location of lowland potato production, have been cultivating table
potatoes since the 1960s. They found the crop to be most profitable thus
adopted it for their cropping system.
Potato is one of the few crops in the country for which the government has
implemented a supply control policy. The Potato Growers Cooperative was
formed to determine the annual amount of tuber seed imports and to decide
on seed quota for its members. In the case of the processing type potato, the
government allows firms to import tuber seed as required for processing.
Contract farming in the potato sector is one successful case for the viable
agricultural production by small and resource-poor farmers. The integration
of farm production with processing firms provided farmers with market
access and reduced their priced risks.
Demand for potato has increased dramatically due to the popularity of both
potato chips and tourism in Thailand. The processing potato production area
has expanded over the past ten years due to the rapid increase in demand
for French fries and snack chips. Processing-type potatoes accounted for 90%
of total production. While contract system has spread to new areas some are
leaving the contract. However, these growers remain in the supply chain.
The departure from contract farming is the main innovation in this case and
the second innovation pertains to the management of womens group that
processes the defective produce.
Cultivation
Due to soil topography requirements potato is found both in the lowland,
uplands, and in the highlands of northern and northeastern provinces. In the
lowlands, most farmers grow potato after rice. Spunta (table type) and/or
Atlantic (processing) are two varieties planted starting November-December
and harvest in February-March.
Farmers in San Sai on the other hand grow potato year after year. This area is
well irrigated thus appear to be the most suitable for farming.
Highland potato yields came from Tak province and districts in Chiang Mai
and the northeastern provinces. Growers in the up/high lands produce two
potato crops on the same plots. Production for the early cool season is
1 Majority of the content of the Background is directly lifted from the original case.

contracted with processing firms. Growers take the risks for second
production (rainy season) though conditions are not favorable. As a result,
lower yield and poor quality of potato harvest thus no firm signed any
contract during rainy season.

Potato Growers
San Sai district was the original site for potato cultivation and for the past 40
years they were among those who enjoyed good irrigated land however the
average farm size particularly in Chiang Mai is smaller than production area
in Tak. The contract growers in Chiang Mai refer to growers in Mae Tang
District while the non-contract growers were sample growers in the original
site (San Sai District). As for Tak, most of non-contract growers were
contracted for the cool season cropping.
Demand for Potato

Thai people consume potato in 2 categories, i.e. snacks (chip, crackers

etc.) and table potato cooked in soup and curry.
Life style of the Thai has changed rapidly in the past 10-15 years due
to:
o Expansion of modern retail stores and shopping habits
o Widespread western fast food chains in Thailand
Domestic demand for potato has increased due to the popularity of
potato chips and western food consumption over the past decade.
o Value of crisp chips consumption amounted to 308 billion baht in
2005 and it was expected to increase at least 10% in 2007.
Demand for potato in Thailand is twice the domestic production.
25-50% of potatoes have been imported from various countries each
year.

Source: Office of Agricultural Economics, 2006

Department of Customs, Thailand: BAAC
Potato Production

Potato planted area scatters in 8 provinces in the northern and

northeastern regions.
There were 11,412 potato growers in 2005
About 95% of planted land is in the North and53 % in Chiang Mai
province.
Domestic production has increased five times within 15 years since
1990 due to the planted area expansion (not yield increase).
Yet, in the past 3 years planted area has become stagnant because of
limited availability of suitable land; although cultivation has been
expanded to northeastern provinces.
Expansion of production in the past 15 years was due
to;

Rapid rise in domestic demand

Market certainty and large absorption of processing industry encourage
farmers to enter contract with business firms.
Favorable climatic condition in the northern region

Market Shares in the Potato Snacks Business

According to the USDA (2004), there were only four large processing firms
holding almost 99 per cent of the total share of the potato chip market in
Thailand in 2002. PepsiCo (Frito-Lay) and Berli Jucker were the largest
processing firms, with 85 per cent of the total market share and these two
companies absorbed most of the processing potatoes in the country. FritoLay brand name claimed to have achieved over 70 per cent market share of
chips in the Thai market (interview with firms, 2006).

Government Policy on Contract Farming

Thailands contract practices were advanced relative to other countries. It
was first implemented under the sixth National Economic and Social
Development Plan (1987-91). Policy to promote export and import substitute,
to assist agro-industrial plants to farmers and to support farmers in
production planning were some of the guidelines. In order to augment the
guidelines, Thai government develop the Four Sector Cooperation Plan to
Develop Agriculture and Agro-industry. In May 2006, the MOAC announced to
use contract farming as a strategy for agricultural structuring. Five
commodities were to be contracted out by processing firms rather than
produced under non-contract system. One of the successful contract farming
case is the potato industry.
Wholesalers and Retailers and Marketing Channel
The main planting area of table potatoes is in Chiang Mai Province, which
accounts for almost 90 per cent of total production. All the purchased Spunta
were stocked in cold storage. The assemblers supplied to Bangkok
wholesalers only when they received orders. Local assemblers were not keen
to learn the sizes of demand by final buyers. Figure below illustrates
marketing distribution channels indicating that Bangkok wholesalers absorb
80 per cent of table potatoes, which subsequently go to hotels/restaurants
and retailers. It was revealed by the assemblers that in spite of the supply
control, prices of table potatoes fluctuated from year to year depending on
movements in tourism.

80
%

Marketing channel of table potato

Processing of Potato2
Contract system has been in the farmers of San Sai area. Just like any other
contract crops, during the adoption stage was the stage of lacked of
sufficient technical know-how on potato cultivation and production inputs. In
1987, when processing potatoes were first introduced into the San Sai area,
farmers signed contracts with the firms. However, as observed by
Wiboonpongse and Sriboonchitta (2005), marketing practices of potato
growers in this district have gradually changed. Presently, 95 per cent of
potato growers in this district no longer sign contracts with the processing
firms. They have no contract selling, but rather, sell their potatoes to brokers
at prevailing market prices. Furthermore, as the import of seeds takes long
procedure and is expensive, an attempt to produce tuber seed domestically
has been carried out by Chiang Mai University in collaboration with The Royal
Project Foundation and a processing firm.
Case Study 1. The response of small growers to dynamic market
environment
Marketing practices of potato growers in San Sai had gradually changed
(Wiboonponse, 2005). Most growers either bought seeds from the firms via
brokers or used their own seeds. They no longer had contract selling but
rather sold their potato to brokers at prevailing market prices.
Innovation

Innovation in this case is technical innovation example seed storage

which enables small growers to have production and marketing
alternatives. Bauman (2000) also indicated that the competition
environment and volatility of Thai markets were not conducive to
contract system. as for processing potatoes, the contract system has
been expanding in most areas except in this area. It implies that all
potato growers face the same environment at both macro and meso
levels.

Another innovation was determined at the micro level wherein, the

growers who have expertise in potato production adopted a new
contract crop e.i baby corn, in their rice potato system.

Brokers play a significant role in the supply chain of processing

potatoes. Generally, most of the growers who produced processing
potatoes were contractees who supplied raw materials to processing

2Majority of the content of Processing Potato is directly lifted from the original case.

food industries via brokers or directly to the firm. Eighty-nine per cent
of the total production from San Sai District is graded as good quality
produce (large and medium sizes) and is delivered to processing firms.
Oversized potatoes are sold in the fresh food market for good prices
and the under-sized ones are sold for cattle feed (1-2 baht/kg) or to the
local fresh market at lower prices to become valuable domestic seed
(12 baht/kg). Others of an unacceptable size (smaller than 4.5cm) are
kept in cold storage for seed.

Growing early season crop tend to have lower prices. Growers

therefore, decided to have free choice to supply to any broker, thus
enjoyed the opportunity of being non-contractual as long as price
difference is above 0.10baht/kg.

Selling outside the contract, growers can wait for desirable prices.

Case 2: Small womens potato processing group

Most of the defective produce from inappropriate harvesting was once sold
as feed for cattle. Over twenty years ago, some of the defective table
potatoes (Spunta variety) were transformed into dry potato slices called
munkalya. The fried-dried potato chip made an acceptable snack and gained
popularity with tourists who brought it back home as a souvenir from Chiang
Mai, the main potato planting area. Currently, the defective Spunta potato is
processed into munkalya and. French fries. to serve local markets. In the
1990s, large processing firms were set up to produce potato chips at
Lamphun Industrial Estate, only 30km away from growing areas in the San
Sai District of Chiang Mai Province. This stimulated a further increase in
demand for raw potatoes in this province. Since nearly all the good
processing potatoes are purchased by the food processing industries, the
remaining 10 per cent are distributed to fresh food markets and kept for
seed. Some of the defective produce is processed into potato chips by some
potato grower housewives group. Development of the so called Community
Enterprise. which has become a specific name for registered groups under
public policy in 2005 were launched nationwide.
Success factors of CMK in a dynamic market

Keys to the success of the group to be included in the potato supply

chain were the ability in management, product development and
marketing management as well as the support from the government
agencies;

Apart from government support in general, the success of the group

was attributed to the leaders ability to achieve better access to
support and by personal performance in management and marketing;
CMK took the opportunity to promote and expand its market by joining
the meeting, fairs and exhibition organized by the government
agencies in Bangkok and other provinces;
The group realized its market potentials and observed and learned
from other advanced groups. products;
The group chose the right market segments. Niche marketing is an
appropriate concept as long as the group can catch up with trends
influenced by large firms;
The group realized that the modern supply chain does not have much
room for small-scaled producers due to the economy of scale in
marketing activities, especially placing and advertising. Therefore, they
focused on the lower level market, which could absorb most of its
products;
Apart from the price competition with the large firms in the market, the
group realized that the taste of potato chips is an important factor
influencing the consumers. decision to buy a product. Therefore, the
group purchased powdered flavoring from the same source as the large
firms to produce similar products in order to keep up with consumer
preferences.

Inclusion of the CMK in market dynamic3

The CMK is a farmers housewives group which was set up to be an
alternative for farm families to increase income from the substandard
potatoes as well as to be a small enterprise participating in the potato supply
chain.

Despite 90% of market share for potato chip in Thailand held by 2

large firms with grew 25-30% annually, the CMK could increase its sale
volume by 70% to 1,080,000 baht in the recent years.
Even originally the CMK had local and lower markets as target groups
it could get involved in the market dynamic by supplying products to
the same target groups as the large firms.
Financial gain received by the members from selling
damaged/defective and unacceptable potatoes (both Atlantic and
Spunta varieties) at 2-5 baht/ kg.
The incremental value of 600,000 baht to the otherwise price of
defective potato as animal feed, means a significant contribution of
the CMK to growers both members and non-members income.

3 (Wiboonpongse, 2006)

The impact of innovation on the supply chain in San Sai 4

Innovation in this study is about management wherein technical know-how
on local seed germination and adoption of cold storage was considered.
Leaving from contract system as one of the innovations also in San Sai were
because of the following reasons:
Price incentive
High cost of imported seeds
Choices of brokers
Environmental advantages
Win-win situation (growers take the production risk in exchange of high
price)
Innovation
Direct market participation
What are the Inclusions of two cases?
1. Potato Growers Cooperative is classified as chain-ownership thus they
manage the first part of supply chain (input of seeds)
2. For the processing in general, the supply chain works through a
contract system. Forward integration exists in the form of technical
assistance and input supplies and value-added for defective potato in
the case of CMK.
3. Chain-segment is another inclusion in the case of processing potato
growers in San Sai as well as off-season potato growers in Tak wherein
potato market is not just for growers and it can be segmented and sold
as fresh and processed.
Philippine Potato Industry5
1. traditionally grown in the highlands, (1,200m ASL) where temperature
is cool
2. matures in 70-120 days from seed tuber planting to harvesting
3. its short growing period allows its integration with established cropping
systems
4. world production in 2005 was 320,977 million metric tons (MMT); top
producers were China (73.46 MMT), India (23.63 MMT), and Russia
(37.28 MMT) (FAO)
4 Innovation and inclusion are lifted originally from the case
5 Philippine Potato Industry Status, FAO 2007

5. production was 69,461 mt in 2006, down by 1% than the output of the

previous year at 70,160 mt
6. area harvested in 2006 was 5,451 ha, down by 0.8% from 5,497 ha in
2005
7. yield per hectare was 12.74 mt in 2006, 0.2% higher than the 12.76 mt
posted in 2005
8. 50 and 35 t/ha-yield in the highlands and lowlands, respectively can be
attained if quality seeds and other necessary inputs are provided
9. major producers were the Cordillera Administrative region (CAR) (75%),
Davao (14%), and
Northern Mindanao (10%)
Varieties
1. for fresh consumption or chips, Granola is commonly grown in high and
mid-elevations, while Cosima and Berolina are grown in the lowlands
2. Kennebec and Atlantic are processing varieties adapted to local
conditions
Imports
1. in 2006, the Philippines imported 61,699 mt of a wide range of
processed potato products (preserved, starch, flour and meal,
uncooked/cooked, fresh/chilled, ready-to eat, flakes, seed potatoes)
value at US$30.5M; up by 6% in tonnage and by 10% in value than
the previous year
2. preserved potatoes comprised 51% of total imports valued at US$16M;
main supplier was the USA, which provided 70% (22,288 mt) of the
total requirement worth US$12M
3. potato starch comprised 15% of all imports worth US$3.4M; Germany
supplies 50% of the requirements worth US$2M
Exports
1. world's top exporters in 2005 were the Netherlands (US$381.97),
France (US$331.9M), and Canada (US$109.97M) (FAO)
2. in 2006, the Philippines exported 73 mt of three major product groups
value at US$210,318; a dramatic leap by 74% in tonnage and by 44%
in export earnings than the previous year

3. ready-to-eat potatoes comprised 86% of total exports valued at

US$204,730; main market was the USA, which absorbed 28% (17 mt)
of total exports worth US$63,724
4. potato flour and meal followed with 10 mt exported worth US$5,393;
Myanmar absorbed 95% of all exports posting earnings of US$5,144
5. potato starch comprised <1% of exports
Marketing Practices
Marketing involves the contract buyers, financier-wholesalers, assemblerwholesalers and wholesaler-retailers
Potato chain6 (Wustman, Franke, Haverkort, & Koesveld, 2010)
A chain for potato chips manufacturing has four major stakeholders:
producers
transporters
retailers
processors.
Potato production is currently conducted by small farmers on small, scattered
fields in highland areas. Large scale operations to produce substantial
volume of high quality raw material for production is a new approach in the
Philippines. Outstanding farmers or companies interested in and sufficiently
capable to organize and manage large scale potato production have not yet
been identified in Mindanao. Transport is carried out by horses (highland
fields to villages), trucks (village to cities) and ships (Mindanao to Manila).
Retailers sell fresh potatoes wrapped in perforated plastic; package sizes
vary from a few hundred grams up to about half kilogram. The fresh potato
chain has been running for a long time.
Processors of potatoes into chips are well established: Liwayway and
Universal Robina Corporation (URC) both operate potato processing units in
Manila. About 20,000 tons of potatoes are annually processed into chips.
Both companies import 100 % raw material from abroad but have a definite
interest in procuring raw material from production areas within the
Philippines. The potato chips chain has been running for about ten years and
relies for 100% on imported raw material.
Processing companies

6 (Wustman et al., 2010)

URC is only interested in purchasing potato raw material from Mindanao once
a production system has been set established. So URCs interest is in
processing and not in production.
A second visit to Liwayway showed a similar attitude. Liwayway is interested
in purchasing Mindanao produced potatoes and formulated some conditions:
1. Problem free fields
2. 1:4 crop rotation: potatoes in a rotation with maize and
barley
3. Proper production and handling management
4. Well managed logistics during the Cagayan de Oro
(Mindanao) Manila shipment.
Liwayway puts emphasis on the organisation of production and improvement
of management. Their suggestion is to improve on knowledge and
management by working in two phases.
1. Phase 1 is to concentrate on the fresh (table) potato market
through the introduction of new potato varieties. Upscaling of
fresh potato production and handling will improve knowledge and
management skills.
2. Raw material production for potato chips manufacturing can be
started in Phase 2. Liwayway expects Phase 1 to take some years
before Phase 2 can be started.
Similar to Thailand, contract growing in potato industry also exists in the
Philippines. In the study conducted by (Batt, 2001) Livelihood Enhancement
for Agricultural Development, Inc. (LEAD) formed a contract growing scheme
between Universal Robina Corporation (URC) and two cooperatives in
Bukidnon province, Mindanao, the most southern island of the Philippines.
The company (URC) needs monthly regular deliveries of white potatoes for
the production of their "Jack and Jill" brand of potato chips. Competing
mainly with imported brands of potato snacks, the company needs a more
cost competitive source of raw potatoes outside of the traditional source
from Mountain Province, Luzon, in the northern part of the Philippines. Aside
from widely fluctuating prices for Mountain Province potatoes due to the
fresh market demands, URC was looking also for cleaner sources with less
disease damages to produce a quality product comparable and competitive
to imported potato chips. 7
Constraints and Challenges

7 (Batt, 2001)

1. Absence of a local potato seed industry

2. Lack of readiness of farmers participants
3. Coordination by the cooperative of production schedules among farmer
participants

Concluding remarks
Contract farming can be successfully used to link small-scale producers to
modern markets where capital, technology and market access constitute key
limiting factors. But contract farming can be an intermediate step. In
northern Thailand, innovation by small-scale potato farmers in terms of
seed saving and early sowing to exploit a gap in the market enabled them
to move out of a contract farming system. Their technical innovation allowed
them to reconnect with more traditional network of brokers, but on their own
terms.
In the Philippines, for example, fast-food chains had been importing frozen
french fries. Although that particular variety of potato could be grown in the
Philippines, the Government had imposed import restrictions on seed
potatoes, resulting in the unavailability of the required variety. Approaches to
the Government by the companies eventually resulted in the ban being lifted
and this permitted the establishment of two contract farming ventures to
supply the rapidly growing fast-food industry. Thus a simple policy reform
ultimately benefited the sponsors and a large number of small-scale farmers.
To be imperative for any marketing and small-scale enterprise to be
successful; particularly in countries like the Philippines, we must continue to
look at cooperatives as part of the civil society rather than members of the
business sector.
Potato is an important crop in feeding and improving the food security of
many Asian countries in the future. Potato means many things to many
people; in some cases, potato may mean the difference between subsistence
and achieving better income; in others, potato may mean the difference
between survival and starvation. In all instances, potatos potential to help
improve food security and eradicate poverty will be important. In Asia, faster
economic growth would lead to less dependency on cereals and greater
demand for potatoes in fresh and in processed forms. Potato can provide the
basic needs: food, employment/income. Potato farmers in Asian countries
can benefit from potato processing, but most of them are with small
holdings, on marginal lands, and at the lower end of the economic scale.
Hence technology and agricultural policy are important in providing

assistance to the potato farmers to increase their benefits in income,

employment and food security.
Potato growers in the Philippines may opt to apply the innovation made by
Thailand in terms of post-harvest in the form of CMK group. Rejects instead
treated as loss will be transformed into value-added products. Furthermore,
dependence on the importation of seeds could be lessen if growers in the
Philippines may look into alternative by producing our own seed and look for
the assistance of cooperatives or firms that supply the inputs. For both,
government policy plays an important role in developing new technology.
BIBLIOGRAPHY
(Berdegu & Binabe, n.d.; Berdegu, n.d.; Markets, n.d.; potato imports
article.pdf, n.d.; Wiboonpongse, 2006; Wustman et al., 2010; Wustman,
n.d.)
Batt, P. J. (2001). Variety-The Key Driver of Demand for Seed Potatoes in the
Philippines.
Berdegu, J. A. (n.d.). Innovative practice in integrating small farmers into
dynamic supply chains: the case of CMK housewives group.
Berdegu, J. A., & Binabe, E. (n.d.). Innovative practice in connecting smallscale producers with dynamic markets.
Markets, R. (n.d.). Innovative Practice.
potato imports article.pdf. (n.d.).
Wiboonpongse, A. et. al. (2006). Keys to Inclusion of Small-scale Producers in
the Dynamic Potato Market in Thailand by.
Wustman. (n.d.). phil potato report.pdf.
Wustman, R., Franke, L., Haverkort, A., & Koesveld, F. Van. (2010). Final
report Philippine Potato Project 2009-2010 Compilation of visit reports,
(3250135709).