In Malaysia, padi is considered a poor man’s crop and is heavily subsidised by the government to keep farmers from abandoning the crop entirely. So when Sime Darby Bhd made known its intention to venture into padi farming, it raised a few eyebrows.

The company announced its plan to plant padi at the height of the rice price increase in mid-2008, when prices doubled partly due to years of drought in Australia, a major rice producer. In February this year, Sime Darby unveiled its 200ha model padi farm carved out of one of its oil palm estates in Perak — a model it hopes to replicate in other parts of the country.

The farm, reportedly set up at a cost of RM12.5 million, features state-of-the-art irrigation systems, a fully mechanised padi nursery, boom sprayers and a combined harvester designed specifically for padi. The farm is expected to produce yields of five to six tonnes per hectare within the first three cycles and 8 to 10 tonnes per ha from the fourth cycle onwards.

Sime Darby has indicated its willingness to share its expertise with smallholders and rehabilitate idle agricultural land in the Northern Corridor Economic Region (NCER). Apart from the NCER, the company says it is in talks with the Sarawak government to plant padi on 7,000ha in the state and plans to do the same in Sabah. It has given itself a time line of three years to start commercial padi farming. Ultimately, padi, rubber and other crops will make up 25% of the company’s plantation business.

Why padi planting?
Its president and group chief executive Datuk Ahmad Zubir Murshid told a media briefing that given the high food prices, padi can be a profitable business if done properly and provided that a high level of mechanisation is employed while using high-yielding seeds. Besides padi production, the conglomerate will leverage its R&D strength to move into seed production. It also has plans to move downstream into rice processing and packaging as well as marketing.

Dr Larry Wong, senior fellow at Institute of Strategic and International Studies, for one, thinks Sime Darby’s entry into padi and rice production fits well into the group’s diversified structure. With input from its Seed Research Centre in Perlis, coupled with its R&D expertise from the merged entities of Golden Hope Plantations Bhd, Kumpulan Guthrie Bhd and Sime Darby, the group will be well provided with the agri-biotechnology application necessary to extract high production yields, given the limit to land expansion.

Sime Darby’s subsidiary, Sime Kubota Sdn Bhd, which has exclusive distributorship of Kubota agricultural machinery and engines, will supply tractors, transplanters and harvesters to enable mechanised farming. Further downstream, Sime Darby’s 30% stake in Tesco should help in the distribution of rice products and potentially provide a platform for the export market.

“Don’t look at it from the production (side) only. Look at it from the entire supply chain — from seed to shelf — perspective. The fit is there and I think it’s exciting. If you see this, you can see the rationale (behind Sime Darby’s move),” says Wong, who has spent over 30 years in the padi and rice industry in both the private and public sectors.

With its expertise in palm oil production, where Malaysia has the most complete supply chain system compared to other producing countries, he adds that it will not be difficult for Sime Darby to replicate the system in rice.

Wong says the focus should not be on how much padi Sime Darby can produce but rather the gains to be made from improved efficiencies in the supply chain for rice and its related products, even leading to the creation of a food superhighway. This is given Sime Darby’s present involvement in foodstuffs, including edible oils, vegetables and sweet corn.

In 2008, there were 142,357 registered padi farmers under the price subsidy scheme in Malaysia and a total of 300,308ha planted with padi. Based on per capita consumption of 79kg per person, Malaysia’s population of 27.8 million will need 2.2 million tonnes of rice a year. At present, the country imports over 800,000 tonnes of rice annually, which means Sime Darby’s 7,000ha, when they come into production eventually, can barely close the gap even if we assume a yield of 10 tonnes per hectare. Nevertheless, it will help improve the country’s self-sufficiency level, currently at 73%.

Given the small size of padi farms not only in the NCER but also in other rice-planting areas in Malaysia, it will be difficult to replicate large-scale mechanised commercial farming as practised in the US and Australia. Thus, Sime Darby has proposed a cooperative structure where small farmers will contribute land as equity, entitling them to a share of profits while having the option of working the fields.

Currently, farmers receive a subsidy of RM248 per tonne of padi. Under Sime Darby’s proposed cooperative structure, it is unclear whether similar subsidies will be given. The key issue is to ensure that smaller farmers are taken care of either by Sime Darby’s programme or by the government.

Apart from PadiBeras Nasional Bhd, which has ventured into contract farming on 9,000ha all over Malaysia, Sime Darby will be the only other private corporation undertaking commercial padi farming.

For Sime Darby to venture into a “political crop” heavily subsidised by the government, there is concern that it is taking on a social obligation which may lead to losses. Balancing commercial and social demands will be a challenge the group will have to deal with in this venture.

“The trouble is, for a long time the industry has relied on the government, but you must realise that the lesson from the current economic slowdown as well as the food crisis is that, going forward, there’ll be a total change in future food systems and your challenges are going to be different; you’ll face an environment where both input and output prices are going to be higher as you factor in all the costs that the government used to carry before the markets were liberalised,” says Wong, adding that the public and private sectors will both have roles to play.

As for undertaking padi farming as part of Sime Darby’s corporate social responsibility (CSR) initiatives, he says the challenge for Sime Darby will be in defining what is CSR and whether it is inclusive or exclusive.

“If CSR engages at different points of the supply chain — for instance, training and technology — and collaborates with other people to extend what they know to farmers in the area, then that becomes inclusive. If it extends only to people trading with them, supplying to them, then that’s very exclusive… purely doing business and calling it CSR will ring hollow,” he explains.

However, Wong is excited at the prospect of higher incomes for farmers as the benefits arising from improved efficiency along the rice supply chain flow back to them. That, he says, is CSR at work.

This article appeared in the Corporate page, The Edge Malaysia, Issue 745, March 9-15, 2009