AmCham arrow Publications arrow Topics Archive arrow Topics Archive 2003 arrow Vol.33- No.6 arrow Feature: A Visit to a Farmers' Association
Feature: A Visit to a Farmers' Association PDF Print E-mail

Treatment of the credit cooperatives of the agricultural associations has been one of the most controversial aspects of the government's financial reform program. TOPICS reporters paid a call to one of the grass-roots institutions...

 

Treatment of the credit cooperatives of the agricultural associations has been one of the most controversial aspects of the government's financial reform program. TOPICS reporters paid a call to one of the grass-roots institutions to understand more about these organizations.

by Tim Culpan with Susan Fang


Huang Tian-tsai has been with Shan-hua Township Farmers' Association in Tainan County for 34 years. In that time, he's seen the fortunes of farmers rise with the affluence of Taiwan as a whole. New machinery and new agro-chemicals have been added to the farmers' kit to boost productivity and income. For more than a century, this part of Tainan County has been abundant with such crops as sorghum, corn, and barley and has raised pigs, chickens, and dairy cattle.

Now as secretary of the association, Huang helps oversee operations in an organization at a crossroads. Since Taiwan joined the World Trade Organization (WTO) last year, the agricultural sector has faced stiff competition from cheap imports as well as a reduction in government subsidies. And at the same time as farmers have encountered these increased economic pressures, their financial support network has been swept up in the central government's financial reform program.

Economists regard revamping of the agricultural associations' credit departments as a necessary part of the island's financial renovation. Farmers worry that it will cut off their lifeline. But the farmers and association officials also seem to recognize the need to face up to the financial system's woes. "I agree with the government plan to take control [of the credit departments] and make reforms," Huang said.

When 100,000 protesters marched on the Presidential Building last November, their beef was not so much with the government's desire to make changes, but with the means being adopted to accomplish it. "The problem was that the government said it wanted to take over just the credit departments, and not the agricultural associations as a whole," Huang said. With the farmers' associations currently running at a loss, cutting off profits from the credit departments could slowly starve the whole organization, he maintained.

If the government wishes to take what historically has been their main profit-making activity away from them, say the associations, it should take the unprofitable ones as well. "The government should also take over the marketing and insurance functions, not just leave the agricultural associations to carry the burden without the credit departments," said Huang.

Seeds of Distress


Spending a day with the Shan-hua Farmers' Association reveals that there's more to these organizations than lax lending and high non-performing loan (NPL) ratios. Huang tells their story as if it were the saga of his own family, displaying an optimism about the future as strong as his fondness of the past. Thirty years ago, he recalls, the associations played a crucial role in increasing the living standards in farming communities. "The farming communities formed the backbone of society at that time, so improving farmers' living standards was equivalent to improving the living standards for society as a whole," Huang explains.

Today, a total 291 farmers' associations (as well as 27 fishermen's associations) are operating at the township level. One person from each farming household within the township may sign up to join the relevant organization by paying a modest fee, while additional members of the family -- as well as other township residents not engaged in farming at all -- may enroll as associate members. Of the 1.93 million association members throughout Taiwan, currently 47 percent are associate members, according to Chiu Yung-chung, director-general of the farmers service department at the cabinet-level Council of Agriculture (COA).  

With relatively few exceptions, the associations all run credit departments, which were established to provide member farmers with access to loans, as most commercial banks were reluctant to let farmers use agricultural lands or properties as collateral. The idea was to provide attractive interest rates to depositors and affordable loans to borrowers, and the credit departments would use the profits from the interest spread to fund marketing initiatives, build and maintain local infrastructure, and improve members' welfare.

For years the system appeared to work well. According to statistics compiled by the Central Bank of China, the overall net return of Taiwan's credit departments in 1990 was 26.46%, the return on assets was 1.04%, and NPLs stood at a mere 1.8%. But by the end of 2002, the NPL ratio had jumped to 18.67%, compared with 6.12% for domestic commercial banks. Moreover, 98% of the credit departments by then had a negative net worth.

Since that turn of events is at least in part a management problem, it is important to understand the way the associations are organized. The management of each association is overseen by a Representative Assembly elected every four years, explained Chiu Yung-chung of the COA. The most recent such election was in 2001. According to the Farmers' Association Law, each association chooses a maximum of 62 representatives (Shan-Hua has 61), each one representing 50 farmer-members. Nine directors and three supervisors are then elected from among the representatives, and eventually a general director is elected from among the directors.

One criticism frequently leveled at the associations is the absence of impartial monitors. In the past that situation has made it easy for politicians and others to interfere in the credit department operations, leading to crony lending -- and in the worst-case scenario, outright embezzlement of funds. Vice Finance Minister Susan Chang has been quoted by local media as saying the deterioration of the credit departments was due to "a lack of internal controls," especially with regard to "interference from local political factions whose members served as leaders of these associations."

At the credit department level, another problem has been that evaluation of loan applications is conducted by personnel with limited professional expertise. That in turn led to disproportionately large amounts of borrowing going to the non-farmer associate members. "The deterioration of some grassroots financing institutions was caused by lax supervision," says Liu Ching-yung, a professor of agricultural extension at National Taiwan University. Citing statistics compiled by the Joint Credit Information Center, Liu said that at present an amount worth NT$29.3 billion (US$8.62 billion) -- about half of all outstanding loans at farmers' credit departments -- are non-agricultural loans. As of end of 2002, the statistics show, small-loan borrowers (under NT$1 million each) made up 51.75% of the total number of borrowers, and the NPL ratio in that range was only 5.7%. In contrast, big borrowers (over NT$10 million apiece) made up only 1.89% of the total but had an NPL ratio of 45.9%. Thus the chief source of the NPL problem was believed to be non-agricultural loans handed out to non-farmer associate members.

At the Shan-hua Association, secretary Huang, expansive on many other subjects, turned reticent when the conversation shifted to finances. He said his credit department makes a small profit, but provided few details and declined to make available an income statement. Among the numbers he was willing to release was that for savings deposits at the association's three branches -- a total of NT$4.5 billion (US$129.3 million) -- with interest rates to depositors ranging from 0.7% per annum for current accounts to 1.5% for term deposits. On the other side of the ledger, he said, total loans at the credit department equal NT$1.7 billion (US$48.9 million), with an interest rate to borrowers of 5% to 6%. The margin is not great.

Huang notes that the amount of lending was much bigger in the past -- and not only because of the recent economic downturn. "Borrowers are getting fewer these days," he says. "Free competition means there are many alternative choices. In addition to us, farmers can also go to other banks for loans."

The shrinking loan portfolio is not the only danger the association faces. NPLs at the Shan-hua Association amount to 13 percent -- better than the national average for farmers' associations but still worrisomely high. Not only does the credit department not receive current income from those loans, but it risks losing the principal it lent out in the first place. As of the end of 2002, its NPL reserve was NT$40 million (US$1.2 million), but Huang would not say whether he expects that to increase.

The NPL problem is not an easy one. Asked how he plans to rein in the NPLs, Huang was vague. "There's no perfect solution," he maintains. "Before, when the economy was better, the [scrutiny of loan applications] was more lax. Now, tightening the assessment process is the only way to control the problem." But more rigorous assessment carries the downside of decreasing the size of the loan portfolio and thus trimming potential revenue. In the end, though, making a huge profit has not been a major goal of the credit departments anyway, since they have not been under pressure from shareholders to perform. More important has been their service to the community.

Farming's Future


Though the future for agriculture in Taiwan may look bleak to many observers, Huang doesn't see it that way. "Farming doesn't necessarily have to die out, but farmers need to become more sophisticated" and adopt more advanced technology, he says. Among the challenges is the small size of most Taiwanese farms, which makes for inefficient operations without any economies of scale. On average, each farm-holding comes to less than one hectare. The challenge has been present for many years, but Taiwan's WTO commitments have made it much harder to hide the problem behind government subsidies and artificially high prices.

Exacerbating the situation is the imbalance between supply and demand for farm products. Despite the small size of the plots, improved yields have led to more output than the market can absorb. To reduce the surplus supply and improve prices, the COA since the late 1990s has paid some farmers not to farm. According to Huang, a rice farmer, can receive NT$80,000 (about US$2,300) per hectare per year to keep the land fallow, for example, compared to the average of NT$100,000 (US$2,874) per hectare a farmer could make in a year by sowing, tending, and harvesting the crop. It can be a lucrative proposition for farmers.

"I don't know if that payment will continue, but a lot of farmers take up the offer," Huang said. He explains further that the subsidy is not offered to everyone. "The government used to buy crops from farmers at a set price, but now under WTO rules, they can't do that anymore," he said. The current deal is available only to those who previously had set-price contracts. Since WTO entry, market prices have declined, which would have increased the burden to the government under the old system, had it purchased grain at fixed prices for resale at a loss. Under the new subsidy approach, Huang says, "the government also gets a good deal because it incurs less of a loss by paying farmers not to farm than by paying a guaranteed price."

In the long term, though, it is clear that reliance on financial assistance from the government is not the way to make the industry healthier. What's needed, says Huang, is to change the structure of the farming sector -- encouraging the consolidation of holdings and the development of an increased role for agribusiness companies rather than individual tillers.

To keep relevant in today's tough times, says Huang, the agricultural associations are reinventing themselves and broadening their services. "Today, the associations are still very important, but in a different way. They provide a more sophisticated service now," says Huang. While the upgrading of farming techniques was the focus 30 years ago when water buffalo pulled plows through the fields, today's agricultural associations need to be more business-minded. "The approach now is more about helping farming enterprises to compete," he says. "We're more focused on professional specialization, for example by concentrating on the products that Tainan has become famous for," such as pomelos and mangos.

Taiwan's third largest farmers' organization in number of members, the Shan-hua association is widely respected for the level of services it provides. In recent years it has sought to diversify its activities, adding business ventures to the traditional revenue base of financial services. At one association-owned factory, a recent college graduate in computer science was packing ice cream into boxes for distribution. Despite having been hired to join the association's IT department, he is on packing duty as part of the company's job-rotation policy, aimed at ensuring that staff have an understanding of all aspects of the business.

Elsewhere, the association operates huge silos -- and processes the grain stored there for sale as animal feed. That operation now takes up one-third of the total staff and the proportion is still growing.

Despite the arguments that the association needs the income from its credit department in order to survive, the new ventures appear to be thriving. Standing next to the credit department teller's counter at one branch is a row of freezers displaying an impressive array of different types of ice cream, all processed and packed on site. Among other products, the plant makes alcohol-based popsicles under contract for Tai-Salt, the Chiayi distillery of the Taiwan Tobacco & Liquor Co., and others around the island. "Don't underestimate this factory," says a sales assistant. "We are the cash cow of the Shan-hua Farmer's Association." That boast, though perhaps still a bit of an exaggeration, reflects how the organization now views its future.


[Box] Seeking a Solution


Although the amount of non-performing loans (NPLs) held by the farmers' and fishermen's associations has constituted but a relatively small portion of the bad debt in the national banking system, the degree of government willingness to face the issue has been considered a key test of its commitment to financial reform as a whole. As in many other countries, the political influence of the farming sector is out of proportion to its population or share of the economy.

 The governmental commitment at first seemed unassailable. Last year it took over the already-insolvent credit departments at 36 associations, merging them into large state-owned banks, and placed tight curbs on the lending activities of the remaining troubled institutions. But when the farmers and fishermen prepared a massive protest march in Taipei last November, the government's resolve appeared to waiver. It suspended plans to reorganize the credit departments to allow time for more public explanation and communication.

Now the government is pursuing a three-pronged program to deal with the issue:
1. Enacting an Agricultural Finance Law, which would establish a national agricultural bank to provide agricultural financing and to supervise the farmers' association credit departments. The Executive Yuan completed the draft in January, and the bill is now before the legislature.

2. Transferring responsibility for the credit departments from the Ministry of Finance (MOF) to the Council of Agriculture (COA) in order to place agricultural development and finance under the same regulatory umbrella. But the COA has indicated that it will rely heavily on the expertise of the MOF in this role.  

3. Converting the structure of the farmers' associations into a shareholding arrangement, with dividends issued to members, so as to strengthen members' commitment to the associations' operations and generate a greater sense of community.
 
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