Financial Incentives to Encourage Organic Farming in Thailand by Sal Forest

SAL FOREST CO. LTD. AND GREEN NET COOPERATIVE

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Submitted to Rockefeller Foundation

Lead Researchers: Sarinee Achavanuntakul and Witoon Panyakul Researchers: Sunee Muangcharoen Gene Wangtrakuldee

May 2016

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Table of Contents

Executive Summary ................................................................................................................................... 7 1.

Background ...................................................................................................................................... 15 1.1 Background and rationale.............................................................................................................. 15 1.2 Objective of this project ................................................................................................................ 16 1.3 Methodology and limitations of research ..................................................................................... 17

Definitions, Criteria, and Certification of Organic Farming ............................................................. 18 2.1 Definitions...................................................................................................................................... 18 2.2 Global and EU organic standards ................................................................................................... 19 2.2.1 Codex organic standard .......................................................................................................... 20 2.2.2 EU regulation on organic production ..................................................................................... 20 2.3 Certification and accreditation standards ..................................................................................... 21 2.4 Certification and accreditation standards in Thailand................................................................... 23

Organic Farming Landscape ............................................................................................................. 26 3.1. Global organic farming landscape ................................................................................................ 26 3.1.1 Organic agriculture land ......................................................................................................... 26 3.1.2 Organic producers .................................................................................................................. 28 3.1.3 Organic products and land use ............................................................................................... 28 3.1.4 Market and international trade .............................................................................................. 32 3.1.5 Factors affecting growth of organic market ........................................................................... 34 3.2 Organic farming landscape in Thailand ......................................................................................... 34 3.2.1 Organic agriculture land ......................................................................................................... 36 3.2.2 Organic products .................................................................................................................... 37 3.2.3 Organic producers .................................................................................................................. 38 3.2.4 Organic market ....................................................................................................................... 39 3.2.5 Government policies ............................................................................................................... 40

Benefits of Organic Farming ............................................................................................................ 42 4.1 Economic benefits ......................................................................................................................... 42 4.1.1 Higher yield ............................................................................................................................. 42 4.1.2 Lower costs of labor and other factors of production ............................................................ 45

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

4.1.3 Price premium and increased income .................................................................................... 45 4.2 Social benefits ................................................................................................................................ 47 4.2.1 Poverty reduction ................................................................................................................... 47 4.2.2 Increased investment in education ........................................................................................ 48 4.2.3 Improved health ..................................................................................................................... 49 4.3 Environmental Benefits ................................................................................................................. 50 4.3.1 Decline in greenhouse gas emissions ..................................................................................... 50 4.3.2 Improved ecosystem services ................................................................................................. 56 5.

Obstacles to Organic Farming .......................................................................................................... 59 5.1 Global obstacles ............................................................................................................................ 59 5.1.1 Risks during the conversion period ........................................................................................ 59 5.1.2 Lack of access to finance......................................................................................................... 59 5.1.3 Costly organic certification ..................................................................................................... 60 5.1.4 Unfavorable government policies .......................................................................................... 60 5.1.5 Lack of knowledge .................................................................................................................. 61 5.2 Obstacles to organic farming in Thailand ...................................................................................... 61 5.2.1 High demand but low supply due to lack of capacity ............................................................. 61 5.2.2 Obstacles during the conversion period ................................................................................. 61 5.2.3 Costly organic certification ..................................................................................................... 62 5.2.4 High costs of production ......................................................................................................... 62 5.2.5 Unfavorable government policies .......................................................................................... 62

Costs of Organic Farming ................................................................................................................. 64 6.1 Conversion costs............................................................................................................................ 64 6.2 Costs of organic farming................................................................................................................ 64 6.2.1 Labor costs .............................................................................................................................. 64 6.2.2 Raw material costs .................................................................................................................. 65 6.2.3 Overall organic costs ............................................................................................................... 65

Financial Incentives for Organic Agriculture .................................................................................... 67 7.1 Financial mechanisms to support organic farming â&#x20AC;&#x201C; Global ......................................................... 67 7.1.1 Agri-environment payments in Europe .................................................................................. 67 7.1.2 Subsidies and advance payment in the developing world ..................................................... 79 7.1.3 Financial incentives to reduce environmental impact............................................................ 79

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

7.1.4 Carbon offset .......................................................................................................................... 81 7.1.5 Carbon Footprint Labels ......................................................................................................... 87 7.2 Finance mechanism to support organic farming â&#x20AC;&#x201C; Thailand ......................................................... 88 7.2.1 Government subsidies ............................................................................................................ 88 7.2.2 Voluntary carbon offset .......................................................................................................... 88 7.2.3 T-VER Case Study: Corn and Rice in Phayao ........................................................................... 95 7.2.4 Low Emission Support Scheme (LESS) .................................................................................... 98 7.2.5 Loan for organic farming......................................................................................................... 98 7.2.6 Partial advance payment ........................................................................................................ 99 8.

Exploring Financial Incentives for Thailand ................................................................................... 100 8.1 Financial Incentives Tested ......................................................................................................... 100 8.1.1 Thailand Voluntary Emission Reduction Program (T-VER) ................................................... 100 8.1.2 BAAC Green Credit ................................................................................................................ 100 8.1.3 Low Emission Support Scheme (LESS) .................................................................................. 101 8.1.4 Forward contract .................................................................................................................. 101 8.1.5 Direct grant or subsidy.......................................................................................................... 101 8.2 Incentives Test Framework ......................................................................................................... 101 8.3 Demand side survey .................................................................................................................... 104 8.4 Supply Side Test........................................................................................................................... 120 8.4.1 Supply side incentives test 1: Maha Sarakham .................................................................... 121 8.4.2 Supply side incentives test 2: Nakhon Pathom..................................................................... 131 8.4.3 Model outputs ...................................................................................................................... 138

Recommendations and Conclusion ............................................................................................... 151

Bibliography ........................................................................................................................................... 155

TABLE OF FIGURES FIGURE 1 : THIRD-PARTY CERTIFICATION (TPC) FOR EXPORT .................................................................................................22 FIGURE 2: MAP OF PGS BY COUNTRY ...............................................................................................................................23 FIGURE 3 : MAJOR ORGANIC CERTIFICATIONS IN THAILAND ..................................................................................................24 FIGURE 4 : EU ORGANIC CERTIFIED LOGO ...........................................................................................................................24 FIGURE 5: USA ORGANIC CERTIFIED LOGO .........................................................................................................................25 FIGURE 6: WORLDWIDE ORGANIC AGRICULTURE LAND BY CONTINENT .....................................................................................27 FIGURE 7 : GROWTH OF ORGANIC AGRICULTURE LAND (1999-2013) .....................................................................................27 FIGURE 8: GROWTH OF SELECTED CROPS, 2012-2013 ........................................................................................................29

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

FIGURE 9: LAND USE BY CEREAL TYPES 2013 ......................................................................................................................29 FIGURE 10: LAND USE BY OILSEED TYPES 2013 ...................................................................................................................30 FIGURE 11 : LAND USE BY TEMPERATE FRUIT TYPES 2013 .....................................................................................................31 FIGURE 12: LAND USE BY TROPICAL AND SUBTROPICAL FRUIT TYPES 2013................................................................................31 FIGURE 13 : LAND USE BY CITRUS FRUIT TYPES 2013 ...........................................................................................................32 FIGURE 14: GLOBAL MARKET FOR ORGANIC FOOD AND DRINK 1999-2013..............................................................................33 FIGURE 15: CONSUMPTION OF ORGANIC VEGETABLES AND FRUITS, 2014 ................................................................................33 FIGURE 16: ORGANIC AGRICULTURE LAND IN THAILAND 1998 - 2013 ....................................................................................36 FIGURE 17 : ORGANIC PRODUCTS OF THAILAND IN 2013......................................................................................................38 FIGURE 18: PRODUCTIVITY YIELD FROM CONVERSION TO ORGANIC AGRICULTURE ......................................................................43 FIGURE 19 : PRODUCTIVITY YIELD OF ORGANIC AGRICULTURE IN THAILAND...............................................................................44 FIGURE 20: AVERAGE ANNUAL PRODUCTIVITY AFTER CHANGE TO ORGANIC AGRICULTURE IN THAILAND (NORTH AND NORTHEAST REGIONS) ............................................................................................................................................................ 44 FIGURE 21 : DEBT POSITION OF FARM FAMILY AFTER CONVERTING TO ORGANIC AGRICULTURE, 2006 ............................................48 FIGURE 22 : ORGANIC AGRICULTURE AND EDUCATION EXPENDITURE IN THAILAND AND CHINA, 2006 ...........................................48 FIGURE 23: MAIN SOURCES OF DIRECT GHG EMISSION IN THE AGRICULTURE SECTOR, 2005 .......................................................50 FIGURE 24 : SOIL CARBON SEQUESTRATION BY FARMING SYSTEM (1981-2005) .......................................................................52 FIGURE 25 : LINEAR REGRESSION OF SOIL CARBON RISE.........................................................................................................53 FIGURE 26 : CHANGE IN BIODIVERSITY AFTER SWITCHING TO ORGANIC AGRICULTURE, 2006 ........................................................57 FIGURE 27 OVERVIEW OF AGRI-ENVIRONMENTAL REGIME IN EUROPE ....................................................................................68 FIGURE 28: OVERVIEW OF RDP MEASURES RELATED TO ORGANIC FARMING IN 2007-2011 .......................................................72 FIGURE 29: THE ORGANIC MODEL: RURAL DEVELOPMENT POLICY OF EUROPE ..........................................................................74 FIGURE 30 : EFFECTIVE SPECIFIC SUBSIDIES AND TOTAL AGRI-ENVIRONMENTAL PAYMENT OF ORGANIC FARM IN AUSTRIA, CZECH REPUBLIC, DENMARK, GERMANY, ITALY, AND UNITED KINGDOM ..................................................................................75 FIGURE 31: PROJECT CATEGORY, PROJECT TYPE AND TRANSACTION VOLUME ............................................................................85 FIGURE 32 : T-VER PROCESS ..........................................................................................................................................94 FIGURE 33: MAHA SARAKHAM PROVINCE LOCATION .........................................................................................................121 FIGURE 34 NAKHON PATHOM PROVINCE LOCATION...........................................................................................................131 FIGURE 35 BASE CASE NET CASH FLOW – MAHA SARAKAM ...............................................................................................144 FIGURE 36 BASE CASE NET CASH FLOW - NAKORN PATHOM...............................................................................................144 FIGURE 37 BEST CASE NET CASH FLOW – MAHA SARAKAM ................................................................................................146 FIGURE 38 BEST CASE NET CASH FLOW - NAKORN PATHOM ...............................................................................................148 FIGURE 39 BREAK-EVEN ORGANIC RICE AREA SIZE – MAHA SARAKAM .................................................................................150 FIGURE 40 BREAK-EVEN ORGANIC RICE AREA SIZE – NAKHON PATHOM................................................................................150

TABLE OF TABLES TABLE 1: NUMBERS OF ORGANIC PRODUCERS BY REGION 2012-2013 ....................................................................................28 TABLE 2: GLOBAL ORGANIC PRODUCT LANDSCAPE IN 2013 ...................................................................................................29 TABLE 3 : ORGANIC PRODUCTION AREA BY CROP IN THAILAND 1998-2013 (HECTARES).............................................................37 TABLE 4 : PRODUCE VOLUME AND MARKET VALUE OF ORGANIC PRODUCTS IN THAILAND .............................................................40 TABLE 5: PROFITABILITY BY FARM SIZE IN THAILAND (BAHT PER RAI) .......................................................................................46 TABLE 6: PRICE PREMIUM ASSOCIATED WITH ORGANIC PRODUCT............................................................................................46 TABLE 7: COMPARISON OF TOTAL LABOR NEED BETWEEN CONVENTIONAL AND ORGANIC AGRICULTURE ..........................................47 TABLE 8: MEDICAL EXPENDITURE OF ORGANIC AND CONVENTIONAL FARMER IN THAILAND IN 2006 ..............................................49 TABLE 9: ENERGY CONSUMPTION IN DIFFERENT AGRICULTURAL SYSTEMS .................................................................................55 TABLE 10: ACTIVITIES IN ORGANIC AGRICULTURE THAT REDUCE GREENHOUSE GAS EMISSIONS ......................................................55

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

TABLE 11: GLOBAL WARMING POTENTIAL OF DIFFERENT FARMING PRACTICES ..........................................................................56 TABLE 12 : DIFFERENT LABOR COST OF ORGANIC AND CONVENTION AGRICULTURE IN THAILAND (BAHT/RAI) ..................................65 TABLE 13 : DIFFERENCE RAW MATERIAL OF ORGANIC AND CONVENTION AGRICULTURE IN THAILAND (BAHT/RAI).............................65 TABLE 14: COST DIFFERENCES BETWEEN ORGANIC AND CONVENTIONAL AGRICULTURE IN THAILAND..............................................65 TABLE 15 : RDP OBJECTIVES AND MEASURES ....................................................................................................................69 TABLE 16 : COMPARING RDP AND CAP PILLAR 1 ...............................................................................................................76 TABLE 17: EXAMPLE SUCCESS STORIES ASSOCIATED WITH DIFFERENT POLICY APPROACHES AND LOCAL OBSTACLES TO THEIR IMPLEMENTATION ................................................................................................................................................ 80 TABLE 18 : THIRD-PARTY CARBON OFFSET STANDARDS / PROTOCOLS BY PROJECT TYPE................................................................82 TABLE 19: SIZE AND AVERAGE PRICE OF VOLUNTARY CARBON MARKETS, 2013-2014 ................................................................84 TABLE 20: T-VERS PROJECT CATEGORIES AND PROJECT TYPES................................................................................................89 TABLE 21: GOOD FERTILIZATION PRACTICE IN AGRICULTURAL LAND .......................................................................................90 TABLE 22: CARBON SEQUESTRATION AND REDUCING EMISSION IN ORCHARDS .........................................................................91 TABLE 23 INCENTIVES TEST FRAMEWORK ........................................................................................................................103 TABLE 24 SUMMARY OF PRELIMINARY DEMAND SIDE SURVEY .............................................................................................105 TABLE 25: NUMBER OF ORGANIZATIONS THAT EXPRESS INTEREST, BY TYPE OF INCENTIVE ..........................................................120 TABLE 26: AVERAGE INCOME AND EXPENSES : ORGANIC VS. NON-ORGANIC FARMER IN MAHA SARAKAM .....................................123 TABLE 27 PROFILE OF ORGANIC VS. CONVENTIONAL FARMER ...............................................................................................124 TABLE 28 NON-ORGANIC FARMERS' INTEREST IN ORGANIC: REASONS AND MAJOR OBSTACLES ....................................................126 TABLE 29 REASONS NON-ORGANIC FARMERS ARE NOT INTERESTED IN SWITCHING ...................................................................127 TABLE 30 CONSIDERATIONS WHEN BORROWING: ORGANIC VS. NON-ORGANIC FARMERS IN MAHA SARAKAM ...............................128 TABLE 31 KEY REASONS FOR INTEREST AND NON-INTEREST CITED BY NON-ORGANIC FARMERS ....................................................129 TABLE 32 LEVEL OF INTEREST IN FINANCIAL INCENTIVES: SUPPLY VS. DEMAND SIDE IN MAHA SARAKAM .......................................130 TABLE 33 AVERAGE INCOME AND EXPENSES: ORGANIC VS. NON-ORGANIC FARMER IN NAKHON PATHOM.....................................133 TABLE 34 PROFILE OF ORGANIC VS. CONVENTIONAL FARMER IN NAKHON PATHOM..................................................................134 TABLE 35 CONSIDERATIONS WHEN BORROWING: ORGANIC VS. NON-ORGANIC FARMERS IN NAKHON PATHOM .............................136 TABLE 36 LEVEL OF INTEREST IN FINANCIAL INCENTIVES: SUPPLY VS. DEMAND SIDE IN NAKHON PATHOM .....................................137 TABLE 37 NET ANNUAL INCOME AFTER HOUSEHOLD EXPENSES, MAHA SARAKAM AND NAKHON PATHOM ...................................139 TABLE 38: ESTIMATES OF GREENHOUSE GAS EMISSION AND INCOME FROM CARBON CREDIT SALE: MAHA SARAKAM....................141 TABLE 39: ESTIMATES OF GREENHOUSE GAS EMISSION AND INCOME FROM CARBON CREDIT SALE: NAKHON PATHOM..................141 TABLE 40: ASSUMPTIONS AND CONDITIONS USED FOR “BASE CASE” AND “BEST CASE”............................................................143 TABLE 41 BASE CASE LESS MECHANISM – MAHA SARAKAM ..............................................................................................146 TABLE 42 BASE CASE LESS MECHANISM – NAKHON PATHOM ............................................................................................146 TABLE 43 BASE CASE GRANT MECHANISM – MAHA SARAKAM............................................................................................146 TABLE 44 BASE CASE GRANT MECHANISM – NAKHON PATHOM ..........................................................................................146 TABLE 45 BEST CASE LESS MECHANISM – MAHA SARAKAM ..............................................................................................149 TABLE 46 BEST CASE LESS MECHANISM - NAKHON PATHOM .............................................................................................149 TABLE 47 BEST CASE GRANT MECHANISM – MAHA SARAKAM ............................................................................................149 TABLE 48 BEST CASE GRANT MECHANISM - NAKHON PATHOM ...........................................................................................149

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Executive Summary

Increasingly in the past 30 years, organic farming has been touted as a viable alternative to mono-crop industrial farming practices which many critics have criticized as “unsustainable” to the farmers, consumers, and the environment. Organic farming adheres to four basic principles which can be summarized as “health, ecology, fairness, care.” Yet, despite increasing growth and interest from consumers, both policy and regulatory landscapes in Thailand have unfortunately been more obstructive to organic farming, rather than facilitating further adoption. For example, during the years 2009-2010, the Thai government adopted the agricultural product guarantee policy which guarantees price higher than market price. As a result, many organic farmers had switched back to conventional agriculture, and many conventional farmers delayed their decision to switch to organic farming. Furthermore, government policy to support organic farming has neither been consistent nor continuous. For example, the quantity of chemical fertilizer consumption continues to steadily rise, despite the government’s adoption of the National Organic Agriculture 2008–2011 Plan. As at the end of 2012, land used for organic agriculture production has decreased to 205,385.81 hectares from 219,390.66 hectares, or 6.4%, from 2011, and the number of certified organic agriculture farms declined to 7,189 farms. Concurrently, both volume and value of organic products decreased from 51,011.80 tons in 2011 to 48,578.50 tons in 2012, or 4.77%. Organic agriculture by definition uses organic fertilizers, advocates no burning of stubble crops and organic matter, so that organic matter can become humus in the soil. Meanwhile, organic farming also helps carbon fixation and sequestration in the soil. As a result, organic farming practices can help reduce climate change in four ways: reducing greenhouse gas emissions carbon fixation/sequestration, improving ecosystem services, and helping farmers to adapt to climate change in ways that protect or increase crop yields. However, to date none of the negative externalities of conventional farming, nor the positive externalities of organic farming, have been systematically quantified, let alone translating them into tangible financial incentives for organic farming. Given the aforementioned “disconnect” between long-term benefits and short-term costs of organic farming, it is therefore worthwhile to explore viable financial incentives to encourage more adoption. These incentives can be borne by the government, private sector, or NGOs; the main purpose is not only to help farmers reduce the costs of switching to organic farming, but also to increase their income from organic production. The rate of adoption of organic farming in Thailand is hampered by many factors such as: lack of market access, lack of know-how, high costs of certification, inconsistent government policies, lack of technical know-how, and the lack of sufficient financial support during the first 3 years, the so-called “transition period” between the point of adoption and the point at which farmers receive organic certification. After the initial three years, organic farmers are

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

expected to be able to enjoy price premium over conventional agriculture products, as well as enjoy increased farming yields after they become sufficiently familiar with organic farming methods, and the soil quality has improved. This research is focused only on one factor, i.e. the lack of transition period support. It aims to survey, compile, and test possible financial incentives that would entice more chemical farmers to switch to organic, as well as preventing organic farmers to abandon organic farming during the transition period. After surveying literature review of financial incentives for organic farming both abroad and Thailand, the research team identified five potential financial incentives that are suitable for the conversion period, and that could be tested with organic farmers and potential financial supporters in Thailand: 1. Thailand Voluntary Emission Reduction Program (T-VER) As mentioned in the previous chapter, Thailand Voluntary Emission Reduction Program (TVER) scheme by the Thailand Greenhouse Gas Management Organization (TGO) was developed to encourage private companies and other sectors in Thailand to participate in voluntary carbon emission reduction, by certifying and then allowing carbon credits or T-VERs to be sold in Thailand’s voluntary carbon market. Two feasible T-VER methodologies that should be accessible by organic farms are “Good Fertilization Practice in Agricultural Land” methology for organic rice and other organic produce, and “Carbon Sequestration and Reducing Emission in Orchards” methodology for fruit orchards. The research team selects “Good Fertilization Practice in Agricultural Land” methology for fieldwork test with farmers, since this methodology is applicable to organic rice, the product that both test communities produce. 2. BAAC Green Credit The research team chooses “Green Credit” program by the Bank for Agriculture and Agricultural Cooperatives (BAAC) to test soft loan option with fieldwork farmers in both groups. Farmers or farmer groups that produce “safe food” or organic products can apply for this loan scheme, which charges interest rate at MRR (7% as of 29 February 2016) for individual farmer, or MLR (5% as of 29 February 2016). The maximum size of credit facility is set at 60% of total expected income from farming, plus 25% of annual household expenses, but the sum of two figures must be less than 100% of total expected income from farming. BAAC will reduce interest (rebate) by 1% per year from base interest, until the minimum of 4%, if borrower can fulfill all of the following conditions: • Undergo the bank’s project monitoring process • Product certified organic or “safe food” by IFOAM or relevant certifiers, whether domestic or international • Repay loan principal and interests on schedule

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

3. Low Emission Support Scheme (LESS) Thailand Greenhouse Gas Management Organization (TGO) launched Low Emission Support Scheme (LESS) to promote more awareness of the importance of greenhouse gas emission reduction, and encourage every sector to participate in greenhouse gas emission reduction scheme through their Corporate Social Responsibility (CSR) activities. Under this scheme, companies with CSR programs that support organic farming can apply for LESS. TGO would then estimate the amount of carbon emission reduced, and issue Letter of Recognition (LoR) to the company. 4. Forward contract One possibility that private company and other organizations can use to encourage transition from conventional to organic farming is “forward contract” scheme, as used in mainstream financial markets. Under this scheme, the organization will negotiate with farmers to pay part or all of the payment for their produce in advance, and the farmers will deliver organic produce at the specified date. 5. Direct grant or subsidy Literature review has identified direct grants or subsidies as one of the most common financial incentives used abroad to support organic farming, particular in Europe. Most of the grants or subsidies typically focus on the conversion period, with the amount of support declining thereafter. The state specifies conditions that grantees must abide by to qualify for supports, e.g. undergo organic training and undergo certification process. Government, private and civil society sectors in Thailand can also draw on the lessons from these schemes to support the conversion period. One key success factor of such grants or subsidies is that their conditions should encourage farmers to successfully make the transition to organic, without making them feel that the conditions are too onerous to meet.

The research team then conducted demand side and supply side survey to gauge relative interests in these five mechanisms, as well as create a preliminary financial model to gauge the relative amount of financial support that would be required. Preliminary demand side survey found that some companies expressed interest to cover both household expenses and planting costs in their support for organic farming. The research team therefore used this assumption in the “best case” model, but for “base case,” only farming costs are stipulated to be covered by grant/subsidy, based on interviews with Department of Agriculture and Office of Agricultural Economics. For “best case” model, the research team “goal-seeked” conditions for each financial mechanism that would yield a positive cash flow for an average organic farmer in every year between year 1 and 7. Key assumptions for “base case” and conditions and goal-seek assumptions for “best case” are summarized as follows:

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Item Income and cost profile of an average farmer T-VER carbon credit price (Baht/tCO2e) Soft Loan (% LTV - ratio of loan to planting costs) CSR – LESS (Baht)

Base Case Assumptions Best Case Conditions Constant farm income and costs from years 1 through 7, using data from fieldworks in Maha Sarakam and Nakhon Pathom 200 Maha Sarakam: 606,450 (goal seek result) Nakhon Pathom: 616,676 (goal seek result) 60% 60%

Support 100% of total farm costs and household expenses in the first year only

Forward (% premium)

20% premium over market price of organic rice

Grant/subsidy (Baht)

Support 100% of farming costs during years 1-3

Support 100% of total farm costs and household expenses in year 1, lowered by 15% per year during years 2-5, and reduce support to 40% of total farm costs and household expenses in years 6-7 (goal seek results) 247% premium over market price of organic rice (goal seek result) Support 100% of both farming costs and household expenses during years 1-5 (goal seek result)

The research team found that in “base case” scenario, net cash flow for an average household is negative for both chemical and organic farmers in all years, under every financial incentive, except for LESS in Nakhon Pathom which helped net cash flow to be positive until around month 18. After that, all financial incentives yield negative net cash flow because income from organic rice sales plus incentives is not enough to cover both farm costs and household expenses. Preliminary financial model results from both “base case” and “best case” scenarios also suggest that landholding size is a major determinant of whether or not an organic farmer is likely to be net cash flow positive after switching to organic farming, since annual household expenses of 79,200 Baht per household per year on average is a significant burden that farmers need to pay no matter how much land they own. The small average size of landholding (roughly 11 and 5 rai per household across two fieldwork studies) means that significant support would be required for any financial incentive that intends to help the farmer become net cash flow positive.

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Without any incentive and taking farming income and cost profiles as a given, each organic farmer household in Nong Saeng, Maha Sarakam (who could grow rice only once a year) would need to own 1,075 rais of land in order to cover farming costs and household expenses. They would breakeven in year 2.75, and their farm would reduce carbon emissions by approximately 31.86 tCO2e per year. Equivalent figures for Nin Phet, Nakhon Pathom organic household (who could grow rice twice a year) would be 53 rais, with a breakeven in year 1.42, and 2.08 tCO2e carbon emission reduction per year. Feedback from the supply side - two farming communities, in Nakhon Pathom and Maha Sarakam - and demand side (13 organizations including government agencies, potential corporate sponsors, and international organizations) can be summarized in the following table: Level of interest (1=highest)

Nakhon Pathom

Maha Sarakam

Demand Side

Organic Farmers

Non-Organic Farmers

Organic Farmers

Non-Organic Farmers

T-VER

Soft Loan

Grant or subsidy

LESS/T-VER

Grant or subsidy

LESS

T-VER

T-VER/Soft Loan/LESS

LESS/T-VER

Soft Loan

Forward

LESS/Soft Loan

T-VER/Soft Loan/LESS

Grant/Soft Loan

Forward

T-VER

LESS/Soft Loan

T-VER/Soft Loan/LESS

Grant/Soft Loan

LESS

Grant or subsidy

Forward

The table above shows that top three mechanisms that attract the most interest overall from our survey are LESS, T-VER, and grant/subsidy respectively. Many organic farmers view T-VER and LESS as attractive â&#x20AC;&#x153;cash bonusâ&#x20AC;? for something they are already doing, i.e. organic farming practices, and view grant/subsidy as something that the government should be doing if they were genuinely interested in promoting organic farming. Some farmers further suggest that these three mechanisms should be integrated with knowledge transfer and market solutions, such as combining LESS with guaranteeing the price at which they could sell their products. Soft loans are the most preferred mechanism only for chemical farmers who already have significant debt burden, and therefore expect their debt burden to go down precipitously if they can receive soft loans that incentivize organic farming. However, as preliminary results from our financial model has shown, soft loan is the only mechanism that could not generate positive net cash flow for farming household, because the interests saved would never be sufficient to cover household expenses.

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Results from preliminary financial model suggest that no mechanism in the “base case” scenario, which is based on all available market prices, as well as income and expense profile of chemical and organic farmers in two test communities, can cover household expenses during the transition period. However, it must be stressed that the research team based the model on two very conservative assumptions: 1. Assume that an average farming household only receives income from rice plantations, while in reality many farmers have non-farm income, e.g. from fruit plantations, vegetables, as well as tranfers from their children. 2. Assume that the income and expense profile of an average organic farming household will not change throughout the 7 years of projection, while in reality the organic farmer would receive higher price premium after the transition period, and would be better able to manage farming costs. Certain faming costs such as organic fertilizer that may be higher than chemical fertilizers during the transition period will also decline once farmers are more familiar with the practice and their soil quality recovers. The research team used very conservative assumptions in order to estimate what might be the “ceiling” in terms of dollar value for each financial mechanism tested. Given the demand and supply side survey and preliminary findings of financial model, the research team has four major recommendations for further development of financial mechanisms for organic farming in Thailand: First, due to their attractiveness in terms of offering an “organic bonus” to compensate organic farmers for positive environmental externalities they help create (e.g. reducing carbon emissions), both T-VER and LESS merit further exploration. TGO as the host of both mechanisms in Thailand has expressed interest in helping to set up organic farming pilot projects and help absorb validation and verification costs. To that end, an “ideal” project to apply for T-VER should have the following characteristics: 1. Total project farmland should be of sizable amount, preferably in the scale of at least 1,000 rais, in order for total carbon emission reduction to be sizable, e.g. at least 20 tCO2e, which is the size that many companies say they look for in a carbon offset project. Since a typical organic farming household holds 5-10 rais of farmland, this is likely to require some coordination e.g. agreement across several farmer groups in nearby areas. 2. The amount of carbon emission reduction from T-VER comprises three components: less use of fossil fuel, less use of chemical fertilizer (particularly fertilizer with high nitrogen content, a source of nitrus oxide which is a kind of greenhouse gas), and more carbon sequestered in the soil. Therefore, the kind of organic farmland that has high carbon reduction potential is one that used to use intensive chemical fertilizer (particularly nitrogen content) and has low-quality soil that is likely to be significantly improved after switching to organic.

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

3. It is imperative to continually measure the amount of carbon in soil. In our study, both test communities in Maha Sarakam and Nakhon Pathom have only recently switched to organic farming (6 months to 1 year), which partly explains why the estimated amount of carbon reduction is negligible compared with chemical rice plots. Future carbon reductions are expected to rise in future years, as organic farming yield more benefits. More research is needed to quantify the amount of organic matter, carbon content, bulk density, and soil pH in the soil of organic farmland for 10-20 years, to improve coefficients and other parameters in the T-VER formula. TGO is continually trying to improve T-VER methodology and welcomes all inputs. 4. The carbon price to use in T-VER carbon offset transactions and LESS support does not need to be the same as the price for other kinds of carbon offset projects, since by nature the carbon offset sale or support of both T-VER and LESS will be done over-thecounter, on a private negotiation basis. TGO has informed the research team that, while our “best case” carbon price of over 600,000 Baht per tCO2e is next to impossible, the price around 30,000 Baht per tCO2e (seen for a similar project in Japan) might be feasible depending on the level of interest from corporate sponsor. This is much higher than the 200 Baht tCO2e market price we use for base case analysis. Second, while none of the financial mechanisms explored could be said to to be the “magic bullet” that could be implemented right away and guaranteed to entice farmers, structuring a combination of several mechanisms, with involvement by different stakeholders including the private sector, government agencies, and government banks, deserves further exploration. An example structure could be: the state provides initial grant funding for farmers who are committed to switch to organic, private company then gives more financial support through LESS mechanism, or a combination of LESS and forward, and simultaneously government bank such as BAAC also commits to reducing existing debt burden for farmers. Third, many farmers expressed skepticism of government’s support, citing lack of consistent organic farming policies in the past. The experience of other countries, particularly EU, shows that government can play an important role by giving direct grant or subsidies for organic farming that are easy to understand (e.g. area payment that pays per unit of land according to benchmarks, depending on the type of crop), and not project-specific, i.e. giving the farmers themselves freedom to choose whichever crop or knowledge provider they desire. Thai government should stop picking their “favorite” organic projects to support, and instead support organic farmers more generally using a condition-based concept (e.g. they could reimburse 100% of training or certification costs no matter which training course or certification they choose). Fourth and lastly, the research team’s fieldwork analysis makes clear that making ends meet, i.e. being able to cover household expenses, remains a major challenge for organic and chemical farmers alike. Given the myriad uncertainties of farming, coupled with an increasing tendency of extreme weather (severe draught or flood), it is not likely that anyone would be able to entice farmers to switch to organic or to stay on the path during the transition period

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

without helping them cover household expenses and responding to their fears of increased debt burden and lesser yields in the future. To that end, other financial instruments that can help farmers manage risks more directly, such as weather index insurance, could be an important part structuring a suitable suite of financial mechanisms to encourage more organic farming in Thailand.

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

1. Background

1.1 Background and rationale Increasingly in the past 30 years, organic farming has been touted as a viable alternative to mono-crop industrial farming practices which many critics have criticized as “unsustainable” to the farmers, consumers, and the environment. Organic farming adheres to four basic principles which can be summarized as “health, ecology, fairness, care.” The main goals are: sustaining the wellbeing of environment and living beings, creating and maintaining the balance of agricultural ecology, fair relationships of people that are related to the production process, and safe and environmentally appropriate farming technology. Given these arching principles, organic farming refuses the use of chemical fertilizers, pesticides, and food additives that post health risks, and promote sound stewardship of the environment which encompasses biodiversity, air, and water. Organic farming practitioners see that everyone that is involved with organic farming should have a better quality of life, as well as play a part in safeguarding food security and poverty reduction. Given the above principles, it is not surprising that organic markets have grown exponentially, as more and more consumers are increasingly concerned about their health and the environment. Market size, breath, and farm productivity have been rapidly growing worldwide including in Thailand. The organic market has transitioned from a small-scale niche market to a US$ 60 billion global market in 2012, with main markets in North America and Europe, particularly USA, Germany, and France (FIBL & IFOAM (2014), World of Organic Agriculture 2014, Frick and Bonn). Over the past 20 years, Thailand has been a manufacturer and exporter of organic agricultural products, exporting mainly to the European Union (EU) market, followed by Japan, United States and Singapore. Organic rice is the most popular product, followed by corn, vegetables, fruits, herbs and spices. These export-oriented products have been certified by both Thai authorities international standards: for example, rice exports to the EU are required to be certified by Biogcert, KRAV, Organic Agriculture Certification Thailand, BSC, and EcoCert. Despite increasing growth and interest from consumers, both policy and regulatory landscapes in Thailand have unfortunately been more obstructive to organic farming, rather than facilitating further adoption. For example, during the years 2009-2010, the Thai government adopted the agricultural product guarantee policy which guarantees price higher than market price. As a result, many organic farmers had switched back to conventional agriculture, and many conventional farmers delayed their decision to switch to organic farming. Furthermore, government policy to support organic farming has neither been consistent nor continuous. For example, the quantity of chemical fertilizer consumption continues to steadily rise, despite the government’s adoption of the National Organic Agriculture 2008–2011 Plan. As at the end of 2012, land used for organic agriculture production has decreased to 205,385.81 hectares from 219,390.66 hectares, or 6.4%, from 2011, and the number of certified organic agriculture farms declined to 7,189 farms.

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Concurrently, both volume and value of organic products decreased from 51,011.80 tons in 2011 to 48,578.50 tons in 2012, or 4.77%. Furthermore, two of the key requirements for the transition from chemical agriculture to organic agriculture are that the farmer not use chemical fertilizers and maintain a “balance” between agriculture produce and the environment. Many small-holder-farmers find these requirements exceedingly difficult, complicated and time-consuming, especially since they have to incur various expenses to prove and certify for organic agriculture, while investment costs are not low. For example, the price of organic fertilizers currently can be as high as 4,000–8,000 Baht per ton, and there is still a lack of suitable organic seeds. These two examples are indicative of high costs of organic farming in Thailand, which is the main factor that impedes adoption. While the short-run costs of switching to organic are significant, there are many proven benefits of organic agriculture, both to the environment and to the farmers themselves in the long run. In addition to improved quality of life and poverty reduction via fairer compensation schemes, organic farming can also help mitigate climate change since farming affects greenhouse gases that are released to atmosphere in the following 6 avenues: (1) type of fertilizer (2) irrigation and water management (3) organic farm management (4) soil management especially the plowing process (5) the use of fossil fuels in agricultural plots, and (6) previous land-use changes. In comparison, organic agriculture uses organic fertilizers, advocates no burning of stubble crops and organic matter, so that organic matter can become humus in the soil. Meanwhile, organic farming also helps carbon fixation and sequestration in the soil. As a result, organic farming practices can help reduce climate change in four ways: reducing greenhouse gas emissions carbon fixation/sequestration, improving ecosystem services, and helping farmers to adapt to climate change in ways that protect or increase crop yields. However, to date none of the negative externalities of conventional farming, nor the positive externalities of organic farming, have been systematically quantified, let alone translating them into tangible financial incentives for organic farming. Given the aforementioned “disconnect” between long-term benefits and short-term costs of organic farming, it is therefore worthwhile to explore viable financial incentives to encourage more adoption. These incentives can be borne by the government, private sector, or NGOs; the main purpose is not only to help farmers reduce the costs of switching to organic farming, but also to increase their income from organic production.

1.2 Objective of this project 1. To survey viable financial incentives for organic farming in Thailand, in order to incentivize conventional farmers to adopt organic farming practices, as a tool for poverty reduction, reducing economic disparity, and sustainable food production.

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

2. To test possible incentives in above with two farming communities in Thailand that lack sufficient incentives to switch to organic farming long-term

1.3 Methodology and limitations of research This research uses qualitative and quantitative methodologies to answer the following key research questions: 1. What are some of the most common financial incentive schemes used worldwide to support organic farming, particularly during the conversion period when yields are uncertain and farmers are in the process of obtaining organic certification? What lessons can we draw from overseas experiences? (literature review) 2. What are some of the most common financial incentive schemes used in Thailand support organic farming, particularly during the conversion period when yields are uncertain and farmers are in the process of obtaining organic certification? What lessons can we draw from overseas experiences? (literature review, interview) 3. What are existing and potential financial incentive schemes that should be further explored for support during the conversion period? (analysis) 4. Who in Thailand might be interested in such financial incentives on the demand side? (literature review, interview) 5. What are the demographics, farmland characteristics, planting practices, and financing profiles of organic and non-organic farmer? (fieldwork: quantitative and qualitative) 6. What is the level of interest both organic and non-organic farmers have in each of the financial incentive identified in item 3. above? What are their concerns? (fieldwork: qualitative) 7. What would the conditions for each financial incentive identified in 3. have to be, in order to enable farmers to maintain net positive cash flow throughout the conversion period? (financial modelling) One key limitation of this research is the lack of some primary data, which requires a certain level of exterpolation and interpolation of existing data.

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

2. Definitions, Criteria, and Certification of Organic Farming

2.1 Definitions “Organic farming” in the sense of non-chemical farming, has been practiced for thousands of years before the advent of “Green Revolution” in the early 20 th century. After farming practices with massive use of chemical fertilizers were increasingly criticized for causing severe impact on the environment, organic farming began to enjoy a revival from the 1920s starting in Europe. The 1940s saw establishment of the world’s first organic farming and organic certification organizations, also in Europe. In 1972, International Federation of Organic Agriculture Movements (IFOAM) was established to co-ordinate organic farming organizations around the globe, and act as international platform for the exchange of information related to organic farming. IFOAM has grown to become the largest international network of organic farming organizations. (European Commission, 2010). At present, the most widely accepted definition of “organic farming” or “organic agriculture” is IFOAM’s definition, which posits that organic agriculture is “a production system that sustains the health of soils, ecosystems and people. It relies on ecological processes, biodiversity and cycles adapted to local conditions, rather than the use of inputs with adverse effects. Organic Agriculture combines tradition, innovation, and science to benefit the shared environment and promote fair relationships and a good quality of life for all involved” (IFOAM, 2008). IFOAM articulated three key principles of organic agriculture as follows: 1. Principle of health: Organic Agriculture should sustain and enhance the health of soil, plant, animal, human and planet as one and indivisible. 2. Principle of ecology: Organic Agriculture should be based on living ecological systems and cycles, work with them, emulate them and help sustain them. 3. Principle of fairness: Organic Agriculture should build on relationships that ensure fairness with regard to common environment and life opportunities. 4. Principle of care: Organic Agriculture should be managed in precautionary and responsible manner to protect the health and well-being of current and future generations and the environment.

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

In Thailand, the National Bureau of Agricultural Food Safety and Food Standards (ACFS) under the Ministry of Agriculture and Cooperatives, has defined “organic agriculture” as follows: “Organic agriculture means a holistic agricultural management system which supports ecosystems, life cycles, and biodiversity by using natural materials, avoiding synthetic materials and any animal, plant, or microorganisms from genetic modification or genetic engineering processes. Organic agriculture also carefully manages the product processing process so as to maintain the qualities of organic agriculture at every step.” (National Bureau of Agricultural Commodity and Food Standards, 2011). Many practitioners of organic farming in Thailand conclude that global organic farming principles as articulated by IFOAM are appropriate to the local economic, social, climate, and cultural contexts. Organic farming yields products that are safe from toxins by reducing or prohibiting the use of chemicals, recovering soil fertility, increasing biodiversity when changing from monocrop to polycrops, as well as changing consumption pattern from consuming products of industrial processes to consuming products from nature and own farms. In addition, organic farmers are encouraged to optimize the use of production factors and engage in sustainable conservation of their farmlands. (Mekayai, 2012) Pioneers of organic farming in Thailand explain that organic farming is most different from chemical farming in the purpose: organic farming intends to conserve and revive the environment by refusing to use synthetics including chemical fertilizers in the planting process, focusing on recovering the agricultural ecosystem especially the soil (Mekayai, 2012).

2.2 Global and EU organic standards Organic standards are considered “lowest requirements” that organic farmers must abide by, and that the certifying body will use as criteria for checking their production processes and certifying farms that meet the requirements. Internationally accepted organic standards are based on a multi-stakeholder consensus-building process which involves every stakeholder: farmer, entrepreneur, retailer, environmentalists, and academics from multiple fields. Because such standards are built on this process, the agreement is therefore akin to a “social contract” between all stakeholders, as well as serving as “definitions” of organic farming, since it specifies clear details of the organic production process (Green Net Cooperative, 2011). Because the entire organic farming process happens out of the consumer’s view, creating credible organic standards are therefore crucial to offer a guarantee to consumers that the products they buy truly come from organic farming, and to enable them to distinguish between organic and non-organic products. Therefore, organic product certification is an important mechanism for both farmers and consumers (Green Net Cooperative, 2013). In addition, the organic certification is also instrumental in building or accessing organic markets, especially large overseas markets in the United States, Europe, and Japan. These countries have laws and regulations that all organic products must be certified according to

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

their national or other accepted organic standards, and also mandate labelling of all organic products sold in their respective domestic markets 2.2.1 Codex organic standard Codex Alimentarius Commission (CAC) was set up in 1962 as a joint committee between United Nation Food and Agriculture Organization (FAO) and World Health Organization (WHO) to design and promote ‘universal’ food safety standards for use in the international markets. Codex’s standard for organic farming is officially titled “Codex Guidelines on the Production, Processing, Labelling and Marketing of Organically Produced Foods.” The CAC appointed a committee to draft organic standards in 1993. The first set of standards was finished in 1998. Later in 2001, the CAC added standards on organic livestock and beekeeping. These standards have been consistently revised and maintained to keep abreast of latest organic practices. For example, in 2001 the CAC added a list of permissible factors of production, and revised this list in 2002. CAC’s standards are based on IFOAM standards as well as national organic standards of various member countries the United Nations. The standards are in the form of “guiding principles” for member countries. The Codex standards are not meant to be certification standards for organic products for use by certifiers and producers, but are meant to be guidelines for different governments to use as a basis for designing their own national standards, under local contexts of each country. Some of the items in the Codex standards are designed to facilitate standard setting and international organic accreditation. (European Commission, 2012) The Codex standards have gathered significant interest in recent years, following the agreement by members of World Trade Organization (WTO) on sanitary and phytosanitary measures (SPS) and technical barriers to trade (TBT). Many observers and countries see the Codex standards as one viable reference for trade dispute resolutions. (Green Net Cooperative, 2015) 2.2.2 EU regulation on organic production The European Commission issued the first set of regulations on organic farming in 1991. Since then, the regulations have been continually amended and updated. The latest key piece of regulation is the European Council Regulation No. 834/2007 which encompasses planting, livestock, production, labelling, and the import of organic products. (European Commission, 2012) In addition, the EC has issued two major implementation rules, namely EC Regulation Np. 889/2008 (details on planting, livestock, and processing of organic products) and No. 1235/2008 (details on the import of organic products from abroad into the EU). (Green Net Cooperative, 2011) In 2012, the European Commission decided to revise existing rules and regulations. In 2014, the EC unveiled the new organic standards. Organic farming practitioners and many EU member states oppose these standards, on grounds that stricter standards may act as trade barrier that prevents organic products to enter EU markets, even those that already met other international standards, such as IFOAM and USA (FiBL and IFOAM, 2015).

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

 Import requirement of major economies Major importers of organic products are European countries, United States, Canada, and Japan. These countries impose strict regulations on the import of organic products. Organic exporters to these countries must comply with regulations, as well as get their products certified by the respective certification body in each country  Bilateral agreement between the exporting and the target import country The United States, European Union, and Japan, all have bilateral agreements between their country and exporting country in order to control quality and standard of organic products. Such bilateral agreements tend to be driven by political agenda, but are still based on accepted organic standards. For example, exporters or processors of organic products that are certified under the US’ National Organic Program but not under Canada’s organic regulation are still allowed to export to Canada under US-Canada bilateral agreement. Moreover, member countries in the European Union also signed bilateral agreements in accordance with European Union’s organic standards. EU also signed a similar bilateral agreement with many countries, including South Korea, Australia, Israel, Argentina, Canada, and India. (FiBL and IFOAM, 2015)  Acceptance of the certifying agency by the target importing country The certification process of organic products frequently has high technical specifications, and certification fees are often very high. Therefore, the expoters typically must have financial wherewithal to certify for country they export to, and subsequently small farmholders can be sidelined or barred from entering the market. Recognizing this impediment, the United States, EU, and Japan allow that organic products only need to be certified by agencies or organizations that are in the accepted list, including those organizations that are in the exporting, not importing countries. (FiBL and IFOAM, 2015)

2.3 Certification and accreditation standards As mentioned earlier, the certification of organic products are aimed at making sure products comply with organic standards, to create trust between producers and consumers, as well as help prevent unfair competition and facilitate market access by organic farmers. At present there are several kinds of certification systems as follows:  Third-Party Certification (TPC) In the Third-Party Certification system, organic producers or groups (“first party”) will get independent party (“third party”) review their planting and production process to ensure it is in compliance with organic standard. The third party will issue certification to the importing

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

country, confirming that such organic products comply with private standard or government regulations. Figure 1 summarizes this sytem. TPC is a widely used process for producers or exporters that want to access large markets such as the United States, EU, or Japan. (European Commission, 2010) Figure 1 : Third-Party Certification (TPC) for Export

Organic Standard (government regulation or private standard) Control Compliance Organic Certificate

Control Body (3rd party)

Defines organic product process Producer (1st party)

Sells Organic Products

Importing Country (2nd party)

Source: (European Commission, 2012)

 Smallholder Group Certification based on Internal Control System (ICS) Individual farmers who band together to form organic farming groups can submit their processes to verification by a third party. The certification process differs based on whether or not the group has an Internal Control System (ICS) as follows: - Group without ICS: Verification body will need to certify all plots of land under organic farming management that belong to the group, using the same process as certifying for each individual farmer. This process is costly because it necessitates verification of every single plot of land - Group with ICS: The farming group must first design an internal control system, which must include staging regular training for members on the relevant organic process and standard, laying down verification and certification process, annual visit to each member’s farm, stipulating penalties for members that do not comply with the group’s requirements, and implementing a clear internal control system with designated persons with responsibilities, undertaking an annual risk review, and producing an annual report that details the group’s

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

operations. After the ICS is in place, a third-party certifier will then visit to certify products from the entire group, sampling only a few plots of land (Organic Agriculture Certification Thailand, 2014). ď&#x201A;ˇ Participatory Guarantee System (PGS) Participatory guarantee systems (PGS) are locally-focused quality assurance systems. They do not involve third-party certifiers, but instead certify organic producers based on active participation of various stakeholders. Such systems are built on a foundation of trust, social network, and knowledge exchange. (IFOAM, 2008). This system is least financially onerous to small farmholders, and is therefore gaining ground in many developing countries including Thailand. Figure 2 shows that currently there are over 46,000 small farmholders in 38 countries that are involved in PGS. Among them, over 17,000 are certified through PGS. As of the end of 2015, PGS is being developed in additional 17 countries worldwide. (FiBL and IFOAM, 2015) Figure 2: Map of PGS by Country

Source: (FiBL and IFOAM, 2015)

2.4 Certification and accreditation standards in Thailand Thailand has both Third-Party Certification (TPC) and Participatory Guarantee System (PGS). The TPC is used by both large producers/exporters and small farmholders, while the newer PGS is gaining popularity as a mechanism to supplement TPC and encourage adoption of organic practices by new communities.

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

 Third-Party Certification in Thailand Several government agencies led by the National Bureau of Agricultural Commodity and Food Standards, under the Ministry of Agriculture and Cooperatives, launched “Organic Thailand” standard in 2012. Other than this state-designed standard, there are several other organic standards, including “safe from chemicals” standard issued by the Ministry of Health, private standards such as Organic Agriculture Certification Thailand (ACT), which certifies in accordance with IFOAM and other international standards. There is also a number of organizations that certify on behalf of importing countries that wish to import organic products from Thailand: for example, Bio AgriCert from Italy, EcoCert from France, etc. Major certifications and their logos are displayed in Figure 3. (Green Net Cooperative, 2011)

Figure 3 : Major Organic Certifications in Thailand

Source : (Green Net Cooperative, 2011)

Organic Agriculture Certification Thailand (ACT) is a leading organization that can certify organic products for every major export destination for Thailand. The organization currently offers the following certifications: (Organic Agriculture Certification Thailand, 2015)  

IFOAM: ACT became IFOAM Accredited Certification Body since 2001 European Union Programme: ACT was included on the list of accepted certification bodies in EC directives 843/2007 and 889/2008 since 2011 Figure 4 : EU organic certified logo

Financial Incentives to Encourage Organic Farming in Thailand : Final Report



Canada: The Canadian government launched Canada Organic Regime (COR) in 2009, placing it under Canadian Food Inspection Agency (CFIA). ACT has been certified body under this scheme since June 2009 United States: National Organic Program (NOP), under the supervision of United States Department of Agriculture (USDA), was in place since 2002. Later in 2009, USDA signed agreement with Canada’s CFIA, giving all organic products that are certified under Canada’s system an automatic equivalent qualification under the NOP system Figure 5: USA organic certified logo

Source: (Green Net Cooperative, 2011)



Switzerland: The Swiss government issued Organic Ordinance (SR 910.18) in 1997, under the supervision of Federal Office for Agriculture (FOAG). ACT became a certified body under this regime in 2012 ACT: In addition to acting as certification organization for various standards, ACT has also produced local organic standard that is designed for early-stage organic producers in Thailand and South East Asia

 Participatory Guarantee System (PGS) in Thailand PGS is a relatively new system in Thailand. Several major organic producers and retailers including Lemon Farm, Green Net Cooperative, Earth Net Foundation, and Agroforestry Network joined hands in 2013 to establish “PGS Organic Thailand+” to co-ordinate and support the implementation of PGS for organic products. Currently PGS under this network encompasses 150 households in 6 provinces in the North, Central, and Northeast of Thailand. Each community organic group in the PGS can add their own additional rules to the core set of rules and principles. (Green Net Cooperative, 2013)

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

3. Organic Farming Landscape 3.1. Global organic farming landscape 3.1.1 Organic agriculture land In 2013, there are over 43.1 million hectares of organic land worldwide, an increase of 391.8% from 1999. (Details in Figure 6 and 7) Compared with conventional farmland, however, organic farmland constitutes only 0.98% of total farmland worldwide. Of all the continents, Oceania has the highest percentage of organic farmland, at 4.1% of total, followed by 2.4% in Europe, 1.1% in Latin America, 0.7% in North America, 0.2% in Asia, and 0.1% in Africa. Organic farmland in Oceania constitutes over 17.2 million hectares, or 40% of worldwide organic farmland. In 2013, organic farmland increased by 5.13 million hectares from 2012, mainly in Australia. Over 97% of the increase in organic farmland in 2013 in Australia was due to an increase in grazing area for organic livestock, bred for retail and export markets. Europeâ&#x20AC;&#x2122;s 11.46 million hectares of organic farmland constitutes 27% of total organic farmland worldwide. Spain is the European country with largest organic area, with 1.6 million hectares, followed by Italy, France, and Germany. Latin America came third in term of area, boasting 6.61 million hectares or 15% of total organic farmland worldwide. Argentina came first in the continent with 3.2 million hectares. Details are in Figure 6. When looking at organic land in individual countries, the list of top ten countries is telling. Australia comes first with 17.2 million hectares, followed by Argentinaâ&#x20AC;&#x2122;s 3.2 million hectares, USA with 2.2 million hectares, China with 2.1 million hectares, Spain with 1.6 million hectares, Italy with 1.3 million hectares, Germany with 1.1 million hectares, Uruguay with 0.93 million hectares, and lastly Canada with 0.87 million hectares. Thailand has only 33,840 hectares of organic land, ranked 58th worldwide in the latest global survey which encompassed 170 countries. (FiBL and IFOAM, 2015)

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Figure 6: Worldwide organic agriculture land by continent

5 0

Asia 2005

Europe 2007

Latin America 2009 2011

11.81 12.07 12.15 12.19

17.32

Afirica

2.22 2.92 2.65 3.02 3.05

6.76 7.77 9.21 10.54 11.46 5.06 5.59 7.66 6.86 6.61

0.49 0.86 1.03 1.07 1.23 2.68 2.9 3.58 3.69 3.43

Million hectares

Northern America 2013

Oceania

Source: (FiBL and IFOAM, 2015)

Figure 7 : Growth of organic agriculture land (1999-2013)

43.1

Million hectares

40 30 20 10

14.9

17.2

19.8

25.7

29.8 29 30.1 31.5

34.4 36.3

36 37.4 37.5

0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: (FiBL and IFOAM, 2015)

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

3.1.2 Organic producers In 2013, there are over 2 million organic producers worldwide, increased by 71,000 producers or 4% from the year before. Three-fourths of all producers reside in Asia, Africa, and Europe (see Table 1). India sports the highest number of organic producers, at 650,000, followed by Uganda with 189,610 producers, and Mexico with 169,703. (FiBL;IFOAM, 2015) Table 1: Numbers of organic producers by region 2012-2013 Region Africa Asia Europe Latin America North America Oceania Total

2012 (no.) 572,863 685,437 321,474 316,583 16,470 14,605 1,927,432

2013 (no.) 574,219 730,744 334,870 319,459 16,393 22,997 1,998,592

Change in numbers +1,266 +45,307 +13,396 +2,876 -77 +8,392 +71,160

Change in % +0.2 +6.6 +4.2 +0.9 -0.5 +57.5 +3.7

Source: (FiBL and IFOAM, 2015) survey, based on information from the private sector, certifiers, and government

3.1.3 Organic products and land use In terms of products, organic cereals constitute the highest use of land, with 3.3 million hectares, followed by oilseeds with 0.78 million hectares, coffee with 0.73 million hectares, olives with 0.61 million hectares, grapes with 0.31 million hectares. Organic vegetables and other agricultural products constitute the remaining 1.34 million hectares. Figure 8 shows that every organic product category showed an increase in land use in 2013, except protein crops and fruits.

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Figure 8: Growth of selected crops, 2012-2013

Source: (FiBL and IFOAM, 2015)

Table 2: Global organic product landscape in 2013 -

Organic product category Organic cereals land in 2013 increased to 3,309,788 hectares from 1,233,801 hectares in 2004, representing 168.25% increase. Wheat constitutes 36% of total cereals land use, followed by oats at 14%, and barley 11%. Europe has the highest concentration of cereal land in the world, and Austria has the highest share at 12.1% Thailand constitutes 0.1% share of land use, with 20,177 hectares for cereals

Details Figure 9: Land use by cereal types 2013

Tritical 3% Rye 6% Rice 7% Maize grain 10%

other/no details 13%

Barley 11%

Wheat 36%

Oats 14%

Source : FiBL and IFOAM

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Organic oilseeds were planted in 779,803 hectares worldwide in 2013, an increase of over 441.7% from 2004. Soybeans constitute leading category with 29% land use, followed by sunflower (11%) and peanuts (10%) Countries with highest growth in land use in this category are the United States, India, Brazil, and China Asia has the largest farmland, led by China Countries with the highest percentage of land use in this category is Peru at 21% (largely soybeans and peanuts), followed by El Salvador at 15% (largely sesame), Austria at 10.1% (largely soy and sunflower seed), Israel at 5.9% (Jojoba), and Kazakhstan at 5.1% (rapeseed and linseed)

Figure 10: Land use by oilseed types 2013

other/no details 27%

Soybeans 29%

Linseed 7% Sunflower Sesame 11% 7% Peanuts Rapeseed 10% and Turnip Source : FiBL and IFOAM 9%

For organic coffee, Latin America comes first in terms of land use, with 204,601 hectares, led by Brazil and Bolivia Thailand has 1,180 hectares of land devoted to organic coffee, representing 2.3% of total land use in this category

Organic grapes are largely found in Europe, which constitutes 258,348 hectares or over 90% of total land dedicated. Most of the production is for wine, led by Spain, Italy, and France with over 60,000 hectares each. A recent newcomer is China, which in 2013 planted organic grapes in over 19,000 hectares across the country

Organic vegetables are mostly grown in Europe, with 105,123 hectares of land. Up and coming new entrants include China, India, Nigeria, and Turkey In terms of highest percentage of land use, Denmark comes first in this category with 21.3%, followed by Austria (19.9%), Switzerland (13.3%) and Germany (10.7%) Thailand has only 709 hectares of organic vegetables, representing 0.1% of total land use worldwide in this category

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Organic protein crops are mostly grown in Europe, especially Sweden, France, Spain, Italy, and Germany. Sweden boasts the highest percentage of farmland at 72.1%

Latin America planted over 90% of all organic cocoa beans worldwide

Among organic temperate fruits, apples are the most popular with 44% share of land use, followed by apricots at 10%, and pear at 8% Organic temperate fruits are mostly grown in Europe. Worldwide production is led by Poland (42,000 hectares), followed by China (35,000 hectares), Italy (28,000 hectares), the U.S. (18,000 hectares), Turkey (12,000 hectares) and France at 10,000 hectares

Figure 11 : Land use by temperate fruit types 2013 other and not details 25% Peach nectarines 4% Cherries 4%

Plums 5%

Apples 44%

Pear 8%

Apricots 10%

Source : FiBL and IFOAM

Among organic tropical and Figure 12: Land use by tropical and subtropical fruit subtropical fruits, bananas is types 2013 the most popular at 38% of land use, followed by avocado (22%) other/no and mango (11%) details Latin America leads production Pineapples 15% in this category. Mexico, 2% Dates Bananas Dominican Republic, France, 2% 38% Uganda, Brazil, and the Kiwis Philippines each has over 2% Figs 20,000 hectares of land 8% dedicated to such fruits, led by Mangos Dominican Republic at 21.1% Avocados 11% Thailand has 1,272 hectares 22% Source : FiBL and IFOAM dedicated to this category, representing 0.1% of land use

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

The most popular organic citrus fruits is orange, with 52% of total land use in this category, followed by lemons and limes at 12%, and pomelos and tangerine at 5% each Europe dedicates the largest area of land to this category. Top three land use are Italy at 28,000 hectares, Mexico 12,000 hectares and China 11,000 hectares In terms of highest percentage of land use, Ghana leads with 29%, followed by Italy 19.7% and France 9.4%

Figure 13 : Land use by citrus fruit types 2013

other/no details 26% Tangerine 5% Pomelo/grap efruits 5% Lemon and Limes 12% Source : FiBL and IFOAM

Orange 52%

Source: (FiBL and IFOAM, 2015)

Overall, Europe leads the world in terms of production area for organic plants and fruits, except for organic cocoa and fruits which are largely planted in Latin America. Cereals, and wheat in particular, constitute the most popular type of organic products in Asia (FiBL and IFOAM, 2015), although Europe still leads in terms of organic land dedicated to this category. 3.1.4 Market and international trade Globally, organic market in 2013 boasted over USD 72 billion sales value, representing almost 5 times increase from 1999 and shows a positive trend (see Figure 14). Europe and North America generated over 90% of global sales in 2013. Countries with the largest organic markets were the United States, Germany, and France. The largest single markets were the United States (43% of the global market), followed by European Union (40%) and China (4.3%). Countries with the highest per-capita consumption of organic products, at over 100 USD, are Switzerland, Denmark, and Luxembourg. (FiBL and IFOAM, 2015) In 2014, Euromonitor International reported that the consumption of organic fruits and vegetables in China had now surpassed India and the United States to rank first in the world (see Figure 15). The key driving factor behind the rapid rise in popularity of organic products in China since 2008 is the increasing concern of consumers on food safety issues, particularly after many media episodes that expose the use of rotten meat in food preparation, and the discovery of contaminants in baby products.

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Figure 14: Global market for organic food and drink 1999-2013

Billion US Dollars

72 59

28.7 15.2

20 0

1999

2004

2010

2013

Source: (FiBL and IFOAM, 2015)

Figure 15: Consumption of organic vegetables and fruits, 2014

10 Millions Ton

8 6 4 2 0 China

India

USA

Spain

Organic Vegetables

Germany

Italy

French

Organic Fruits

Source: (Organic Farms Economies & Consumers, 2016)

Other than consumer concerns over health and the environment, another key factor that helped drive the growth of organic market in Europe is the Eupean Union’s “Organic Action Plan” which is a coordinated and systematic approach to growing the market, encompassing many types of financial incentives for conventional farmers to switch to organic (which will be covered in Chapter 7 of this report). This Plan has resulted in a continuous increase of organic

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

farmland in Europe in the past 10 years. Today Europe boasts 10.2 million hectares, or 5.7% of organic land worldwide. 3.1.5 Factors affecting growth of organic market The Research Institute of Organic Agriculture (FiBL) and IFOAM jointly identify factors that affect the growth of global organic market annually in their “The World of Organic Agriculture Statistics & Emeging Trends” report. Key findings from the 2015 report are as follows: (FiBL and IFOAM, 2015) First, there is still very low market share of organic products outside Europe and North America, which together account for 90% of total market share. Countries in Asia, Latin America, Africa, including Australia, remain major producers and exporters of organic products rather than consumers. Each country in these continents needs to expand and increase the variety of products in the domestic market to better meet the increasing needs of domestic consumers. Second, organic products are facing tougher competition from other food products that post various kinds of “eco labels,” of which there are over 200 labels today. The main purpose of such labels is to inform and convince consumers that they are the result of “environmentally and socially responsible” processes. If “green consumers” which constitutes the most important consumer group of organic products cannot meaningfully differentiate between organic products and eco-labels, particularly tea and coffee products, sales of organic products may decline in the future. Lastly, different consumer perceptions of “organic” in different countries, as well as definitions of “organic” that differ from IFOAM principles, have affected sales. For example, many consumers in the United States buy organic products because they perceive that such products are good for their health and have higher nutrition value, while many consumers in Europe buy organic out of concern for the environment, and Chinese consumers buy organic because they view such products as high-quality and safe, etc. 3.2 Organic farming landscape in Thailand Literature review of organic market in Thailand revealed that in the past 40 years, market growth is largely a result of three trends in society: a shift in consumer behavior, organic farming seen as solution to losses from conventional farming, and increasing awareness of environmental problems. The first trend, a shift in consumer behavior, is a relatively recent trend of middle class and upper-middle class consumers who are increasingly concerned of their health and food

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

safety. Many of them have come to perceive organic food as “safe food” because they “come from nature” without chemicals or have low chemials usage in the production process. The second trend results from the efforts of many non-governmental organizations (NGOs) who joined hands with grassroots farmers’ organizations to find a viable solution to the problem of declining prices and yields of conventional crops that result from overuse of chemicals. Organic farming is seen as one such solution. In 1989, the Alternative Agriculture Network (AAN) was set up to coordinate between NGOs and community leaders to impart organic farming knowledge and experience to various communities in Thailand. AAN organized its first national conference in 1992, requesting the government to promote sustainable agriculture and organic farming and add it to Thailand’s national sustainable development strategy. To date, there has been no concrete response from the government. The third important trend is increasing awareness of farmers on the impact of conventional farming on the environment, as well as the importance of conservation. Many farmers report first-hand experience that intensive use of chemicals over decades result in soil pollution, decline in biodiversity, and impaired ecosystems. (Supachai Lorlowhakarn, 2006) The combination of three aforementioned trends explains the rapid rise of “healthy food business.” Years 1992-1997 is recalled by many organic practitioners as “golden age” of health stores. Government agencies at that time also promoted “safe food,” such as safe vegetables, non-toxin vegetables, etc. As a result, Thai consumers became confused between “safe food” and “organic food,” and typically prefer “safe food” due to lower prices and higher accessibility. Domestic market therefore had been growing extremely slowly. The financial crisis in 1997 put a further dent in the market and resulted in several years of stagnation, similar to other business at the time. The organic market in Thailand started to recover in 2003, when an international conference on organic farming was co-hosted by IFOAM and the United Nations’ Food and Agriculture Organization (FAO) in Bangkok. The conference sparked renewed interest in both the production and consumption sides, as well as from the Thai government which vowed to support organic market with more concrete policies. In addition, the launch of statesponsored “Organic Thailand” standard has helped consumers distinguish between “safe food” and “organic food” products. Thai producers also began to see a positive trend in the domestic market, and began to develop specific marketing schemes (FAOSTAT, 2011). In 2014, Thailand exported approximately USD 37 million worth of processed organic products, USD 17 million worth of organic rice, and only USD 1.9 million worth of organic vegetables and fruits (Organic Agriculture Development Center, Sukhothai Thammathirat Open University, Earth Net Foundation, 2015) (see details in section 3.2.4 Organic Market).

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

3.2.1 Organic agriculture land Green Net Cooperative, one of the pioneers of organic farming in Thailand, estimated that organic farmland grew very little year-on-year before 2002. But from 2002 onwards, organic farmland has rapidly risen continuously, despite slowing down somewhat during the world financial crisis in 2008 (see Figure 16). In 2013, Thailand has land that has been certified organic totaling 34,109 hectares, only 0.19% of total agricultural land in the country. The Northeast has the highest percentage of organic farmland, followed by the Central, North, and South regions. Most organic producers in the North and Northeast are small farmholders, each household owning only 3.04 hectares (Northeast) and 1.92 hectares (North) of land on average. Meanwhile, organic producers in the Central and South regions tend to be large farmholders, owning an average of 14.08 hectares (Central) and 10.24 hectares (South) per household respectively.

hectare

Figure 16: Organic agriculture land in Thailand 1998 - 2013

40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

Note: 1 hectare = 6.25 rai Source: Green Net 2015

Overall, organic agricultural land in Thailand increased 3.8% during the period 1998-2013. Crops that saw highest land expansion were tea and coffee, with 10.21%. This corresponds with global data which shows that Thailand has roughly 2.3% share of organic agricultural land. Land for fruits and rice grew during the same period by 6.9% and 0.9% respectively, while land for other organic products all declined. Total land certified organic increased slightly from 32,871 hectares in 2013 to 34,109 hectares in 2013. Details are in Table 3.

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Table 3 : Organic production area by crop in Thailand 1998-2013 (hectares) Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Growth/ Decline

Field Crops 1,005.03 881.62 1,120.84 1,584.08 5,254.60 7,475.09 8,349.24 1,257.57 7,328.32 1,076.99 18,114.09 1,047.46 12,320.80 1,616.58 11,277.71 1,886.58 17,944.36 7,347.30 22,132.48 7,469.13 22,513.86 7,469.13 19,994.30 7,470.63 20,116.91 6,858.49 0.61% -8.19% Rice

Vegetables

Fruit

563.00 563.00 3,581.17 3,561.70 2,125.38 2,375.16 2,419.39 2,640.51 2,211.26 2,890.64 1,127.63 1,141.25 710.95 709.33 -0.23%

2,044.32 799.26 797.09 2,545.15 1,339.19 1,174.75 1,080.21 1,517.68 1,190.41 1,272.17 6.87%

Coffee/ Tea 845.76 896.80 1,070.28 1,179.59 10.21%

Mix 1,253.26 1,269.62 1,937.04 1,463.21 -24.46%

Aquatic animals 294.16 284.79 269.75 -5.28%

Others

Total

123.00 123.00 123.00 121.76 172.36 32.60 240.00 1,398.15 170.77 20.88 203.33 2,239.93 1001.62%

1,005.03 881.62 1,683.84 2,147.08 8,958.77 11,159.80 13,899.50 21,701.49 22,550.40 19,155.65 16,954.74 30,755.52 34,079.25 35,102.51 32,861.73 34,109.39 3.80%

Note: 1 ha = 6.25 rai Source: Earth Net Foundation / Green Net Cooperative as of December 2013

3.2.2 Organic products Thailandâ&#x20AC;&#x2122;s organic products are relatively plain with little variety, owing to the fact that Thailand is still in the initial stages of developing organic markets. Most of the products are therefore basic commodities that have not been processed. Rice accounts for the most land used and highest production, with 59% land use share and 44,005 tons production in 2013, followed by other field crops at 20% land use share, fruits 4%, coffee and tea 3% (see Figure 1). There is still very low level of processing involved, due largely to the lack of raw materials and lack of consistency in production.

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Figure 17 : Organic products of Thailand in 2013

Coffee/Tea 3% Fruit 4% Vegetables

Mix Aquatic animals 1% 4%

Other 7%

2% Field Crops 20%

Rice 59%

Source: Earth Net Foundation / Green Net Co-operative as of December 2013

Among all rice types, jasmine rice (hom mali) accounts for the highest percentage of all organic rice produced in Thailand, followed by red jasmine, black jasmine (hom nil), and riceberry. Most of the organic rice grown in Thailand is harvested annually, once a year between November and December Organic vegetables and fruits together account for close to 6% of total organic agricultural land. Fresh vegetables can be grown and sold year-round, but organic fruits are seasonal with the exception of bananas and papayas. Several fruits yield enough to make it attractive for processing, such as longan and coconuts. Processed products that currently use organic produce as some or all of the raw materials include: rice processed products, seasoning, drinks, snacks, and food condiments such as sugar, sweeteners, palm oil, etc. Such processed products as one category is now the largest exports of Thai organic products, exceeding rice, and plays an increasingly important role for organic products in Thailand (Organic Agriculture Development Center, Sukhothai Thammathirat Open University, Earth Net Foundation, 2015).

3.2.3 Organic producers Currently one can divide all organic producers in Thailand into 2 types: private operators, and civil society and local cooperatives. Private operators range from small farmholders, local community farming groups, to large corporations. Civil society and local cooperatives usually do not engage directly in organic farming, but serve as â&#x20AC;&#x153;facilitatorâ&#x20AC;? to support farmers to shift from conventional farming to organic. Their roles range from providing training and education, building markets, buying produce at fair trade prices, as well as providing marketing support for farmer groups.

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Other than the export markets, currently there is an increasingly diverse sales channels for organic products in Thailand:   



Specialized market fair: a typical channel for areas outside Bangkok, held in big cities near where consumers live. Such fairs are only held on specific dates, not on a daily basis, and are often called “green market” to entice green consumers Specialty stores: retail stores that are specifically branded “organic only.” The most well-known in Thailand is Lemon Farm, with 9 branches in Bangkok Regular channels: locations consumers usually shop such as modern trade, supermarkets, and malls. The more the market grows, the more organic products will appear in such regular channels Social media channels and mobile application: as Thais increasingly use free social media platforms such as Facebook and Instagram in their daily lives, it is not surprising that these platforms have become another channel to connect consumers directly with organic producers. Examples include pook pinto kao Facebook page (https://www.facebook.com/pookpintokao/) and FolkRice application (https://www.facebook.com/folkrice/)

3.2.4 Organic market Except organic vegetables, the volume of organic products in Thailand has grown in every category between 2004 and 2013. However, the value of rice, field crops, vegetables, coffee and tea has declined from 2010 to 2013 (see Table 4). Organic rice has been Thailand’s main organic export product in the past 20 years. Major export markets are Europe and North America. In terms of export value, the five most important export countries for organic rice are: the U.S., Italy, Netherlands, France, and Denmark. In 2014, Thailand exported over 12,690 tons of organic rice, value totaling Baht 552 million or USD 17 million. Also in 2014, organic vegetables and fruits exports accounted for only Baht 60.75 million (USD 1.87 million). All of the exports went to Europe and Asia. In the past few years, organic processed foods became an increasingly important export category. In 2014, organic processed foods export totaled over Baht 1,200 million in value (approx. USD 37 million), transported to Europe, North America, and other South East Asian countries. Key export items in this category are: organic coconut milk, organic curry paste and sauces, sweeteners, and sugar (Organic Agriculture Development Center, Sukhothai Thammathirat Open University, Earth Net Foundation, 2015).

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Table 4 : Produce volume and market value of organic products in Thailand 2004 2007 2010 2013 Organic Volume Value Volume Value Volume Value Volume Value Product (tons) (million (tons) (million (tons) (million (tons) (million Baht) Baht) Baht) Baht) Rice 7,827.4 313.1 13,467.1 373.4 23,515.8 752.5 44,005.8 704.1 Field Crops 1,572.0 55.0 2,934.1 65.9 13,071.0 366.0 12,002.4 336.1 Vegetables 2,656.7 159.4 5,336.8 297.2 2,114.3 105.7 1,330 53.2 Fruits 3,833.1 76.7 11,930.4 236.6 4,050.8 153.9 4,770.7 190.8 Coffee/Tea 1,057.2 190.3 1,474.5 176.9 Mix 3,524.8 141.0 4,115.3 164.6 Others 76.9 4.6 9.1 1.8 213.5 42.7 4,148.6 289.1 Total 15,966.1 608.8 33,677.5 974.8 47,547.3 1,752.1 71,847.2 1,914.8 Source: Green Net 2015

In terms of pricing, organic products are sold at a significant premium in the domestic market in every category. Organic vegetables are priced over 100% higher than conventional and “safe vegetables” (Green Net Cooperative, 2015).

3.2.5 Government policies In Thailand, the term “organic agriculture” was first formally included as a policy direction in the 8th National Economic and Social Development Plan (1997-2001) which declared the importance of various forms of “sustainable agriculture,” including organic agriculture, agroforestry, mixed agriculture, and new theory agriculture. The plan calls for devoting the minimum of 20% of all agricultural land in the country, or 2.5 million rais (400,000 hectares) to sustainable agriculture under His Majesty’s sufficiency economy philosophy. In 2005, the Thai government announced that organic agriculture was now a “national agenda,” to be propelled and implemented by National Organic Agrilculture Development Board (NOADB). This board produced the first National Organic Agriculture Development Strategic Plan (2008-2011). Key strategies include: promoting knowledge management and innovation, developing organic agriculture in accordance with local cultures, building commercial capacity of organic practitioners, and improving management for the development of organic products. NOADB has been drafting the next Strategic Plan (20132016), with the key goal of raising Thailand to be “the center of organic production, trade, and consumption in ASEAN.” However, there is no progress as of February 2016. The Thai government has been promoting and supporting organic markets in the past two decades. The National Bureau of Agricultural Commodity and Food Standards (ACFS) was set up under the Ministry of Agriculture and Cooperatives specifically to push for the use of

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

various agricultural standards, as a main tool to control product quality. The National Organic Agriculture Development Strategic Plan also serves as a main platform through which various government actors support organic farming. However, these efforts by the government so far have been little successful, because most policies still lack clarity, continuity, and effective mechanisms that are necessary to actualize policies. For example, the government’s “rice pledge scheme” which buys agricultural products at prices higher than market has become a key disincentive for conventional farmers to switch to organic farming. This is borne out by the facts that Thailand’s total organic farmland has not grown since 2011, and the use of chemicals has continued to increase (Office of Agricultural Economics, 2015).

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

4. Benefits of Organic Farming After organic farming has been practiced for over 40 years, there now exists a large body of research that document, dispute, refute, or refine the benefits of organic farming. Benefits can be divided into three categories: economic, social, and environmental. 4.1 Economic benefits 4.1.1 Higher yield Conventional farmers and the general public typically believe that switching to organic farming will yield less than chemical farming. However, a significant number of research reports found that organic yield may be equal to, or even surpass, yields from chemical farming (Kristiansen, Taj, & Reganold, 2006) contingent on favorable factors including types of crops, soil characteristics, and climate. (Pimentel, Hepperly, Hanson, Douds, & Seidel, 2005) The type of farming conducted before switching to organic is also an important determinant of organic yield. (International Fund for Agriculture Development, 2003; 2005) A wide-ranging study of organic farming practices in Asia, Latin America, and Africa (International Fund for Agriculture Development, 2005) found that the characteristics of agricultural land are an important determinant of yield. If land was fertile before switching to organic, yield in the first year after switching tends to decline, since a â&#x20AC;&#x153;conversion periodâ&#x20AC;? is necessary to recover from damages from intensive chemical use, and during this period organic farmers may face pest problems. (Independent Science Panel, 2003) But after 2-3 years, yield tends to rise from better soil, and pests are controlled by natural mechanisms. After this conversion period, organic yield may be lower, equal to, or higher than yield from conventional farming, depending on the type of crop, land environs, as well as the level of knowledge and care of organic farmer (International Fund for Agriculture Development, 2005). In cases of infertile land or land that is inappropriate for framing (marginal land), Setboonsarng (2015) found that yield tends to rapidly rise after the conversion to organic farming, before tapering off after 2-3 years (see Figure 18).

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Figure 18: Productivity yield from conversion to organic agriculture

Although organic farming yields less than chemical farming in some cases, if one considers total productivity of all crops and livestock per unit of land, organic farming tends to offer higher productivity, since it features multi-crops and multiple livestock. On the other hand, chemical (conventional) farming concentrates on monocrop to maximize yield, at the expense of providing other revenue sources for farmers (Independent Science Panel, 2003; International Fund for Agriculture Development, 2005). Setboonsarng, Leung, and Cai (2006) studied yields from organic farming from the North and Northeast regions of Thailand in 2003. The researchers compared productivity between certified organic lands (more than 4 years of organic practice), conversion period lands (2-3 years), initial stage lands (less than 2 years), and productivity from chemical farming. There were a total of 445 farms surveyed, 168 in the northern region (Phayao and Chiang Rai) and 277 in the northeastern region (Ubon Ratchathani, Surin and Yasothon). The team found that in the both regions, yield from organic farming was higher than chemical farming especially in the Northeast (see Figure 19). The same research team conducted a follow-on research in 2004, using annual production data from the Northeast, and found that average yield every year from organic farming is higher than chemical farming, except for the first year (see Figure 20).

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Figure 19 : Productivity yield of organic agriculture in Thailand

Source: Setboonsarng, Leung, and Cai (2006)

Figure 20: Average annual productivity after change to organic agriculture in Thailand (North and Northeast regions)

Source: Setboonsarng, Leung, and Cai (2006)

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

4.1.2 Lower costs of labor and other factors of production Setboonsarng (2006) compared labor costs between organic farming and chemical farming in China, Sri Lanka, and Thailand, divided by type of crops. The study found that organic farming requires more intensive labor use in all three countries. Setboonsarng, Leung, and Cai (2006) found that labor costs in organic farming in Thailand may be higher or lower than conventional farming, depending on type of crops. The same study also found that the costs of other factors of production (fertilizers, pesticide, etc.) in organic farming system are lower on average than conventional farming. Although there are differences from types of crops and plantation calendar, the overall costs of organic farming are lower than conventional farming. (See details of costs in Chapter 6 of this report) However, it is premature to conclude that total costs of organic farming are significantly lower than conventional farming, since there are related costs which can be widely varied. For example, Thai organic rice farming case studies, conducted by Food and Agriculture Organization of the United Nations (2007), showed that ongoing costs can vary from 135.0 to 213.7 US$/ha/year. Ongoing costs include soil fertility management, pest management, certification, training and meetings, and marketing expenses. 4.1.3 Price premium and increased income Proponents of organic farming argue that organic products command a â&#x20AC;&#x153;price premiumâ&#x20AC;? over conventional products. Several studies in the U.S. found that although organic farming incurs high costs of conversion and labor, organic products do command a significantly higher price premium on average (McBride & Greene, 2009). While organic farming incurs 10% higher costs on average, market prices of organic products are typically 65-140% higher than conventional products (New Farm Organization, 2003) because consumers are willing to pay more for better health (Kilcher.L, 2006; Lockie, Lyons, Lawrence, & Halpin, 2006) Such factors help explain why organic farmers enjoy higher profits than conventional farmers (Rigby & Caceres, 2001) However, in countries where government policies support chemical agriculture in ways that distort market mechanisms, organic farming may not necessarily produce higher yield (Rasul & Thapa, 2004). A significant number of studies found that price premium is the key factor that allows organic practitioners to enjoy higher profits than conventional agriculture (Chavas, Posner, & Hedtcke, 2009; Archer, et al., 2007; Pimentel, Hepperly, Hanson, Douds, & Seidel, 2005; Smith, Clapperton, & Blackshaw, 2004; Delate, et al., 2003; Reganold, Glover, Andrews, & Hinman, 2001; Clark, Klonsky, Livingston, & Temple, 1999). Price premium depends on supply and demand in the market, as well as additional costs of organic farming. (Oberholtzer, Carolyn, & Catherine, 2005) For Thailand, research that compares organic farmerâ&#x20AC;&#x2122;s income for different sizes of land shows that organic farming does generate higher income than conventional farming, and create benefits from price premium in a statistically significant way (ADBI, 2006) as displayed in Table 5 and Table 6.

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Table 5: Profitability by farm size in Thailand (Baht per rai) Land Category 0 – 5 rai 6 – 10 rai 11 – 20 rai >20 rai Total

All Farms 1,719 1,744 1,723 1,646 1,721

Conventional Farmers 1,374 1,413 1,337 1,276 1,369

Organic Farmers 2,432 2,076 2,021 1,866 2,072

p-value* 0.0000** 0.0000** 0.0000** 0.0057* 0.0000**

Notes: *The p-value of a random sample is the probability that its value will differ from the sample mean Value range from 0 to 1. The smaller the p-value, the more significant is the result. A p-value of 0.001 means that there is only I change in 1,000 that the observation is a coincidence. The symbol** indicates significant different at the 1% * at a 5% level. Source: ADBI Survey Result, 2006

Table 6: Price premium associated with organic product Crop Rice 2006 Rice Tea Pepper Ginger

Country Thailand (Baht/kg) PRC (yuan/kg) Sri Lanka (rupee/kg) Sri Lanka (rupee/kg) PRC (yuan/kg)

Organic Agriculture 10.26

Conventional Agriculture 9.35

Premium (%)

Sig.

9.7

1.58

1.41

12.4

***

40.00

22.82

75.3

***

177.85

145

22.7

***

1.9

1.88

4.8

PRC = People’s Republic of China,kg = kilogram, sig = significance. Note : **and***indicate significance levels of 5% and 1% ,respectively. Source : ADBI Survey Result, 2006

Although price premiums of organic farming are well established in many areas, structural inefficiencies may result in price distortions. For example, a study of organic farming in Maha Sarakam province, in the Northeast region of Thailand, found that organic farmers were unable to sell their produce at higher prices than conventional farming. The key reason is that the organic certification process had many practical difficulties. For instance, the audit of land and products usually take a long time, leading to spoiled produce in the meantime. As a result, many farmers choose to sell their produce without going through the certification process, thereby cutting themselves off from the possibility of price premium. Many farmer groups in Thailand that successfully pass certification and enjoy price premiums signed sales contract with large agricultural companies (Panyakul & Sukjirattikarn, 2003).

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

4.2 Social benefits 4.2.1 Poverty reduction Proponents of organic farming have long touted the system as an important mechanism for poverty reduction. The organic farming system is said to create more jobs for members of the local communities than chemical farming, since most poor farmers have knowledge of traditional farming methods that are more reconciliable with organic farming than conventional farming (the traditional methods, in other words, are often â&#x20AC;&#x153;organic by default.â&#x20AC;?) Therefore, training and capacity building for organic farming tends to be easier than for conventional farming (International Fund for Agriculture Development, 2011). As mentioned earlier, ADBI survey (2006) compared the need for labor between organic and non-organic farming in China, Sri Lanka, and Thailand. The study found that organic farming requires more labor, thereby supporting the thesis that organic farming creates more jobs in the community than conventional farming. See Table 7 for details. In addition to reducing poverty via creating more jobs, organic farming is also found to help reduce poverty by helping to reduce debt burden. Setboonsarng (2006) found that over 60% of households reported lesser debt burden after switching to organic farming, because organic farming helped farmers gain higher income and reduce production costs, thereby resulting in higher profits (see details in

Figure 21). In addition, organic farming households tend to better diversify risks among more sources of income (from planting multiple crop types), and have less food expenses (from being able to subsist on organic produce).

Table 7: Comparison of total labor need between conventional and organic agriculture Crop Country Organic Agriculture Rice PRC 251.88 Tea PRC 232.70 Tea Sri Lanka 259.70 Rice 2005 Thailand 75.80 Banana Thailand 204.57 PRC = Peopleâ&#x20AC;&#x2122;s Republic of China Source: ADBI Survey Result, 2006

Conventional Agriculture 221.32 149.77 285.67 73.11 275.61

p-value 0.05 0.00 0.08 0.36 0.11

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Figure 21 : Debt position of farm family after converting to organic agriculture, 2006

Source: ADBI Survey Result, 2006

4.2.2 Increased investment in education So far, no research has established that organic farming system helped improve education level of the farmers in Thailand. But a survey of farmersâ&#x20AC;&#x2122; expenses in China and Thailand in 2006 found that organic farmers had higher income than conventional farmers, resulting in organic farmers being more able to pay for their childrenâ&#x20AC;&#x2122;s education, judging from higher education expense per capita (see details in Figure 22). This result may be partly explained by the fact that successful organic farming requires management and marketing skills which are taught in schools and universities. The heads of organic farming households therefore have higher incentive to invest in childrenâ&#x20AC;&#x2122;s education compared to conventional farmers. (ADBI, 2006) Figure 22 : Organic agriculture and education expenditure in Thailand and China, 2006

Source: ADBI Survey Results, 2006

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

4.2.3 Improved health Deteriorating health from intensive use of chemicals in conventional farming has long been one important factor that compels farmers to switch to organic (Independent Science Panel, 2003; 2005). Intensive use of chemicals increases the risks of cancer and other diseases for the farmers themselves and those in the community (U.S. Dept. of Health and Human Services, 2010), especially since conventional farmers tend to use chemicals much more intensively the more they farm, with insufficient knowledge of appropriate use or health impacts. On the contrary, organic farming by definition avoids chemicals in the farming process, allowing farmers and communities to stay safe from adverse impact. A study in Maha Sarakam province in Thailand in 2010 found that farmers who had poor health from overuse of pesticides tended to switch to organic farming more readily than others. (Thapa & Rattanasuteerakul, 2011) Setboonsarng and Lavado (2008) studied expenses of farmers in the North and Northeast of Thailand in 2006, and found that conventional farmers paid 56% higher health-related expenses compared to organic farmers. This means that organic farmers could utilize such expense savings for other uses, implying that they are likely to enjoy higher quality of life than conventional counterparts. In a separate study, Setboonsarng & Lavado (2008) studied medical expenses of organic farming households and conventional farming households in the North and Northeast region in 2006, divided by income levels. They found that on average, organic farmers had significantly less medical expenses than chemical farmers, as seen in Table 8. This research supports the proposition that organic farmers can use savings for investments such as childrenâ&#x20AC;&#x2122;s education, which will help enhance their quality of life in the short and long run.

Table 8: Medical expenditure of organic and conventional farmer in Thailand in 2006 Medical Expenditure Poorest 20% Second poorest Middle Second richest Richest 20%

Total 999 359 685 616 820 2,516

Organic 712 293 564 483 860 1,245

Conventional 1,277 406 781 759 767 3,892

Note *significant at 10%, **significant at 5%, *** significant at 1% Source: Setboonsarng and Rouselle, 2008

p-value 0.0676* 0.2608 0.2837 0.8783 0.4167 0.0661*

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

4.3 Environmental Benefits 4.3.1 Decline in greenhouse gas emissions “Greenhouse gas” is any gas in an atmosphere that absorbs and emits radiation, a fundamental cause of the greenhouse effect. Main greenhouse gases are carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O) and ozone. In the past half century, greenhouse gases in the atmosphere have risen rapidly, and are the major cause of climate change (Hepperly & Setboonsarng, 2015), which directly and indirectly caused more frequent and more severe draughts, floods, and storms (Trenberth, 2011). The composition of greenhouse gas emissions from agricultural sector is detailed in Figure 23. Worldwide, the agricultural sector constitutes one crucial cause of climate change. A 2005 study found that global agricultural sector emitted a total of 5.1-6.1 gigatons of CO2 equivalent worldwide, or 10-12% of total global greenhouse gas emissions (Intergovernmental Panel on Climate Change, 2007). For Thailand, a study by governmentappointed Climate Change Policy Committee (CCPC) in 2008 (Government-appointed Climate Change Policy Committee, 2008) found that Thailand’s agricultural sector emitted a total of 82.79 million tons of CO2 equivalent in greenhouse gases, or 24.1% of total greenhouse gas emissions in Thailand.

Figure 23: Main sources of direct GHG emission in the agriculture sector, 2005

Soil emission (CH4+N2O), 38%

Rice Production (CH4), 11% Manure (CH4+N2O), 7% Biomass burning (CH4+N2O), 12% Enteric fermentation (CH4), 32% Source: (IFOAM EU Group, 2009)

On the other hand, the agricultural sector also has the capacity to alleviate climate change. Organic farming practices emit less greenhouse gases than conventional farming, and boast a higher potential to sequester carbon (Panyakul V. , Organic Farming and Global Warming,

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

2012; Hepperly, et al., 2008). In addition, alleviation of climate change via organic farming has the advantage over many other means in that it can be implemented immediately, incurs relatively low costs, and helps maintain organic matter in the soil (Food and Agriculture Organization of the United Nations, 2007). The role of organic farming in alleviating climate change can be broken down into several categories: (1) Carbon sequestration Organic farming practices help maintain soil quality that is suitable for carbon sequestration, which can only happen when the soil structure has ample organic matter, water, and living organisms (Sundermeier, Reeder, & Lal, 2005) Since organic farming system focuses on using organic matter in soil improvement, both in terms of manure and compost, this practice results in the soil having more organic matter, thus improving its capacity for carbon sequestration (Panyakul V. , 2010). Examples of activities and farm management techniques in organic farming that affect soil capacity for carbon sequestration includes the following: ď&#x201A;ˇ

Use of organic matter in soil improvement The avoidance of all chemicals and simultaneous focus on using organic matter such as manure and compost in soil allows more carbon to be sequestered in microorganisms and organic matter in the soil. A study of organic rice and soybean in Pennsylvania in the United States found that the organic farming system (whether or not manure is used) helps increase carbon content in the soil by 25% over a 25-year period, while conventional farming during the same period resulted in 4% loss of carbon content in soil (details in Figure 23) (Hepperly, et al., 2008). These results are in line with results of an independent comparative study of organic and conventional farming in Switzerland (Raupp, 1996, cited in Kotschi & Muller-Samann, 2004) which found that organic farms that have been operating for 18 years had 3-8 tons per hectare higher carbon content in the soil than conventional farms that use chemical fertilizers.

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Figure 24 : Soil carbon sequestration by farming system (1981-2005)

Chnage in soil carbon (%)

35 25.22

26.96

15 5 -5 Conventional

-3.57 Farming System Organic without animal manure Organic with animal mannure

Source: Hepperly et al (2008)

ď&#x201A;ˇ Crop rotation Another standard practice in organic farming is crop rotation, especially beans variety. Haas and Kopke (1994, cited in Kotschi & Muller-Samann, 2004) found that crop rotation enables biomass that are under the soil (plant roots) to be more voluminous than biomass above the soil (plant bodies), thereby increating soil organic matter. In addition, plant biomass (both on and under soil) in organic farms can sequester 28.8 kilograms of CO2 equivalent per hectare more carbon than conventional farms. Another study compared organic farms (separated into two types: farms that rotate with beans, and farms that use manure) with conventional farms in the United States during the period 1981-2002. The study found that in the long run, both types of organic farms sequestered significantly more carbon in soil than conventional farms as shown in Figure 25 (Rodale Institute, 2006).

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Figure 25 : Linear regression of soil carbon rise

Source: Rodale Institute, 2006

ď&#x201A;ˇ

Tillage reduction Tillage reduction or no-tillage practice can help prevent carbon loss from the soil, as well as enhance the soilâ&#x20AC;&#x2122;s capacity for carbon sequestration. It also helps reduce impact on soil microorganisms and helps preserve topsoil. However, some practitioners found that tillage reduction can increase organic matter only in the topsoil layer, in which organic matter is much less stable (Panyakul V. , 2012). Alvarez (2005, cited in (Azeez, 2009)) reviewed 161 experiments that reduced tillage in various weather conditions, and found that on average, such farms had increased organic matter roughly 2.1 tons per hectares, or less than half the data from organic farms. This is because organic farms add more volume and more diverse organic matter into the soil, in addition to reducing tillage.

(2) Nitrous oxide emission reduction Nitrous oxide is one type of greenhouse gas, almost 90% of which is emitted from activities of microorganisms in the soil. The use of nitrogen fertilizers in conventional farming will increase nitrous oxide in the atmosphere, because excess nitrogen will be converted by microorganisms into nitrogen and nitrous oxide gases which are then emitted, contributing to the greenhouse gas affect (Raupp, Pekrun, Oltmanns, & Kopke, 2006). The organic farming system can reduce emission of nitrous oxide into the atmosphere because it promotes the use of organic fertilizer instead of chemical fertilizers, of which nitrogen is an important component. A study which compares biodynamic agriculture, organic agriculture, and chemical agriculture in Switzerland found that on average, fertilizers in the organic system has 36% less nitrogen content than in the chemical system (Hepperly & Setboonsarng, 2015). Organic farming therefore entails less excess nitrogen, and therefore less nitrous oxide.

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

In addition, crop rotation and soil structure improvements in the organic system result in more porous soil that has more room for oxygen; the soil then emits less nitrous oxide to the atmosphere. Lastly, the organic farming system avoids dense crops or livestocks, leading to less usage or loss of nitrogen. (3) Methane emission reduction Methane is one of the worldâ&#x20AC;&#x2122;s most potent greenhouse gases. Raising livestock is one major source of methane emission in agriculture worldwide. Methane originates in the digestive process of ruminants such as cows, as well as airtight (no oxygen) digestion of manure. Organic farming helps reduce methane emission by changing the type of feed for ruminants, and providing ample grazing grasslands instead of intensive livestock farming (Panyakul V. , 2012). However, large amount of organic fertilizers may result in an increase in methane emission, not a decline. See example in Section 7.2.3 T-VER Case Study: Corn and Rice in Phayao of this report. A comparative study in the U.S. which compares organic livestock with conventional livestock found that organic livestock that are raised in grasslands emit methane 20-23% less than conventional livestock, all things being equal. The differences also depend on cow breeds and farm management system (Benbrook, 2009). Furthermore, organic farming encourages the use of aerobic digestion (the process whereby microorganisms access gaseous oxygen directly from the surrounding atmosphere) in breaking down organic matter, and encourages farmers to avoid burning organic matter. Both practices help reduce methane emission (Niggli & Fliessbach, 2008). (4) Energy use reduction Typically, the use of energy in agriculture can be divided into direct uses (e.g. gas, tractors, processing, packaging, and transportation) and indirect uses (e.g. the use of chemical fertilizers, pesticides, and irrigation). Such energy uses naturally differ by crop type and planting methods (Panyakul V. , 2012). Generally speaking, organic farming uses less machinery, less fossil fuel, and avoids chemical fertilizers; therefore, it uses less energy than conventional farming. A comparitve study on energy use between organic and chemical farming systems in Switzerland found that organic farming uses 31-35% less energy (Nemecek, Dubois, Huguenin-Elie, & Gaillard, 2006). This corresponds with a Europe-wide study (Niggli, J. Earley, & K. Ogorzalek, 2007) which found that on average, an organic farming system uses 10-70% less energy per unit of land, depending on crop type. Another comparative study in the United States (Rodale Institute, 2006) found that organic farming, both with tillage and no tillage, consumes less energy than conventional farming. Organic farming with no tillage consumes the least energy, as shown in Table 9.

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Table 9: Energy consumption in different agricultural systems Practice Conventional tillage Convention no-tillage Organic tillage Organic no-tillage

Energy Requirement (MCal/ha) 19,488 15,368 10,005 6,373

Reduction (%) 0 21.1 48.7 67.3

ha = hectare , MCal = megacalorie Source: Rodale Institute (2006)

Research studies cited above support the view that organic farming has a significant role in reducing greenhouse gases. Activities in the organic farming system that directly and indirectly result in less greenhouse gas emissions compared to conventional farming are summarized in Table 10. Nonetheless, the exact calculation of overall impact of each type of greenhouse gas is cumbersome, because such impact is contingent on many different factors. Therefore, there is an increasing use of total greenhouse gas impact factor called â&#x20AC;&#x153;Global Warming Potentialâ&#x20AC;? (GWP) which is typically compared to the impact of carbondioxide emission (Panyakul V. , 2012).

Table 10: Activities in organic agriculture that reduce greenhouse gas emissions Activities Less use of machinery Support mixed plantation (with legumes) Support crop rotation Avoid factors of production that contribute to greenhouse gas effect (e.g. chemical fertilizers) Avoid intensive crop/livestock Avoid burning organic matter Tillage reduction or no-tillage

CO2 / / / /

N2O

CH4

/ / / / /

Source: Summarized from Aubert (2007); Niggli, Schmid, and Fliessbach (2007)

A comparative study of GWP between conventional farming (both with tillage and no tillage) and organic farming in the central region of United States found that organic farming is the only system that produces negative GWP. In other words, it is the only farming system that is net carbon negative (sequester more carbon than emitting it into the atmosphere) (see Table 11 for details). The key reason is that organic farming leads to higher accumulation of organic

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

matter than conventional farming, and therefore it can sequester more carbon (Cavigelli, et al., 2009). Table 11: Global Warming Potential of different farming practices ∆Soil C a b

N2O flux a c

Energy use a

Total GWP a

No till 0 303 807 1110 Chisel till 1080 406 862 2348 Organic -1953 540 344 -1069 a kg CO2 ha-1 y-1 equivalents b Average carbon change rate over 11 years c N2O data were measured in 2008 d Energy use is for a typical year using published value and field records e kg CO2 Mg grain-1 equivalents

Greenhouse gas intensity (intensity gain e ) 330 153 -207

Source: Cavigelli et al., 2009

4.3.2 Improved ecosystem services “Ecosystem services” refer to all benefits that accrue to living beings from the environment and ‘services’ of the ecosystems, both direct (e.g. food, clean water, natural resources) and indirect (e.g. carbon absorption, conversion of carbondioxide to oxygen, water purification, and topsoil conservation). Organic farming plays a crucial role in conserving and recovering important ecosystem services, mainly through enhancing biodiversity, water purification, and soil organic matter. (1) Enhancing biodiversity Biodiversity is indispensable to stabilizing and balancing ecosystems, as well as provides basic factors of production for agriculture. Conventional farming typically encourages monocrop and intensive use of chemicals to boost yield, which may adversely affect biodiversity (Setboonsarng S. , 2006). On the contrary, organic farming supports higher biodiversity compared to conventional system, be it agro-biodiversity or natural biodiversity, due to the following factors: 



Organic farming tends to avoid using modified hybrid seeds, but stresses the importance of local seeds that are suitable for local ecosystem. Most breeding is done using open pollination method, which allows seeds to have a high genetic diversity. Every organic standard strictly prohibits the use of Genetically Modified Organisms (GMOs), because GMOs can self-breed and propagate uncontrollably. If local crops are contaminated by GMOs, biodiversity and natural ecosystem will be severly and irrevocably altered.

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

ď&#x201A;ˇ

Organic farming practices encourage simultaneous cropland and livestock, or mixed plants and crop rotation, and refuse the use of chemicals especially pesticides and herbicides. These practices help increase biodiversity in farmlands and the surrounding areas. Organic farming does not weed out local plants but conserves them. Such plants play an important role in the ecosystem; e.g. they help cover topsoil, provide habitats for insects and pollinators in nature, provide feed for animals, sources of organic matter for microorganisms, and even can serve as foodstuffs and medicinal herbs for farmers (Panyakul V. , 2010).

A 2006 survey of biodiversity in 80 organic farms in the North and 248 organic farms in the Northeast of Thailand (ADBI, 2006) found that over 80% of farms in the North and 90% of farms in the Northeast had higher biodiversity compared to pre-conversion period (as measured by the number of insects, crabs, fish, frogs, and other animals in the farm), as shown in Figure 25 Figure 26 : Change in biodiversity after switching to organic agriculture, 2006

Source: ADBI survey results, 2006

(2) Water purification An important factor that affects water quality in agriculture is the process of nitrogen and/or phosphorus leaching. Since nitrogen and phosphorus in chemical fertilizers are soluble in water, such substances are often washed into water sources and spread far and wide, resulting in hypoxia (lack of oxygen in water) and wastewater. Usually in conventional farming, plants can absorb only 50% of substances in chemical fertilizers; the remainder leaks into water source and soil, or re-emitted into the atmosphere (Smil, 1999). In addition, most wastewater from agriculture are not treated before returning to natural source, especially wastewater from conventional agriculture that is heavily contaminated with chemicals, resulting in pollution in the atmosphere.

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

The organic farming system helps purify water because of the avoidance of chemicals, which helps reduce contaminating water sources with nitrogen and phosphorus. A study of nitrate runoffs from organic farms compared to conventional farms found that nitrate from organic farms are 40-64% less than from conventional farms (Stolze et al. (2000), cited in Scialabba & Hattam. (2002)). This coincides with later results in Michigan, USA (Snapp, Gentry, & Harwood, 2010), which found that organic farm management results in 50% less nitrate runoffs compared to conventional farming.

(3) Increase in Soil Organic Matter (SOM) Soil organic matter (SOM) is indispensable for plant growth, as well as biodiversity and ecosystem services (Pimentel, Hepperly, Hanson, Douds, & Seidel, 2005; Van, 2000). Various activities in the organic farming system help increase SOM; for example, crop rotation and the use of natural fertilizers help improve the soilâ&#x20AC;&#x2122;s capacity in water absorption, carbon and nutrients sequestration, resulting in healthier plants that can better tolerate diseases and pests (Hoitink, Inbar, & Boehm, 1991; Cook, 1988), as well as better growth and higher yield (Snapp, Gentry, & Harwood, 2010). Many research projects studied the amount of SOM in various agriculture systems. One study in the U.S. found that in the long run, organic farming system will increase carbon and nitrogen in the soil by 30% and 40% higher than conventional farming respectively (Marriott & Wander, 2006). In addition, studies of crop rotations between maize and tomatoes in Maryland and Virginia, also in the U.S. (Bulluck, Brosius, Evanylo, & Ristaino, 2002) as well as studies of organic vegetables and strawberries in California (Reganold, et al., 2010) also found that organic farming could increase the amount of SOM in a relatively short period, namely 23 years.

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

5. Obstacles to Organic Farming 5.1 Global obstacles

Both smallholders and large farm owners who engage in organic farming typically do so because they expect a price premium for organic products. Expected profits are also important, since oveall cash costs for organic farming are typically lower than conventional farming, even though labor costs are generally higher. In addition, farmers expect better health and the environment from switching to organic. One major obstacle is that during the conversion period, which may last 2-3 years, organic yield may be less than conventional farming so that the farmer’s overall income may not increase (Asia-Pacific Regional Symposium, FAO, 2013). 5.1.1 Risks during the conversion period Several studies have been conducted on the different types of risks during the conversion period from conventional to organic farming. Major risks can be summarized as follows (Sterte, 2011):  Yield risk: lower crop yield during the conversion period, as a result of change in agricultural techniques and practices, changing crops to rotation crops, as well as pests that cannot be eliminated due to strict prohibition of pesticides.  Price risk: budding organic markets may have relatively little demand that is outsripped by supply. In addition, farmers may be unable to sell organic products at premium price during the conversion period (for example, because the certification process is still ongoing).  Institution risk: uncertain national policies, rules and regulations affect farmers’ incentives whether or not to switch to organic. For example, European Union has a number of subsidies or compensation schemes. It remains uncertain whether such schemes will remain constant or will be reduced in the future. Such risks and the lack of sufficient risk management tools can and do induce many farmers during the conversion period to return to conventional farming (see examples from Thailand in section 5.2 below). 5.1.2 Lack of access to finance Report of the Asia-Pacific Regional Symposium on Entrepreneurship and Innovation in Organic Farming in 2013 summarized that on average, farmers in the Asia-Pacific region have much greater difficulty in access to finance compared to conventional farmers, especially small farmholders. Ths is mainly due to the fact that financial institutions, including specialized banks that concentrate on agricultural loans, misperceive organic farming that the yield will always be less than conventional farming, and farmers also face external risks that are out of

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

their control, e.g. unfavorable climate, low prices, etc. In addition, many financial institutions perceive that only conventional farmers can reasonably forecast their production yield, because there are formulae for chemicals used per hectare and expected corresponding yield. Financial institutions use such formulae as a basis to design and sell loan packages that target specific conventional crops. However, organic farming in reality generates higher profits than conventional farming and involves far less risks. Reasons given by financial institutions for their disinterest in organic farming are therefore misconceptions. The report concludes that financial institutions should seek better knowledge of organic farming, and consider lending under terms that are appropriate to the value chain; for instance, requiring certification as condition for loan disbursement (Asia-Pacific Regional Symposium, FAO, 2013).

5.1.3 Costly organic certification Most organic producers reside in developing countries, exporting their products for sale in the developed world. This requires Third-Party Certification (TPC) in accordance with standards, rules and regulations of each country. Such TPC process is often costly, creating barrier to entry for most organic farmers in developing countries, who tend to be grassroots farmers with limited resources. Because they cannot pay for TPC, they cannot access the export market and cannot sell their products at a price premium. In recent years, the Participatory guarantee systems (PGS) which is much less costly than TPC, has emerged as a viable alternative for small organic farmers to access and receive organic certification. This system is based on trust of every stakeholder from upstream to downstream, and therefore depend on established relationships between producers, producer groups, sellers, and end consumers (Asia-Pacific Regional Symposium, FAO, 2013) (see further information in 2.2).

5.1.4 Unfavorable government policies Most developed countries have policies that are aimed at maintaining stability of agricultural product prices, and reducing income gap between urban and rural residents. However, government policies still largely subsidize conventional farming, including chemicals and product prices, leading to market distortions that helped dampen consumersâ&#x20AC;&#x2122; interest in organic products relative to conventional products, making the competition harder for organic farmers. Various NGOs and international organizations have been proposing for decades that governments should remove all subsidies to conventional farming. (Asia-Pacific Regional Symposium, FAO, 2013)

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

5.1.5 Lack of knowledge The past 2-3 decades have seen a marked increase in the number of conventional farmers who have switched to organic farming. However, the practice of organic farming still faces significant hurdles, one of which is farmersâ&#x20AC;&#x2122; lack of knowledge in organic farming and related market mechanisms. Most conventional farmers therefore choose to stay with conventional farming (FiBL and IFOAM, 2015). In addition, most consumers also lack knowledge of the differences between organic and conventional products, and are still largely unaware of the benefits from consuming food that is safe, healthy, and incur minimal impact to society and the environment (Asia-Pacific Regional Symposium, FAO, 2013). 5.2 Obstacles to organic farming in Thailand Given the changing organic market landscape in Thailand as discussed in 3.2.4, there remains a number of obstacles to organic farming in Thailand, some of which mirror obstacles in other countries. 5.2.1 High demand but low supply due to lack of capacity As mentioned earlier, recent years have seen rapid growth of demand for organic processed products, as well as non-food organic products such as cosmetics and personal hygiene both for the domestic and export markets. Despite high market potential, the supply of necessary organic raw materials is still too limited to adequately respond to demand (Organic Agriculture Development Center, Sukhothai Thammathirat Open University, Earth Net Foundation, 2015). This is partly due to the fact that such products require significant investments and know-how in branding, technology, and innovations in processing, which small organic farmers cannot access (Lorlowhakarn, et al., Strengthening the Export Capacity of Thailand 's Organic Agriculture, 2008). Small farm producers often lack the necessary resources and infrastructure for effective product distribution. This is an obstacle to market penetration in both the domestic and export markets (Lorlowhakarn, et al., Strengthening the Export Capacity of Thailand 's Organic Agriculture, 2008). 5.2.2 Obstacles during the conversion period The 2006 survey of Asian Development Bank Institute (ADBI) in Japan found that yield per hectare of organic farming during the conversion period is relatively low (as mentioned earlier in section 4.1.1, Figure 18), pressing farmers into financial hardship as they need to seek working capital during the conversion period. In addition, labor costs are often higher for organic farming compared to conventional farming. To delve in more detail, the above-mentioned survey results reveal that the price premium particularly received in the previous year is the main motivation to continue with organic agriculture in the next season, a response given by 48% of the farmers. Of the total, 23% of farmers stated the price premium as an important reason to convert to organic agriculture or continue with organic agriculture (ADBI, 2006).

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Several studies found that an important obstacle to organic farming in Thailand is the fact that farmers need to adapt their lands and practices to meet the requirement of international organic standards. This adaptation process is often costly, thereby hampering the farmers’ ability to successfully make the transition (Lorlowhakarn, et al., Strengthening the Export Capacity of Thailand 's Organic Agriculture, 2008). 5.2.3 Costly organic certification In the past decades, the Thai government has shown interest in developing domestic organic standards on a voluntary basis. The government has designed and launched “Organic Thailand” standard, but it has not been accepted by major export destinations. As a result, Thai organic farmers have to resort to costly certification processes that would allow them to access these export markets (Lorlowhakarn, et al., Strengthening the Export Capacity of Thailand 's Organic Agriculture, 2008). Farmers say that the certification conditions are too strict, and some conditions are impossible to do in practice, which prevents them from receiving price premium or exporting (ADBI, 2006; Bello.W.B, 2008). 5.2.4 High costs of production Organic farming is more labor-intensive than conventional farming (ADBI, 2006) because labor is necessary for pest control in place of chemicals. In addition, organic farming in Thailand is usually small scale, and each farm is dispersed from each other with little effort in combining land plots. This means they often have to incur high costs if they were to collect and transport produce to processing plants. High collection and transportation costs also mean very few farmers can send their produce to pass certification. The end result of such high costs which became a major impediment is that farmers do not receive price premium for organic products (Organic Agriculture Development Center, Sukhothai Thammathirat Open University, Earth Net Foundation, 2015). In addition, small farmers’ lack of bargaining power means that they cannot negotiate for a higher price to compensate for higher costs (ADBI, 2006). 5.2.5 Unfavorable government policies Thailand has a long history of government interventions to shore up fallen crop prices and satisfy the demands of farmers, who constitute an important voting block. For example, in 2008 the government guaranteed jasmine rice at the high price of 15,000-16,000 Baht per ton. As a result, organic farmers decided to sell their crops to conventional rice mills instead of organic sellers. Later in 2012, the government issued another round of price guarantee that distorted market prices yet again. The result is that many farmers decided not to switch to organic farming, since they saw that conventional farming still yield a high price, even though those crop prices in global community markets have continually been declining (Green Net Cooperative, 2013). The government also has not put much effort in developing farmers’ and consumers’ knowledge about organic farming (Kasikorn Research Center, 2008)

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

The National Organic Agrilculture Development Board (NOADB) has been drafting the next Strategic Plan (2013-2016), with the key goal of raising Thailand to be â&#x20AC;&#x153;the center of organic production, trade, and consumption in ASEAN.â&#x20AC;? However, there is no progress as of February 2016.

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

6. Costs of Organic Farming

Costs of organic farming can be grouped into two major categories: costs of capacity building and enabling farmers (including training and certification), and direct costs borne by farmers themselves.

6.1 Conversion costs Conversion Costs vary according to the previous resource management system. Costs may be insignificant in systems that have followed agro-ecological principles for a long time. Another factor influencing farmersâ&#x20AC;&#x2122; costs is the development of organic technology, if locally available and affordable (Food and Agriculture Organization of the United Nations, 2007). For Example, case studies conducted by FAO (2007) provided an overview picture of costs and benefits at the farm level. Organic farmers in the case studies included rice producers in Thailand and India, vegetables producers in Brazil and Czech Republic. The studies showed that costs of conversion and production losses are important in the Czech and Hungarian cases but not in the others. In these two countries, farmers who have used conventional means need to follow a conversion plan, which can be costly. For Thailand, a study by Asian Development Bank found that costs in converting conventional farmers in Ubon Ratchathani in the Northeast of Thailand amounted to USD 26.2 per farmer per year, or USD 1.57 per rai. (Markandya, Setboonsarng, Hui, Songkranok, & Stefan, 2010) After the conversion period (typically lasting 2-3 years), farmerâ&#x20AC;&#x2122;s household income increases by USD 254 per year on average.

6.2 Costs of organic farming 6.2.1 Labor costs Studies in the U.S. found that organic farming uses 15% more labor on average than conventional farming (Sorby, 2002; Granatstein, 2003). However, studies in Thailand found that labor costs in organic farming may be higher or lower than conventional farming, depending on crop type (Setboonsarng S. P., 2006). See details in Table 12.

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Table 12 : Different labor cost of organic and convention agriculture in Thailand (Baht/rai) Crop Rice 2005 Rice 2006 Banana Asparagus

Country Thailand Thailand Thailand Thailand

Difference (OA-CA) 77 46 -851 -3,294

Sig. No No ** ***

CA = conventional agriculture, OA = organic agriculture, sig = significance Note: ** and *** indicate significance level of 5% and 1 % respectively. Source: Setboonsarng, Leung, and Cai (2006)

6.2.2 Raw material costs Setboonsarng, Leung, and Cai (2006) found that organic farming in Thailand incurs lower raw material costs (e.g. fertilizers, pesticides) than conventional farming, varied by crop type and planting period (details in Table 13). Variable costs of organic farming tend to be lower than conventional farming, because organic farming uses organic fertilizers that can be produced cheaply or freely from locally available resources. Table 13 : Difference raw material of organic and convention agriculture in Thailand (Baht/rai) Crop Rice 2005 Rice 2006 Banana Asparagus

Country Thailand Thailand Thailand Thailand

Difference (OA-CA) -21 -14 -679 -2,189

Sig. No No No No

CA = conventional agriculture, OA = organic agriculture, sig = statistical significance Source: Setboonsarng, Leung, and Cai (2006)

6.2.3 Overall organic costs Setboonsarng et. al. (2006) conducted research in Thailand and found that organic farming incurs less costs than conventional farming for many crop types except rice in 2006, as shown in Table 14.

Table 14: Cost differences between organic and conventional agriculture in Thailand Crop Rice 2005 Rice 2006

Country Thailand (Baht/rai) Thailand (Baht/rai)

Difference (OA-CA)

Sig.

-68

235

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Banana Asparagus

Thailand (Baht/rai) Thailand (Baht/rai)

-4,098

-6,646

***

CA = conventional agriculture, OA = organic agriculture, sig = statistical significance Note: ** and *** indicate significance level of 5% and 1 % respectively. Source: Setboonsarng, Leung, and Cai (2006)

This research report also stipulated that the reason organic rice had higher production costs than convention rice in 2006 was due to the fact that that year, organic farmers imported biopesticides which are more expensive than chemical pesticides. Another study conducted in Mahasarakham Province of northeast Thailand assessed the status of organic vegetable farming and then analyzed the financial performance of three main vegetables cultivated, namely: morning glory, green onion and Chinese kale. Results showed that while growing organic morning glory incurred slightly higher cost compared to that of conventional morning glory, cultivating other organic vegetables generally cost lower than conventional vegetables (Rattanasuteerakula & Thapa, 2012). It must be noted that research results can vary markedly from country to country. For example, an experiment in the USA yielded different results from the two aforementioned studies. Brumfield et al. (2000) used budgeting methods to analyze the costs and benefits of adopting organic methods versus conventional agriculture for tomatoes, sweet corn, and pumpkins. The study took 3 years (1991 to 1993) of field studies conducted at the Rutgers University Snyder Research and Extension Farm, Pittstown, New Jersey. They found that the cost of production per unit of organic vegetable was 28% to 34% higher compared to conventional system. (Brumfield, Rimal, & Reiners, 2000) Similar result was found in The U.S. Department of Agricultureâ&#x20AC;&#x2122;s 2008 Organic Production Survey, which reported that organic farms had higher production costs than non-organic farms, averaging $171,978 per farm compared to the all-farm average of $109,359 (National Agricultural Statistics Service, 2010).

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

7. Financial Incentives for Organic Agriculture 7.1 Financial mechanisms to support organic farming – Global Studies summarized in the preceding chapters all point to the same direction: many farmers are interested in switching from conventional to organic farming due to the potential of higher income from price premium. However, organic farming is fraught with risks. Government supports to encourage the conversion to organic farming may be a doubleedged sword, as farmers could flock to organic farming, resulting in a massive volume of products at a time when demand declined. As a result, farmers may not be receiving price premium that they expected. This was the case in Ireland (Howlett, Connolly, Cowan, Meehan, & Nielsen, 2002). A major obstacle during the conversion period (from conventional to organic farming) is a financial one: farmers face declining income from the fact they have no produce to sell while in the process of soil improvement and capacity building. The lack of income means that farmers would not have enough money to maintain their livelihood during this period (Haggblade, Tembo, & Donovan, 2004). Even when their farmlands start yielding organic produce, they still cannot receive price premium while waiting for the certification process to complete, which could take many years (Sanders, Stolze, และ Padel, 2011). As a result, many farmers who decided to switch to organic switched back within the first 2-3 years, although to date relatively little research has been done to document this phenomenon. A 2002 study by Food and Agriculture Organization (FAO, 2002) found that direct government subsidies to farmers or other market players to encourage switching to organic farming is a key factor that propels the organic market. Many direct payment schemes are linked to the fact that organic farming can have far less environmental impact and greenhouse gas emissions than conventional farming, as explained earier in Chapter 4. Many studies have shown that the European Union’s organic farming policies and corresponding financial incentives have markedly impacted the growth of organic market in Europe, in terms of the number of farms, organic farmland, and market size (Sanders, Stolze, และ Padel, 2011). The European Commission launched “European Action Plan for Organic Food and Farming” in 2004, and has since been promoting member countries to adopt area payment as part of agri-environmental measure, both to organic and non-organic farmers.

7.1.1 Agri-environment payments in Europe Agri-environment measures began in a few member states of the European Union (EU) in the 1980s on their own initiative, and was taken up by the European Community in 1985 in Article 19 of the Agricultural Structures Regulation, but remained optional for Member States. In 1992 it was introduced for all Member States as an “accompanying measure” to the Common

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Agricultural Policy (CAP) reform. It became the subject of a dedicated Regulation, and Member States were required to introduce agri-environment measures “throughout their territory”. In 1999, the provisions of the agri-environment regulation were incorporated into the Rural Development Regulation as part of the "Agenda 2000" CAP reform. The aim of their incorporation was to help achieve coherence within Rural Development Plans. Agri-environment measures are designed to encourage farmers to protect and enhance the environment on their farmland. It provides for payments to farmers in return for a “service” – that of carrying out agri-environmental commitments that involve more than the application of usual good farming practice. Farmers sign a contract with the administration and are paid for the additional cost of implementing such commitments and for any losses of income (e.g. due to reduced production) which the commitments entail. Agri-environment payments are co-financed by the EU and the Member States with a contribution from the Community budget of 85 % in Objective 1 areas and 60 % in others. Agri-environment measures may be designed at national, regional or local level, so that they can be adapted to the particular farming systems and environmental conditions, which vary greatly throughout the EU. This makes agri-environment a potentially precise tool for achieving environmental goals. Figure 27 Overview of Agri-Environmental Regime in Europe

Source: (Directorate General for Agriculture and Rural Development, European Commission, 2005)

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Agri-environmental payments that relate to organic farming and sources of funds 1. Rural Development Plan (RDP) 2007-2013 at national or regional level, co-funded by European Agricultural Fund for Rural Development (EAFRD) and the national budget of that country. The Rural Development Plan in accordance with European Union (EC) Resolution EC No. 1698/2005 features three main axes as shown in Table 15. At present, most member states of the EU use Measure 214 (Organic Support Payment / Area Payment) under Axis 2 as the main tool to support the conversion of organic farming. Some member states also use measures in Axis 1 and 3 in conjunction. Details are shown in Figure 28. Table 15 : RDP Objectives and Measures Objective Axis 1 : Improving the competitiveness of the agriculture and forestry sector



Measures Vocational training and information actions (Measure 111): support training of farmers, usually used in conjunction with Measure 114



Setting up of young farmers (Measure 112): additional financial support (“organic bonus”) for farmers younger than 40 years old who express interest in converting to organic farming



Use of advisory services (Measure 114): financing advisory services for farmers



Modernisation of agriculture holdings (Measure 121): an important source of funds for farmers who decided to convert to organic farming, this Measure grants “organic bonus” to farmers who want to invest in capital expenditures, e.g. produce silos, buy machinery or equipment



Adding value to agricultural and forestry products (Measure 123): financing the increase in production efficiency or marketing, e.g. new product development, improving production technology. This measure targets small and medium producers that have less

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Objective

Measures than 750 employees or sales less than 200 million Euros. 

Cooperation for development of new products, processes and technology in the agriculture and food sector and in the forestry sector (Measure 124): financing up to 100% of expenses up to 3 years for farmers who conduct agriculture concurrently with forest conservation

 Participation of farmers in food quality schemes (Measure 132): financing expenses incurred in the certification and audit processes for organic farming, up to the lesser of 100% actual expenses and 3,000 Euros, no more than 5 years  Information and promotion activities (Measure 133): financing marketing and public relations for organic and nonorganic products, up to 70% of actual expenses incurred  Setting up of product groups (Measure 142): support farmer groups who band together for organic or non-organic farming, this Measure finances group expenses including operational expense, information technology, capital expenditures, and salaries. The ceiling is capped at 5% of market value of products Axis 2 : Improving the environment and the countryside

 Organic support payment / Agrienvironmental measures (Measure 214): financing to support the conversion to organic farming, this Measure is considered “organic bonus” because it does not preclude farmers from receiving financial support from other Measures  Animal welfare: financial support per

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Objective

Axis 3 : Improving the quality of life in rural areas and encouraging diversification of the rural economy

Measures animal raised, for farmers who can raise livestock up to the high standards determined by the state ď&#x201A;§ Diversification into non-agricultural activities / Encouragement of tourism activities (Measure 311/313): support inclusive economy by financing activities that generate income for members of the local community, such as sale of handicrafts, community tourism, etc. This Measure targets small localities that have no more than 2,000 resident households, with the minimum support of 2,000 Euro per project, or 30-60% per community or regional group

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Figure 28: Overview of RDP measures related to organic farming in 2007-2011

Source: (Sanders, Stolze, & Padel, 2011)

2. Common Agricultural Policy (CAP) Pillar 1 This avenue of support is a result of agricultural policy reform called â&#x20AC;&#x153;CAP Health Checkâ&#x20AC;? which all the agriculture ministers in EU signed into agreement in 2008. This reform was aimed at modernizing and simplifying common agricultural policies in the EU. Results of the CAP Health Check specifically mentioned that due to climate change and rising food demands, agriculture must be environmentalfriendly, use resources efficiently, conserve biodiversity, and focus on distributing

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

budgets to local communities (Pohl, 2009). Under Pillar 1, member states are eligible to receiving up to 10% of national budget for these goals, under Article 68 in EC Regulation 73/2009. The source of funds for this Pillar is European Agricultural Guarantee Fund (EAGF). See further details on CAP Pillar 1 in the following sections and Table 16. 3. National or regional organic farming plan. Source of funds for these plans would be the countryâ&#x20AC;&#x2122;s own budget, not from the EU

Assessing the effectiveness of EUâ&#x20AC;&#x2122;s financial incentives for organic farming It is clear that financial support of organic farming by each member state of the EU is an integrated and complete suite of support that is aimed at creating balance between the demand and supply of organic products, as well as increasing competitiveness of organic products vis-Ă -vis non-organic products. Key activities in organic farming that qualify for financial support among those described in the previous section include: advisory services, training, support during the conversion period, certification process, research, training, capital expenditures, technological improvements, product quality development, marketing expenditures, formation of farmer group, and special support for farmers younger than 40 years old. Each member state is free to use one or more measure that they see fit, and the amount of support depends on respective national laws. Details are shown in Figure 29.

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Figure 29: The organic model: Rural Development Policy of Europe

Vocational training, information actions (Measure 111)

Setting up of young farmers (Measure 112) Cooperation for development and new products, processes and technology (Measure 124)

Farm management, farm relief and farm advisory services (Measure 115)

Adding value to agricultural and forestry products (Measure 123)

For all measures : Efficient support for organic farming can be reach by the dedication of the certain percentage of the budget to organic farming and/or giving priority to measures for organic farmers and/or increased funding for participants with a main focus on organic farming

Farm modernization (Measure 121)

Agri. Environmental payments (Measure 214)

Diversification into non-agricultural activities (Measure 311)

Setting up and supporting producer groups (Measure 142 and 133)

Obligatory use of measure 132 to support organic farmers by refunding certification cost Annual welfare payment (Measure 215)

Tourism activities (Measure 313)

Use by farmers and forest holders of advisory system (Measure 114)

Supporting farmers who participate in food quality schemes (Measure 132)

Source: (Pohl, 2009)

A previous research that studied the implementation Area Payment (Measure 214) in 6 countries found that in all 6 countries, namely Czech Republic, Italy, Germany, Denmark, Australia, and United Kingdom, only this Measure alone cannot help organic farmers gain higher income than from chemical farming; additional Measures are required to improve farmerâ&#x20AC;&#x2122;s profitability to the same level as conventional farming. Data from all of the six countries in this study support this conclusion. The larger organic subsidies from government, the more conventional farmers switch to organic farming, as shown in higher percentage of organic area to total farming area. Details are shown in

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Figure 30.

Figure 30 : Effective specific subsidies and total agri-environmental payment of organic farm in Austria, Czech Republic, Denmark, Germany, Italy, and United Kingdom

Source: (Sanders, Stolze, & Padel, 2011)

Researchers therefore concluded that Area Payment is crucial in farmersâ&#x20AC;&#x2122; decision to convert to organic farming. In addition, the rate and conditions of Area Payment must cover additional expenses or lost income during the conversion period (Sanders, Stolze, & Padel,

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

2011). This finding is in line with Pohl, (2009) which found that Area Payment for organic farming must be sufficient to compensate for additional expenses and reduced yield that farmers must bear. The most important factor is the continuation of financial support during the conversion period, as well as continued support after the conversion period to ensure that organic farmers can sell their products at a premium.

Comparing RDP and Pillar 1 Measures As mentioned earlier, EU member states are encouraged to provide financial support to farmers who decide to switch to organic farming, both in the conversion period and subsequent periods. The amount of financial support is meant to include costs incurred during the conversion period, as well as additional expenses incurred during the time that farmers are unable to sell at a premium. The actual amount and conditions of support varies according to many factors such as crop type; greenhouse crop typically yields the highest support. Each stateâ&#x20AC;&#x2122;s policies and budgets also determine how much the respective government would support under RDP (e.g. Area Payment). But under CAP Pillar 1, the funds will be disbursed equally for every country under Article 68. Details are shown in Table 16.

Table 16 : Comparing RDP and CAP Pillar 1 Principle Clause/legal framework

Support under Rural Development CAP Pillar 1 Plan (RDP) Axis 2 Measure 214 - Organic Support Article 68 Contingent on the Payment / Area Payment interpretation of each country about which category the project belongs to, from the following list: 1. Support agriculture that is instrumental in environmental protection or improvement 2. Improve the quality of agricultural product 3. Improve the agricultural market 4. Improving livestock welfare 5. Agricultural activities that help rehabilitate the environment or is environmentally friendly

Payment amount Cover additional expenses or lost Every member state is qualified for income during the conversion period the same amount of support - EUR 900 per ha for legumes ,fruit

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Principle

Support under Rural Development Plan (RDP) Cover yield differences (due to the fact that yield during the conversion period is sometimes less than yield from conventional farming), production costs, and management expenses

CAP Pillar 1 and olive trees - EUR 350 per ha for open field legumes, wine , aromatic and medicinal plants - EUR 200 per ha for annual crops - EUR 100 per ha for meadows and chestnuts

Amount paid will be compared with data from â&#x20AC;&#x153;reference farms,â&#x20AC;? both During the conversion period, the non-organic and organic farming, to payments are increased to twice the determine rate of payment aforementioned rates Payment ceiling established in terms of maximum percentage of expenses EU member states that have been or income, and paid on a per-area using RDP may switch to support under Article 68 to continue to basis (Euro/hectare) support organic farming during and Total amount paid depends on after the conversion period. In national budget of each country and addition, each state can choose different crop types whether financial support during either or both periods will be considered support under RDP Measure 214, Article 68 under CAP Pillar 1, or a mix between the two. For example, a state may determine that it will pay during 1-3 years in the conversion period in accordance with RDP Measure 214, and then during the maintenance period will pay in accordance with CAP Pillar 1, as long as it does not exceed overall CAP limit Payment duration

Conversion period: 3 years. Rates of Conversion period: about 3 years support during year 1 through 3 will be higher than support during year 4 Maintenance period: about 2 years and 5, since farmers during the first 3 (after the conversion period) years are not likely to receive price premium yet for their organic products Maintenance period: payment after

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Principle

Support under Rural Development Plan (RDP) the conversion period varies depending on the nature and amount of expenses necessary to maintain each crop type, as well as each countryâ&#x20AC;&#x2122;s organic farming policies

CAP Pillar 1

Bonus / double Farmers who conduct farming (both funding organic and non-organic) that serves conservation purposes (for example, converting grasslands to grazing land that is well maintained, engaging in practices that preserve biodiversity, preserving natural geography, preserving water sources or soil quality, preserving local breeds or near-extinct species) will qualify for additional financial support in accordance with EC Regulation No. 1974/2006, which stipulates that farmers can be double-funded if they meet one or more criteria of different Measures. Hence, farmers who already receive support from Measure 214 may also receive support from other Measures if he qualifies Limitations

Some EU member states tie financial Limited by national support with national plans; they will determined by CAP terminate the support or application process once the plan reaches expiration date Each state determines the amount of budget for use in the support, ranging from 7-314 Euros per hectare. Some states also face difficulties in executing the supports they promised

Source: (Sanders, Stolze, & Padel, 2011)

ceiling

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

The most recent incarnation of the RDP is the Rural Development Plan 2014 â&#x20AC;&#x201C; 2020. An example of the national implementation of this plan is Ireland, an EU member state. Under this plan, Irish farmers who are interested in government support must subscribe to the 2015 Organic Farming Scheme (OFS). Under this scheme, farmers must undergo organic farming training, submit land to monitoring, show training certificate and fulfill various conditions in order to receive financial support from the government. The support will be revoked if farmers revert back to non-organic farming. In addition, farmers who enter the program but cannot meet conditions will also be fined (Ireland Department of Agriculture, Food and the Marine, 2015). An important factor to note is that many of the aforementioned EU measures are meant to support both organic and non-organic farming. If the potential income of farmers and financial support combined for organic farming are roughly the same or lower than what they already receive from conventional farming, many farmers are not likely to switch to organic. As a result, many researchers stipulate that financial support for organic must be significantly higher than non-organic income and government support (Sanders, Stolze, & Padel, 2011). 7.1.2 Subsidies and advance payment in the developing world Several research reports on organic supply chains that concentrated on small farmersâ&#x20AC;&#x2122; income in the developing countries found that many countries provide financial support for organic farmers, mainly in the production and marketing processes, both for the domestic and export markets. Such financial supports are in the form of grant, subsidies, soft loans made by government-owned banks, or government agencies in charge of community development. In some countries, private buyers also commit to pay part of the agreed-upon price up front, so that farmers could use the sales proceeds immediately as working capital for organic farming (Santacoloma & Edwardson, 2013).

7.1.3 Financial incentives to reduce environmental impact A fast-growing world population increases the demand for food, which in turn increases the demand for agricultural land. In addition, many countries worldwide support farmers such as subsidizing produce prices without regard to rising environmental costs of farming. Since global agricultural sector accounts for 30-35% of global greenhouse gas emissions, there is a clear conflict between current practices of agriculture and natural ecosystems (Tanentzap, Lamb, Walker, & Farmer, 2015). Policymakers can resolve conflicts between agricultural practices and the ecosystem by promoting more sustainable agricultural practices. For example, the government can encourage better management of soil, water, and fertilizers to increase yield from existing lands to satisfy rising food demand without the need to expand agricultural land. The government can also support no-till practices in order to increase carbon sequestration in soil, thereby reducing greenhouse gas emissions. Research has uncovered five major avenues that governments use for these purposes (Tanentzap, Lamb, Walker, & Farmer, 2015):

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

1. Issuing regulations, e.g. limiting the use of pesticides or pumping water for agriculture. Farmers who violate regulations face fines or other penalties. 2. Giving financial incentives for sustainable practices: for example, to farmers who can increase yield without using chemical fertilizers or pesticides. 3. Promoting farmer communities and local stakeholders to work together in reducing environmental impacts. 4. Giving direct financial incentives to farmers for products that reduce environmental impacts 5. Helping to create markets for agricultural products that reduce environmental impacts The experiences of using these measures are mixed. Some countries were successful in reducing deforestation, improving water quality, improving soil quality, and improving natural habitats. But some countries experienced complexities in the execution or enforcement of such measures, incurring cost overruns, benefits are short-term rather than long-term, or farmers found themselves facing higher costs that outweigh environmental benefits. See some examples in Table 17 (Tanentzap, Lamb, Walker, & Farmer, 2015). Table 17: Example success stories associated with different policy approaches and local obstacles to their implementation Approach Regulations

Community-based

Example Success Story Critical Counties programme launched in 2008 by Brazilian government suspended access to credit for farmers in counties with the highest deforestation rates. This stimulated collective actions to conserve native vegetation, resulting in deforestation rates dropping to <20% of previous 10-yr average. Landcare Australia is among the best-known partnerships between communities, government and organizations. Established by a $360 million programme in 1988 and engaging about 30% of farming community at its height. Notable successes

Obstacles Complexity, enforceability, cost of implementation. Where compliance is linked to payments, as in EUâ&#x20AC;&#x2122;s Common Agricultural Policy, clear environmental standards and operational guidance are required at farm level. Payment must also incorporate regional and/or sectorial variation in the cost of compliance. Difficulty in delivering social and/or short-term economic benefits to individual farmers; the lack of these benefits has limited uptake of Landcare practices in Australia.

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Approach

Economic instruments

Example Success Story include: improving water quality, reducing soil degradation, and restoring habitat. Conservation Reserve Program (CRP) established in 1985 by US government provides farmers with annual rental payments for removing land most sensitive to agricultural impacts from production for >= 10 years. Currently, >10 million ha enrolled at annual cost of USD 2 billion. CRP has eliminated millions of tonnes of GHG emission and fertilizer additions and established new habitat supporting tens of million of birds and other wildlife. Gains arisen despite conversion of non-cropland into production predicted over area equal to 20% of CRP land.

Obstacles

Can perform poorly if farmers paid for actions rather than actual environmental outcomes associated with their land. For example, temporary retirement schemes emerged initially in EU to reduce overproduction. As no environmental outcome was explicity targeted, farmers tended to retire least profitable land that wat often the poorest quality, limiting environmental benefits.

Source: (Tanentzap, Lamb, Walker, & Farmer, 2015)

7.1.4 Carbon offset As described in Chapter 4, organic farming when properly conducted delivers major environmental benefits, including better carbon sequestration in the soil, which helps reduce greenhouse gas emissions compared to conventional farming. Since there already exists several financial mechanisms that aim at reducing greenhouse gas emissions, these mechanisms can also be applied as incentives for organic farming as well (Kasterine, 2010). Worldwide, “cap and reduce” is one of the most popular schemes in many countries after 2012, when the Kyoto Protocol expired. Under such a legally binding scheme, organizations in heavy-emission industries cannot emit more greenhouse gases than the mandated ceiling (“cap”), and have the duty to “reduce” their emissions. Carbon offset mechanism in these

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

countries are viewed as an important financial instrument to help organizations meet the required emission reduction target (The Center for a New American Dream, 2009).

Example: Carbon Offset Standard in the USA The most important requirement for credible carbon offset is that the the emissions amount must be independently verified, and that actual emission reduction activities can be monitored. In the United States, there are several standards for carbon offsets including American Carbon Registry, Voluntary Carbon Standard, the Gold Standard, Climate Action Reserve, or equivalent standards from other credible organizations (The Center for a New American Dream, 2009). The offset must be “real, additional, and permanent”:   

Real: Quantified greenhouse gas emissions must represent actual reductions from the baseline scenario Additional: reduction must be surplus to regulation and beyond what would have happened in the absence of the project or in a business-as-usual scenario. Permanent: Reduction must be permanent or have guarantees to ensure that any losses are recaptured in the future.

As of 2009, there are 4 main categories of projects that can be qualified as carbon offset: renewable energy, land use, land-use change and forestry/sequestration (LULUCF, sequestration), energy efficiency, and methane capture. Each project in these categories can use several voluntary standards as detailed in Table 18.

Table 18 : Third-party carbon offset standards / protocols by project type Renewable Energy - Chicago Climate Exchange (CCX)

LULUCF/Sequestration -Chicago Climate Exchange (CCX)

Energy Efficiency -Chicago Climate Exchange (CCX)

Methane Capture -Chicago Climate Exchange (CCX)

-American Carbon Registry

-USEPA Climate Leaders

-Voluntary Carbon standard (VCS)

-The Gold Standard

-Voluntary Carbon Standard

-Voluntary Carbon Standard (VCS)

-Joint Implementation Mechanism (UNFCCC JI)

-Climate Action Reserve (CAR)

-Joint Implementation Mechanism

-Climate Action Reserve (CAR)

-Joint Implementation Mechanism

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Renewable Energy

LULUCF/Sequestration

Energy Efficiency

Methane Capture

-Climate Action Reserve (CAR)

-Clean Development Mechanism UNFCCC CDM

-Clean Development Mechanism

-Climate, Community and Biodiversity Standards (CCBS)

-The Gold Standard

-Plan Vivo

-Green-e Climate Source: (The Center for a New American Dream, 2009)

Validation and verification of carbon offset In every country and under every standard, a carbon offset project must undergo the validation and verification processes by a third-party organization that is registered with carbon offset authorities. Both procesess will be conducted in accordance with the approved carbon reduction methodology, which will consider the following key factors: 1. Baseline and measurement – estimate the difference of greenhouse gas emissions between two scenarios: with this particular carbon offset project, and without this carbon offset project. The amount of greenhouse gas emissions will be measured after the project begins. 2. Additionality – the project must be “new,” i.e. not a project that would be implemented anyway without carbon offset payments because of various reasons, e.g. forecasted to be cost-effective, or forced to implement as a result of laws or regulations. 3. Permanence – emission reduction from the project must be permanent or will count only for the permanent portion. For example, if the project plants trees for use as fuel, trees are cut down once they are grown, and the carbon sequestered would be released back into the atmosphere again. Such projects therefore lack the permanence of emission reduction. Similarly, for tree-planting projects, once trees in the forest are sufficiently grown (roughly after 50 years), trees will no longer sequester carbon and may in fact release more carbon than sequestered. 4. Leakage – the project may help reduce greenhouse gas emission in its area, but may increase emission outside the project area. For example, in a forest restoration project, villagers may still need to cut trees for fuel, so they cut trees from outside the project area to fulfill this need, giving rise to the “leakage” of carbon offset.

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Carbon offset markets All carbon markets worldwide can be divided into two major categories: regulatory market, and voluntary market. In a regulatory market, most carbon offset buyers are companies, government agencies, and other organizations that seek carbon offsets to comply with relevant laws and regulations. In a voluntary market, such organizations and individuals buy and sell carbon offsets voluntarily. In 2014, voluntary markets worldwide are traded at over USD 395 million, a 4% increase over 2013. The average price of carbon is 3.8 USD per ton CO2 equivalent (CO2e), a 22% decline over 2013. Details are shown in Table 19.

Table 19: Size and average price of voluntary carbon markets, 2013-2014 Year Volume Value Average Price **

2014 87 MtCO2e 395 Mln USD 3.8 USD/t CO2e

2013 76 MtCO2e 379 Mln USD 4.9 USD/t CO2e

% Change +14 % + 4% - 22%

All Year* 0.93 BtCO2e 4.4 Bln USD 5.8 USD/t CO2e

Source: State of the Voluntary Carbon Markets 2015 Notes: *Ecosystem Marketplaceâ&#x20AC;&#x2122;s first State of Voluntary Carbon Markets report was published in 2007, but our data collection encompasses years prior to that date. **All prices (and market values) are volume-weighted to determine their significance. Furthermore, this volume-weighted average price excludes the REDD Early Movers (REM) agreement (which used a $5/tonne proxy). The average price including REM is $4.0/tCO2e

Also in 2014, there are 6 major categories of carbon offset activities, encompassing roughly 20 project types. There were a total of 764 projects traded in the voluntary carbon markets, totaling 87 million tons CO2 equivalent (MtCO2e). Among them, land use and forestry proejcts came first with 31.4 MtCO2e, followed by renewable energy projects at 16.7 MtCO2e, and methane sequestration wih 4.9 MtCO2e. Details are shown in Figure 31.

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Figure 31: Project category, project type and transaction volume

Source: State of the Voluntary Carbon Markets 2015

Carbon offset and organic farming Terrestrial carbon sequestration is proposed by scientists as an effective mitigation option because it combines mitigation with positive effects on environmental conservation and soil fertility (Lindenlauf, 2009). Several reports suggested that organic farming sequesters more carbon in soil than conventional farming (Niggli & Fliessbach, 2008). In addition, other research has estimated that organic farming worldwide sequesters 0.9-2.4 gigatons CO2 per year, or an average of 200-400 kilograms CO2 per hectare per year (Lindenlauf, 2009). As described in Chapter 4 of this report, organic farming therefore helps alleviate global warming. Subsequently, estimating the amount of carbon sequestered in the soil becomes a key element of tapping into the carbon offset markets as a possible financial incentive for organic farming. Despite such promise, to date there has been no international carbon reduction certification standard that is issued specifically to measure carbon sequestration in organic farming. However, several methodologies in various carbon markets can be adopted for use with organic farming, such as IPCC AFOLU 2006, Chicago Climate Exchange (CCX) and Voluntary Carbon Standard (VCS). For example:

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

IPCC AFOLU 2006: Measure the change in carbon sequestered in soil for 20 years, at the depth of 30 centimeters, allowing error rate of +/- 4% to +/- 50% (for the no-till scenario) such as rice and tropical mountainous areas - Voluntary Carbon Standard (VCS): Management of farmland or grazing land by using no-till policy, bare lands management, planting of cover crops or buffer zone. VCS allows leakage percentage to be assumed at zero for projects that are smaller than 10,000 hectares. The amount of carbon sequestered must be measured in comparison with the increase in methane, nitrus oxide, and carbon. In addition to carbon sequestration in soil, other practices that are common in organic farming can also be used as a basis for carbon offset project as well. These practices include: extend crop rotation, cultivation of nitrogen fixing plants, reduced erosion by avoiding bare fallow, erosion reduction by integrating landscape element, setting aside bare land, use of manure (from livestock production or green manure) instead of chemical fertilizers, implementation of agroforestry, and the reduction of synthetic fertilizers (Lindenlauf, 2009).

Key considerations Several researchers (see: Lindenlauf, 2009) recommend the following key considerations when developing carbon offset project from organic farming: 

Risk management Farmers or offset buyers can reduce risks that stem from the uncertainties of carbon emission during the project by: 

Buying insurance from an insurance company to insure the amount of carbon during the project  Reserve a certain amount of carbon from the project. For example, if the project is expected to reduce 1,000 tons CO2 equivalent per year, the seller may decide to sell only 900 tons  Register some carbon as buffer with the offset registration authority. If carbon in any particular year is less than the amount previous agreed, the seller would then have the option to draw on carbon in buffer to compensate the buyer  Farmer’s education Project developer should educate organic farmers about the investment in carbon offset, so that they can understand that properly managed organic farming can reduce the project’s risks from uncertainties. 

Greenhouse gas measurement Since much of the carbon benefits of organic farming lies in carbon sequestration in the soil, measuring carbon therefore means measuring from actual soil samples. Technologies such as radar or sensors cannot be used. In addition, many organic farms grow local crops interspersed with economic crops. Information on the carbon benefits of such local crops is still sparse and requires input from organic experts.

Financial Incentives to Encourage Organic Farming in Thailand : Final Report



Cost-benefit analysis for farmers One needs to analyze all costs that go into the carbon offset project from organic farming, from the costs of organic standard certification, planting costs, third-party carbon offset verification costs, and any other project costs. Sale of carbon credit should offset costs incurred to make the project cost-effective. In addition, an appropriate methodology for carbon offset must be considered, in order to provide additional financial incentives above and beyond price premium for organic products.



Importance of pilot project Setting up a pilot project would be beneficial as a way to collect the necessary baseline data, other information, first-hand experience for project development, as well as to design a technical plan to collect soil sample and measure carbon, and measure impact on the ecosystem. The pilot project should ideally involve small-scale organic farmers who would benefit from studies in the above-mentioned areas.

In addition to carbon sequestration, certain land use projects that are similar in some aspects to organic farming can also qualify for carbon offsets. For example, no-till agriculture and plantation of soil-cover plants. The Chicago Climate Exchange (CCX), a leading voluntary carbon market in the United States, currently posts carbon trades from such projects. There are still no organic farming projects that are listed on the CCX, because the exchange has not issued carbon calculation methodology or trading standards that are specific to such projects. There is also no standardized “monitor, report, and verify” (MRV) measure anywhere in the world that can verify how much greenhouse gas emissions per hectare is reduced by organic farming. Nonetheless, IFOAM and several other organic enablers expect that there will be carbon trades from organic farming in the future. IFOAM will join forces with other organizations in developing the carbon calculation methodology for organic farming in order to help organic farmers access the carbon credit markets (Kasterine, 2010). 7.1.5 Carbon Footprint Labels Several countries, notably United States, members of the European Union, and Japan, have promoted displaying carbon footprint information on organic products that are sold in retailers, in order to inform consumers how much carbon each product helps reduce or increase. Environment-related information is increasingly a part of the country of origin labelling (COOL) legislations, and is seen as part of the government’s effort to help consumers choose more environmentally friendly products and entice producers to produce more of such products (Czarnezki, 2011). However, there are still different standards on how to measure carbon footprint for the label. For instance, some countries measure overall carbon emission in the production process as well as the method of transporting the products from abroad, which often uses a significant amount of high-emission fossil fuel. This is commonly known as “Carbon Food Miles.” But some other countries or some other labels do not include carbon food miles in their carbon calculation.

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

In addition, carbon footprint label is considered by some organic practitioners to place undue burden or anti-competition pressure on small farmers in the developing world, because such label encourages consumers in the developed world to consume locally produced organic products in order to minimize carbon food miles. Furthermore, a credible MRV (monitor, report, and verify) measure is also necessary to certify the amount of carbon emission or emission reduction. MRV measure is costly and there is as yet no internationally standardized MRV that is applicable worldwide (Kasterine, 2010).

7.2 Finance mechanism to support organic farming â&#x20AC;&#x201C; Thailand 7.2.1 Government subsidies Since the Thai government announced organic farming as national agenda in 2001, different state agencies have been allocated budgets to help farmers reduce the use of chemicals in agriculture and gradually increase organic practices, such as soil rehabilitation, water and soil conservation, water source improvement, organic fertilizer production, local seed preservation, and organic farming training. Inititally, various disperate organic-related projects that the Thai government had been supporting have largely not been successful, largely because they have been implanted from foreign countries without properly adopting them to fit with Thai context (Green Net Cooperative, 2008). Throughout the years 20012009, Thai government supported organic farming through specifically allotted (Secretariat of the House of Representatives, 2006). The second period of government support began with the development of 2008-2011 National Organic Agriculture Development Plan, written under the first National Organic Agriculture Strategic Plan, 2008-2011. Under this development plan, the Thai government allocated Baht 4,826.8 million budget to promote organic agriculture in 4 areas: innovation and knowledge development, traditional organic agriculture, commercial organic agriculture, and organic farm management. No budget was allocated for helping farmers in the conversion period, especially during the first 1-3 years when the farmers are still unable to certify their produce, or cannot access price premium for produce that has been certified (Green Net Cooperative, 2008).

7.2.2 Voluntary carbon offset Since the dawn of the 21st century, there have been two notable attempts to develop carbon standard or methodology that would help organic farms access carbon credit markets. In 2010, Earth Net Foundation and Green Net Cooperative released a whitepaper, proposing the establishment of a non-profit â&#x20AC;&#x153;carbon offset organizationâ&#x20AC;? that would service individuals, private companies, and other organizations that wish to offset their carbon footprint by buying carbon credits from organic farms. The buyers would simultaneously be able to offset their carbon footprint while helping poor organic farmers as well (Earth Net Foundation and

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Green Net Cooperative, 2010). Researchers propose that such a “carbon offset organization” for organic farming should have at minimum the following operations:   



Provide carbon credit for 5-10 years. Carbon credit for the first 2-3 years may be sold at a higher price to ease farmers’ burden during the conversion period, when they still could not get organic certification or access a price premium for their products Monitor organic projects that receive proceeds from carbon credit, including the behavior of farmers after they switch to organic farming Assess the results of change in farmer’s farm management practices, relying on the results of organic certification process, such as from third-party verifier or the farmer group’s Participatory Guarantee System (PGS) Monitor and measure the reduction in greenhouse gas emissions of organic farms, including the collection of baseline data and consideration of permanence and leakage issues

Since 2009, Thailand Greenhouse Gas Management Organization (TGO), a public organization which acts as an implementing agency on greenhouse gas emission reduction in Thailand and is the country’s Designated National Authority for Clean Development Mechanisms (DNACDM), has been developing and various methodologies and standards to expand and improve Thailand Voluntary Emission Trading Scheme (Thailand V-ETS). The V-ETS is meant to encourage every sector to have a role in voluntarily reducing greenhouse gas emissions in Thailand. The amount of greenhouse gases reduced, or carbon credit, is called “T-VER” in this programme. T-VERs can be bought and sold in the voluntary carbon market. The main project categories and project types of T-VERs are listed in Table 20. Table 20: T-VERs project categories and project types Project Category Production and industrial energy Waste management and transportation

Forestry and agriculture

Project Type 1. Energy efficiency 2. Renewable energy 3. Waste disposal and management 4. Transportation management 1. Forests and green space 2. Agriculture

Source: (Thailand Voluntary Emission Trading Scheme, 2015)

There are two official T-VERs methodologies that organic farmers can potentially use to access carbon market funds: the “Good Fertilization Practice in Agricultural Land” methology for organic rice and other organic produce, and “Carbon Sequestration and Reducing Emission in Orchards” methodology for fruit orchards. Details are shown in

Table 21 and Table 22.

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Table 21: Good Fertilization Practice in Agricultural Land Methodology Project type

Good Fertilization Practice in Agricultural Land Agriculture

Project characteristics

Activity that reduces greenhouse gas emission and increase carbon sequestration in the soil from “good fertilization practice,” i.e. good soil management and increase of soil organic matter. Changes in greenhouse gas emissions result from:   

N2O emission from the use of chemical, organic, and urea fertilizers C2O emission from the use of lime and Dolomite C2O emission from burning fossil fuel

Applicability

1. Farmland that has been properly and beneficially changed in the use of fertilizers or soil enhancement materials 2. Small project; no more than 5,000 tons C2Oe emission reduction per year

Project conditions

1. Possesses legal ownership or land use document 2. Farmland that has undergone continuous agricultural practice for no less than 5 years 3. Location is at no risk of landslide 4. Has data on the usage of fertilizers or soild enhancement material or reference from adjacent areas for no less than 3 years 5. In case of no data in 4., project may use reference data from government agencies

Other conditions

Can obtain measurements for paddy fields and other crops, each of which has different emission factor Can obtain measurements of direct and indirect greenhouse gas emissions Can obtain measurements of C2O emissions from burning fossil fuel in farm machinery No need to calculate leakage emissions Has plan to monitor the project and annual measurement of greenhouse gas emissions, both via GSP, maps, fertilizer usage, carbon content in soil as measured by the lab

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Methodology

Good Fertilization Practice in Agricultural Land - Measure carbon content in soil in accordance with IPCC Guideline : Soil Carbon Calculation1 - Reference methodology: The American Carbon Registry Methodology (ACR) on N2O Emissions Reductions through Changes in Fertilizer Management (2010)2

Source: (Thailand Voluntary Emission Trading Scheme, 2015)

Table 22: Carbon Sequestration and Reducing Emission in Orchards Methodology

Carbon Sequestration and Reducing Emission in Orchards

Project type

Agriculture

Project characteristics

Increase carbon sequestration and reduce greenhouse gas emissions -

Applicability

Volume of biomass of above-ground parts of trees that sequester carbon: trunks, branches, and leaves - Volume of biomass of below-ground parts of trees that sequester carbon: roots - N2O emission from the use of chemical, organic, and urea fertilizers - C2O emission from the use of lime and Dolomite - C2O emission from burning fossil fuel 1. Fruit orchard that is properly managed and maintained 2. Farmland that has been properly and beneficially changed in the use of fertilizers or soil enhancement materials 3. Orchard that is grown as mono-species or multi-species

Project conditions

1. Possesses legal ownership or land use document 2. Farmland that has undergone continuous agricultural practice for no less than 5 years 3. Location is at no risk of landslide

Other conditions

Can obtain measurements carbon sequestration in trees, both above- and below-ground

https://www.ipcc.ch/meetings/session25/doc4a4b/vol4.pdf http://americancarbonregistry.org/carbon-accounting/standards-methodologies/emissions-reductions-through-changes-in-fertilizer-management/acrmethodology-for-n2o-emission-reductions-through-changes-in-fertilizer-management-final.pdf 2

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Methodology

Carbon Sequestration and Reducing Emission in Orchards -

Can obtain measurements of direct and indirect greenhouse gas emissions Can obtain measurements of C2O emissions from burning fossil fuel in farm machinery No need to calculate leakage emissions Has plan to monitor the project and annual measurement of greenhouse gas emissions, both via GSP, maps, Demeter Tape, fertilizer usage, carbon content in soil as measured by the lab Measure carbon content in soil in accordance with IPCC Guideline : Soil Carbon Calculation3 Reference methodologies include: o Clean Development Mechanism (CDM) : “Simplified baseline and monitoring methodology for small scale CDM afforestation and reforestation project activities implemented on lands other than wetlands” (AR-AMS0007)4 o Verified Carbon Standard (VCS): Methodology for improved forest management conversion from logged to protected forest (VM0010)5 o The American Carbon Registry (ACR): Improved forest management (IFM) and N2O Emissions Reductions through Changes in Fertilizer Management The American Carbon Registry Methodology (ACR): N2O Emissions Reductions through Changes in Fertilizer Management (2010)6

Source: (Thailand Voluntary Emission Trading Scheme, 2015)

Another T-VER methodology that at first glance seems that it could be used to support organic farmers during the conversion period is “tree conservation.” In the Northeast of Thailand, for example, many farmers preserve big trees on farmland instead of cutting them down. However, since farmers preserve trees with or without organic farming, this does not seem a viable option for organic farming to access carbon credit (because there would be no net change in carbon emissions). 3

https://www.ipcc.ch/meetings/session25/doc4a4b/vol4.pdf https://cdm.unfccc.int/methodologies/DB/J6ZHLX1C3AEMSZ52PWIII6D2AOJZUB 5 http://www.v-c-s.org/methodologies/methodology-improved-forest-management-conversion-logged-protected-forest-v12 6 http://americancarbonregistry.org/carbon-accounting/standards-methodologies/emissions-reductions-through-changes-in-fertilizer-management/acrmethodology-for-n2o-emission-reductions-through-changes-in-fertilizer-management-final.pdf 4

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

T-VER process Figure 32 : T-VER process Project developer Project Design Document Outside evaluator

Validation Report

Registration application

Incomplete/Incor rect information

Additional information

Preliminary document review

Project analysis *Validate and check assumptions & accuracy *Estimate co-benefits (i.e. benefits other than GHG reduction) from the project

80 days

GHG Emission Reduction Project Screening Sub-Commitee

TGO Board Report result and announce on website

Inform result and open new registration

Source: (Thailand Voluntary Emission Trading Scheme, 2015)

7 days

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

7.2.3 T-VER Case Study: Corn and Rice in Phayao “Good Fertilization Practice in Agricultural Land” corn and rice plantation project in Tambon Mae Ka, Muang District, Phayao Province, is one of the first pilot T-VER projects in Thailand. Phayao University is project developer. The seven-year project began on 1 June 2014, and is currently registered with TGO. The project area includes 8.69 rais of corn plantation, and 22.50 rais of rice paddy plantation, encompassing freehold land belonging to 4 farming families. Although this project is not organic farming, it is instructive for organic projects because the source of carbon emission reduction that would qualify for carbon credit is the same as the supposed source for organic projects, i.e. higher carbon sequestration in the soil. The aim of this project is to reduce carbon emission by changing the amount and type of fertilizers to fit with each plant’s nutrient needs, and increase carbon sequestration in the soil by using organic fertilizer. Changing the fertilizer composition and amount was achieved by using “tailor-made fertilizer” principle. The project developer would collect soil samples to measure the nutrient composition (nitrogen, phosphorus, and potassium), then analyze how much of each nutrient the organic fertilizer has, in order to calculate the amount of additional organic fertilizer needed in the soil. The soil would then have sufficient nutrients for plant growth, while reducing and sequestering carbon at the same time. From site visit and discussion with project developer, the research team found that the total carbon emission reduction and sequestered from corn and rice fields amounted to 1.96 tCO2e per year. However, for rice paddies, project developer found that carbon emission actually increased compared to before the project began, after switching to organic fertilizer. The developer surmised that this is because rice paddies need a significant amount of organic fertilizers, leading to more methane (CH4) even though CO2 declined, leading to net increase in greenhouse gas emissions in terms of CO2 equivalent. Although the project does help reduce greenhouse gas, especially for corn plantation, interviews with project developer and farmers who joined this project found that they faced four major obstacles in the T-VER process. The first obstacle is the long time needed to explain to farmers what the project means to do and what benefits they would get, so that they would be confident enough to join. Much time was also needed to explain the tailor-made fertilizer process and T-VER process. Many steps are too complex for farmers to do themselves, such as assessing nutrients in the soil or writing a Project Design Document. Therefore, project development needs heavy involvement from outside experts or supporters, such as Phayao University in this case, to act as “middlemen” and help coordinate the project throughout the entire process.

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

The second major obstacle is the reduced yield after changing fertilizer. Experience from the corn plantation found that in the first year, corn yield declined from 8,000 kilograms per year to 7,500 kilograms per year. The farmers also send to sell produce from land plots that have changed fertilizer in the same bundle as produce from other plots that have not changed fertilizer; they are therefore unable to receive a price premium. As a result, some farmers turned back to chemical fertilizers. Some farmers say they want to continue with the project, but want to switch to other crops such as ginger instead of corn, because the market seems more receptive. As for rice paddies, the project has discontinued all work in this section, after the project developer found that these lands yield net carbon positive instead of negative, due to a higher increase in methane emission compared to a decrease in carbon dioxide emission. In addition, the farmer who owns these paddies is not that interested in the project, preferring conventional farming to this new method. The third obstacle is the lack of financing for the project. In the past, TGO supported funds in writing the project validation report, which helped allow project developer to register as a TVER project. However, TGO offered no financial support in the monitoring and verification stages, which requires writing a verification report. This process is quite costly (in the tens of thousands of Baht). The lack of financial support led to this project coming to a complete halt, and today it has not received any T-VERs from TGO, and cannot begin to sell carbon credit. The fourth and final obstacle is the unattractive financial returns from the project. Because the carbon emission reduction that results from the project is very small, i.e. only 1.96 tCO2e from the entire 31.19 rais of land, or only 62.84 kilograms per rai, the expected income from carbon credit may not be enough to compensate for the costs of project development. In the project developerâ&#x20AC;&#x2122;s opinion, one solution would be to â&#x20AC;&#x153;bundleâ&#x20AC;? tens or hundreds of farmers to join the program in order to save on validation and verification costs, but this may be difficult. The price of carbon must also be high enough (say, USD 20/tCO 2e) to both attract farmers and compensate for all project development costs. Given the above obstacles which range from convincing farmers, reduced yield in the initial stage, lack of funds, and unattractive cost-benefit profile, TGO should consider exploring these obstacles and coordinate with related parties, so that T-VER for agriculture could become a reality.

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Corn cob: main component of organic fertilizer

Corn plantationâ&#x20AC;&#x2122;s owner

Organic fertilizer that has not disintegrated

Disintegrated organic fertilizer

Corn plantation soil characteristic

Corn plantation after till

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

7.2.4 Low Emission Support Scheme (LESS) Recent years have seen rising interest from Thai companies to buy carbon credits as part of their “Corporate Social Responsibility” (CSR) activities, especially for companies with a large carbon footprint or purveyors of morally questionable products. Many companies are interested in getting acknowledgement from Thailand Greenhouse Gas Management Organization (TGO) that they have sponsored carbon reduction activities largely for public relations purposes, not to fulfill carbon reduction targets. In response to this demand, TGO has implemented Low Emission Support Scheme (LESS) since 2015 to encourage such CSR after-process activities. Under LESS, companies with CSR activities can submit low-emission projects to TGO for evaluation. TGO will then issue Letter of Recognition (LoR) once it determines that the project does help reduce greenhouse gas emissions. Companies therefore have incentives to support organic farms that can vouch for their carbon reduction and sequestration profile, in return for public and official recognition under LESS. As of 30 April 2016, there are 128 LESS projects for carbon reduction projects totaling 184.30 million tonnes CO2 equivalent. Most of these projects are CSR activities of companies, namely reforestation and increating green area projects (Thailand Greenhouse Gas Management Organization, 2016). 7.2.5 Loan for organic farming There are several financial institutions and non-financial institutions in Thailand that currently grant loans in support of organic farming: 1. Bank for Agriculture and Agricultural Cooperatives (BAAC) BACC is a government-owned specialized financial institution with a specific mandate of supporting farmers in Thailand. In 2014, BAAC launched “Green Credit” loan program. This program specifically targets “safe food” and organic farmers and farmer groups by offering low interest rates and favorable conditions (Economic Temperature, 2014). Collaterals are required. See more details in Chapter 8 of this report. As of April 30, 2016, BAAC has outstanding Green Credit of approximately 300 million Baht. The program will be terminated in March, 2017, and the decision whether or not to extend will depend on the evaluation of the program’s performance. 2. Krung Thai Bank The Community Bank Services of the Krung Thai Bank Public Company Limited (CBS-KTB) constitute a social programme of KTB whose majority shareholder is the Ministry of Finance. Its aim is to provide favourable loan funds to community organizations, as well as assist them in improving their business operations. Collaterals or at least guarantors are required to

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

underwrite the loan. CBS-KTB then recommends the loan conditions – volume, interest rate and payment terms – to the KTB branch nearest to the borrowers, where the final decision will be made. In effect, the community organization undertakes the loan agreement directly with the nearest KTB branch, and CBS-KTB only has an advisory role for loan approval. In one ongoing arrangement Green Net Cooperative coordinated with Bak Ruea Farmer Organization (BRFO) and another three organic rice producer organizations to apply for the CBS-KTB loan as a single project. The credits are provided individually to each organization by separate branches of KTB. The loan conditions are like an overdraft credit where interest rate is applied when cash is drawn out. If the producers have some cash to repay part of the loan, the interest charge is reduced accordingly (Santacoloma & Edwardson, 2013). 3. Community Organizations Development Institute (CODI) The Community Organizations Development Institute (CODI) is a public organization under the supervision of the Ministry of Finance whose main objective is to promote the development of community organizations and civil society by coordinating the efforts of stakeholders involved in community development. One of its key activities is to provide credit facilities to community organizations in order to improve the quality of life of their members. Organic and sustainable agriculture are one of CODI’s main intervention strategies. It has a special loan fund for local community organizations undertaking business related to organic agriculture. Such loans do not require collateral, but the loan proposal must be reviewed and approved by CODI’s regional and national committees (Santacoloma & Edwardson, 2013).

7.2.6 Partial advance payment In Thailand, Bak Ruea Farmer Organization (BRFO) receives advance payment from Green Net Cooperative, its buyer, during the harvest season to pay for 30–50 percent of the organic paddy. When the paddy is milled and delivered to Green Net, this amount will be deducted from the final payment. Green Net provides this advance with no interest. However, BRFO is responsible for and bears the cost of storage of the paddy. Green Net, for its part, secures this advance payment from its fairtrade partner in Europe. The advance payment is based on agreed prices and the quantity to be exported (Santacoloma & Edwardson, 2013).

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

100

8. Exploring Financial Incentives for Thailand 8.1 Financial Incentives Tested The preceding chapter identified several kinds of existing financial incentives that global and Thai organic farmers can access during the conversion period. The research team further explores these financial incentives in Thailand’s context, and identified five potential financial incentives that are suitable for the conversion period, and that could be tested with organic farmers and potential financial supporters in Thailand: 8.1.1 Thailand Voluntary Emission Reduction Program (T-VER) As mentioned in the previous chapter, Thailand Voluntary Emission Reduction Program (TVER) scheme by the Thailand Greenhouse Gas Management Organization (TGO) was developed to encourage private companies and other sectors in Thailand to participate in voluntary carbon emission reduction, by certifying and then allowing carbon credits or T-VERs to be sold in Thailand’s voluntary carbon market. Two feasible T-VER methodologies that should be accessible by organic farms are “Good Fertilization Practice in Agricultural Land” methology for organic rice and other organic produce, and “Carbon Sequestration and Reducing Emission in Orchards” methodology for fruit orchards. Details are shown in

Table 21 and Table 22 of the preceding chapters. The research team selects “Good Fertilization Practice in Agricultural Land” methology for fieldwork test with farmers, since this methodology is applicable to organic rice, the product that both fieldwork groups produce. 8.1.2 BAAC Green Credit The research team chooses “Green Credit” program by the Bank for Agriculture and Agricultural Cooperatives (BAAC) to test soft loan option with fieldwork farmers in both groups. Farmers or farmer groups that produce “safe food” or organic products can apply for this loan scheme, which charges interest rate at MRR (7% as of 29 February 2016) for individual farmer, or MLR (5% as of 29 February 2016). The maximum size of credit facility is set at 60% of total expected income from farming, plus 25% of annual household expenses, but the sum of two figures must be less than 100% of total expected income from farming. BAAC will reduce interest (rebate) by 1% per year from base interest, until the minimum of 4%, if borrower can fulfill all of the following conditions: 

Undergo the bank’s project monitoring process

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

 

101

Product certified organic or “safe food” by IFOAM or relevant certifiers, whether domestic or international Repay loan principal and interests on schedule

8.1.3 Low Emission Support Scheme (LESS) As explained in the preceding chapter, Thailand Greenhouse Gas Management Organization (TGO) launched Low Emission Support Scheme (LESS) to promote more awareness of the importance of greenhouse gas emission reduction, and encourage every sector to participate in greenhouse gas emission reduction scheme through their Corporate Social Responsibility (CSR) activities. Under this scheme, companies with CSR programs that support organic farming can apply for LESS. TGO would then estimate the amount of carbon emission reduced, and issue Letter of Recognition (LoR) to the company.

8.1.4 Forward contract One possibility that private company and other organizations can use to encourage transition from conventional to organic farming is “forward contract” scheme, as used in mainstream financial markets. Under this scheme, the organization will negotiate with farmers to pay part or all of the payment for their produce in advance, and the farmers will deliver organic produce at the specified date. 8.1.5 Direct grant or subsidy Literature review in previous sections has identified direct grants or subsidies as one of the most common financial incentives used abroad to support organic farming, particular in Europe. Most of the grants or subsidies typically focus on the conversion period, with the amount of support declining thereafter. The state specifies conditions that grantees must abide by to qualify for supports, e.g. undergo organic training and undergo certification process. Government, private and civil society sectors in Thailand can also draw on the lessons from these schemes to support the conversion period. One key success factor of such grants or subsidies is that their conditions should encourage farmers to successfully make the transition to organic, without making them feel that the conditions are too onerous to meet.

8.2 Incentives Test Framework The research framework and key procedures used to test financial incentives identified in this project can be summarized in

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Table 23 below.

102

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

103

Table 23 Incentives Test Framework Supply Side Survey : Fieldwork 1 Preliminary Demand Side Survey •to gauge the level of interest in 5 financial incentives from potential funders •to get information and update from organizations that already support organic farming (e.g. TGO, BAAC, NGOs, CSR programs)

Informs

•to gauge the level of interest in 5 financial incentives from both organic and non-organic rice farmers •to collect farming practice and other relevant data from organic and nonorganic rice farmers •workshop with 30 organic rice farmers, questionaire with 50 chemical rice farmers in Maha Sarakam

Informs

Supply Side Survey: Fieldwork 2

In-Depth Demand Side Survey •to gauge the level of commitment for 5 financial incentives from potential funders •to explore potential collaboration between funders and organic farmers

Informs

•to gauge the level of interest in 5 financial incentives from both organic and non-organic rice farmers •to collect farming practice and other relevant data from organic and nonorganic rice farmers •workshop with 10 organic rice farmers, focus group interview with 20 non-organic rice farmers in Nakorn Pathom • sturutured questionnaire with 30 non-organic rice farmers

As of 29 February 2016, the research team finished preliminary demand side survey and the first supply side survey (fieldwork 1). Results can be found in the following sections. In the final stage of this project, the research team will assimilate findings from both surveys, as well as from in-depth demand side survey and fieldwork 2, to form the gist of analysis and recommendations.

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

8.3 Demand side survey For this research, the research team interviewed 13 organizations in Thailand to gauge the level of interest in supporting organic farmers during the conversion period. Each organization was selected because it meets one or more of the following criteria: 1. Has existing Corporate Social Responsibility (CSR) program that supported organic farming in the past 2. Has existing grant / subsidy / loan program that directly supports organic farming 3. Has existing financial incentive scheme that could be adopted to support organic farming 4. Corporate vision or main business is related to agricultural or food products Table 24 summarizes the results of preliminary demand survey.

104

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

105

Table 24 Summary of Preliminary Demand Side Survey Note: X = interested, P = potentially interested NO.

Name of organization

Department of Agriculture, Ministry of Agriculture and Agricultural Cooperatives

Description

Interview Summary

Department of Agriculture has a direct mandate to build and disseminate knowledge base on agriculture to farmers, design and enforce agricultural standards, and develop certification system for agricultural products

• Department of Agriculture currently offers free organic certification (only for government standard) for farmers, but is expected to suspend this service in 2016, due to budget constraints • Department representative feels that seeking consumers of organic products and seeking access to organic markets are more important than initial financial support. Department of International Trade Promotion or Commerce Ministry should play a role here • Government should subsidize processed organic products because it adds much value to the produce. Government agencies such as National Science and Technology Development Agency and National Innovation Agency should play a leading role • Government should support training on proper organic farming methods and lay down clear organic farming support policies

T-VER

Soft Loan

LESS

Forward

Grant/ Subsidy

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

NO.

Name of organization

Description

Interview Summary

Office of Agricultural Economics (OAE), Ministry of Agriculture and Agricultural Cooperatives

OAE is tasked with developing Thailand’s agricultural sector. Its main mandate is to monitor and analyze agriculture business situation and trends, propose and develop agricultural action plans, collect and distribute agricultural data.

OAE explains that the National Organic Agriculture Development Plan B.E. 2559-2564 sets 20% as annual target for organic agriculture land increase. The government is considering setting up a fund to facilitate organic farming, which is likely to be soft loan mechanism, because the government has no budget to support on a grant or subsidy basis. If the government were to consider grant or subsidy, it would likely cover only costs of farming, excluding household expenses.

Thailand Green House Gas Management Organization (TGO) (Public Organization)

TGO is mandated to supervise carbon markets, develop and enforce Clean Development Mechanisms (CDMs) in Thailand

• Currently TGO offers Thailand Voluntary Emission Reduction Program (T-VER) which has two methodologies which relate to agriculture: Good Fertilization Practice in Agricultural Land, and Carbon Sequestration and Reducing Emission in Orchards. TGO has subsidized • In TGO’s view, the main reasons that carbon emission reduction programs in agricultural sector are not popular are the following: 1) There is no economy of scale. As a result, carbon credit price may not compensate for costs of project development, registration, and

T-VER

Soft Loan

LESS

Forward

106

Grant/ Subsidy

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

NO.

Name of organization

Description

Interview Summary

veritication. Also, agricultural data collection is a cumbersome process. TGO therefore advises that project developer should bundle several agricultural projects into a single T-VER project in order to generate economy of scale and make the project more cost effective 2) Data collection is inefficient, particularly data regarding past usage of chemical fertilizers, which is necessary to calculate carbon emission baselines 3) Relating to 1) above, the amount carbon emission reduction is small compared to relative high costs of T-VER project development. Therefore, carbon price in agriculture T-VER must be higher than in other sectors, which are currently traded at around 200 Baht per tonne CO2e. Also, both seller and buyer should be aware that the higher price is due to “co-benefits” that accrue from the project, such as better environmental protection and better health for farmers and consumers. • TGO offers Low Emission Support Scheme (LESS) to encourage carbon emission

T-VER

Soft Loan

LESS

Forward

107

Grant/ Subsidy

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

NO.

Name of organization

Description

Interview Summary

T-VER

Soft Loan

LESS

reduction activities in the corporate sector. This method could be adopted for organic farming as follows: any company that support organic farming as part of their Corporate Social Responsibility (CSR) programs can request TGO to assess carbon emission reduction. TGO would then issue Letter of Recognition (LoR) which company can use for public relation purposes. As of 30 April 2016, there have not been any organic farming projects that subscribe for LESS. TGO is willing to help develop template to facilitate anyone who is interested in developing the project. • TGO has been attempting to issue Letter of Guarantee (LG) for projects that have been registered with TGO, in order to register with UNFCCC, and then this LG would be used as collateral for bank loan. The major problem is currently banks have insufficient knowledge of carbon credit. 4

Biodiversity-Based Economy Development Office (BEDO) (Public

BEDO plays a role in supporting and promoting value-added use of biodiversity, folk wisdom, and

• Currently supports local economy and products in two ways: 1) Supporting grassroots enterprise no more than 200,000 per enterprise per year 2) Issuing “Bio-Economy” label for

Forward

108

Grant/ Subsidy

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

NO.

Name of organization

Organization)

Description

biodiversity-based business

Interview Summary

environmentally-friendly products • Currently developing “Bio-Check” label that is designed to be comparable to environmentally friendly brands in Europe • BEDO sees that their labels can be adopted to every type of financial incentive that research team proposes, especially T-VER and LESS. BEDO has recently launced the “family forest for self-sufficiency, diversity security and local wisdom” program under TGO’s LESS scheme, and registered with TGO as a forestry project. Under this program, BEDO will give 50,000 Baht per community, totaling 13 communities, one per province, for them to plant trees in the community to increase biodiversity and reduce household expenses from foraging. • BEDO is interested in engaging in a possible LESS scheme for organic farming, but prefers to see a pilot project or case study that reveals project performance and substantiates benefits to the community. Only then will BEDO be interested in branching out from community forest to organic farms. • BEDO joined forces with Forestry Department in launching the family forest

T-VER

Soft Loan

LESS

Forward

109

Grant/ Subsidy

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NO.

Name of organization

Food and Agriculture Organization of the United Nations (FAO)

Description

FAO has international roles in promoting agricultural development, helping eliminate food insecurity, making agriculture more productive and sustainable, reducing rural poverty, enabling inclusive and efficient agricultural and food systems, and increasing the resilience of livelihoods to threats and crises.

Interview Summary

program in Samut Pragram, and will develop Good Agriculture Practices: GAP program jointly with the Department of Agriculture, Ministry of Agriculture and Agricultural Cooperatives (DOA). If DOA would financially support organic farms for TGO’s LESS scheme, BEDO would be willing to add financial support also. • FAO currently supports food and agriculture in each country through the Technical Cooperation Programme (TCP), maximum USD 2 million per country. This support is given primarily through state mechanisms, e.g. helping to develop organic agriculture learning curriculum, helping to develop the community-based participatory guarantee system (PGS). • For specific case of Thailand, if FAO finds that there remains some unused funds in the TCP facility, it may be possible to support organic farming through T-VER, LESS, and grant/subsidy schemes. If farmers found their yields decline after switching to organic, FAO could subsidize in the form of grant, for example 2,639 Baht per rai (calculated from rice price x yield, e.g. 7 Baht x 377 kg. per Rai). FAO could also possibly help subsidize

T-VER

Soft Loan

LESS

Forward

110

Grant/ Subsidy

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Name of organization

Description

Interview Summary

T-VER

costs of farming, such as organic fertilizers. • For the forward scheme, FAO suggests that companies that run supermarket / grocery / convenience store business may play a big role in supporting organic farming, such as by discounting consignment fees, or help increase distribution channels by selling organic products in their stores. 6

World Bank

The World Bank is an international financial institution that provides loans to developing countries for capital programs. It comprises two institutions: the International Bank for Reconstruction and Development (IBRD), and the International Development Association (IDA). The World Bank is a component of the World Bank Group, which is part of the United Nations system.

• World Bank currently has “Partnership for Market Readiness” (PMR) program, which supports carbon emission reduction in Thailand via 2 mechanisms: 1. Energy Performance Certificate Scheme – EPC: World Bakn will buy certificate from energy efficient projects 2. Low Carbon City Program – LCC: World Bank is interested in buying TVERs from various projects that TGO certified, including agricultural projects. Still under discussion with TGO and related government agencies • World Bank is interested in building a “Pool Carbon Fund” for companies that have carbon emission reduction CSR projects that

Soft Loan

LESS

Forward

111

Grant/ Subsidy

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Name of organization

Description

Interview Summary

T-VER

Soft Loan

are tradable in carbon markets 7

Bank for Agriculture and Agricultural Cooperatives (BAAC)

Government-owned specialized financial institution (SFI) with a specific mandate of supporting farmersm farmer groups, and agricultural cooperatives in Thailand

Farmers or farmer groups that produce “safe food” or organic products can apply for “Green Credit” loan scheme, which charges interest rate at MRR (7% as of 29 February 2016) for individual farmer, or MLR (5% as of 29 February 2016). BAAC will reduce interest (rebate) by 1% per year from base interest, until the minimum of 4%, if borrower can fulfill all special conditions, e.g. getting IFOAM or GAP standard. The maximum size of “Green Credit” facility is set at the higher of 100% of projected farming income and the sum of 60% of projected farming income and 25% annual household expenses. It is lent as a revolving loan (year by year renewal). BACC stresses that this program does take into consideration the uncertain cash flows of organic farmers during the conversion period, and is therefore flexible on principal and interest payment terms.

Government Savings Bank (GSB)

GSB is a state-owned • GSB does not yet offer soft loans for bank whose deposits are agriculture, conventional or otherwise. But it guaranteed by the offers loans for community organizations

LESS

Forward

112

Grant/ Subsidy

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Name of organization

Description

Interview Summary

government under supervision of the Ministry of Finance. Although it focuses on savings, currently the bank offers several loan products and programs that target farmers, including loan moratorium for farmers in distress, and soft loans for farmers and farming groups.

which come in two different kinds of facilities: 1. Loans for the development of community organizations (individual): no more than 2 million Baht at the rate of MRR + 2% per annum. The repayment schedule is flexible depending on cashflow of the borrower. Timely repayment of both principal and interest would qualify for 1% principal repayment rebate. 2. Rural development loan: 1 million Baht credit facility at 6% interest per annum, for community groups such as community bank, saving group, NGO, SME, community enterprise, etc. The term of the loan is five years, flexible based on cashflow, and timely repayment of principal and interest would qualify for 1% interest rate reduction at year end. â&#x20AC;˘ GSB would gladly consider offering soft loan to support organic farming, whether through existing client base of community groups, or in cooperation with organizations such as Green Net. GSB could lend directly to organic farmers, who would sell their produce to

T-VER

Soft Loan

LESS

Forward

113

Grant/ Subsidy

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Name of organization

Description

Interview Summary

T-VER

Soft Loan

LESS

Green Net. Green Net in turn would collect principal and interest repayment from farmers and deliver to GSB. 9

PTT Public Co., Ltd.

PTT conducts integrated energy and petrochemical businesses as the nation's largest energy company.

 PTT is interested in LESS scheme for organic, because it also helps increase biodiversity in addition to reducing carbon emissions. PTT is already pushing several of its CSR programs to qualify for LESS, and therefore is interested in being a leader in LESS for organic.  However, PTT wants to work with the community rather than giving money directly to farmers. For example, the company would be interested in setting up community organic farming plan, training farmers, etc.  PTT may need input from other government agencies such as BEDO to verify biodiversity benefits of organic farming. The company also seeks more details on the obstacles of organic farming in each area, as well as key success factors in order to formulate support plan.

PTT Global Chemical Public

PTTGC is a fully integrated

• PTTGC is already seeking to buy T-VER credits every year, as the company seeks to

Forward

114

Grant/ Subsidy

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Name of organization

Co., Ltd. (PTTGC)

Description

petrochemical and chemical company in PTT Group. The company has joined TGO’s T-VER and Thailand V-ETS programs.

Interview Summary

be carbon neutral. The company has not bought any credits relating to agriculture, but would be interested to buy under the following conditions: 1. Located in Rayong province (their main operating locale) 2. Registered with TGO 3. Would pay the market price, which currently is around 200 Baht per CO2e, or an appropriate price that the seller proposes, given that the seller absorbs all costs of project design documents (PDD), validation, and verification processes • PTTGC is already conducting various CSR programs that aim at reducing GHG emissions, since the company voluntarily set 10% emission reduction target from 2012 level by 2022, or the equivalent of 760,000 tonnes CO2e. • The company is interested in LESS scheme, but must consider other factors including budget, results, action plan, project management, performance measurement, potential CO2 reduction etc. The company may add other components such as employee engagement in order to create co-

T-VER

Soft Loan

LESS

Forward

115

Grant/ Subsidy

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NO.

Name of organization

Description

Interview Summary

T-VER

Soft Loan

LESS

Forward

benefits. An ideal project size would be 30-50 tonnes CO2e, because this is the amount PTTGC must achieve every year. 11

Central Food Retail Co., Ltd. (CFR)

CFR owns and operates supermarkets under TOPS Supermarket, Marketplace by TOPS, and City Market under TOPS trademark.

• CFR suggests that forward scheme for organic products is difficult to materialize in Thailand for the following reasons: 1. The uncertainty of yield and price, meaning the farmer tends to refuse selling at the agreed-upon price, although the buyer could offer to buy at the average annual price. 2. Farmer may lose benefits if forward price is less than spot price in the future. In addition, buyers may pressure farmers to accept a low price. • Nevertheless, company executives are mulling to buy organic products under forward scheme; it is too early to say which form this may take. The company may invest for farmers, and then when they sell the products in the future, the company would then deduct such costs from the value of goods sold. • In the past, CFR has worked with various community enterprises and cooperatives to

116

Grant/ Subsidy

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NO.

Name of organization

Description

Interview Summary

T-VER

Soft Loan

117

LESS

Forward

Grant/ Subsidy

supply the company with organic products. The company tried to convince them to form a bigger group, so that they could produce in the amount that the company wants to procure, but so far it has been problematic. CFR typically receives less organic products than the target. â&#x20AC;˘ CFR has credit team that would provide 1520 days credit to community enterprises or cooperatives, relying on them to pay the organic farmers. As a result, farmers have to wait many days to receive payment; the company is therefore trying to reduce credit term to 7 days. â&#x20AC;˘ The company is willing to accept organic farmersâ&#x20AC;&#x2122; products during the conversion period (i.e. prior to receiving certification). It will offer a price which is higher than conventional farming products, but not as high as organic products that have been certified. In addition, they would require some assessment process to ensure that farmers have been adhering to organic farming principles. 12

T.C. Pharmaceutical

TC Pharmaceutical Industries Co., Ltd. is

Company currently supports organic farming in many provinces of Thailand. It typically

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

NO.

Name of organization

Description

Interview Summary

industries Co., Ltd.

one of the largest beverages companies in Thailand. It produces and sells “Red Bull” brand of energy and sport drinks, functional drink, white tea, and nutritional snacks.

supports for 3-5 years, with the following procedures: 1. Provide knowledge on organic farming 2. Help farmers set up grassroots enterprise to buy rice, process rice, and sell rice at the price set by the enterprise (up to 1 million Baht startup funding) 3. Create organic rice market by connecting producers to consumers. The company also buys organic rice up front from farmers and pay them in installments prior to final delivery 4. Support seed selection that is suitable for local conditions The company is interested in expanding support for organic to TVER and LESS schemes, particularly for regions surrounding the company’s plant in Prachin Buri, since the plant is developing its carbon emission reduction plan.

Bangkok Airways Public Company Limited

Bangkok Airways Public Company Limited operates “Bangkok Airways” airline. It

Bangkok Airways just recently set up corporate social responsibility department, which is currently formulating strategy and budget. The company therefore cannot give

T-VER

Soft Loan

LESS

Forward

118

Grant/ Subsidy

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Name of organization

Description

operates in three segments: airline, airports, and supporting airlines business.

Interview Summary

T-VER

Soft Loan

LESS

Forward

119

Grant/ Subsidy

specific opinion on the proposed 5 financial incentives. However, the company is interested in sponsoring organic projects under LESS scheme, because the company is under discussion with TGO and is interested in conducting CSR for every province on the airlineâ&#x20AC;&#x2122;s route, including Chiang Mai, Chiang Rai, Sukhothai, and Samui island.

Overall, preliminary results from the demand side show that T-VER and LESS schemes attract the largest number of interest (6 organizations equally), followed by soft loan and grant/subsidy (3 organizations each). Forward mechanism attracts the least interest (2 organizations). Details are shown in Table 25.

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Table 25: Number of organizations that express interest, by type of incentive T-VER

Grant/Subsidy

LESS

Forward

Soft Loan

Number of org. interested

8.4 Supply Side Test On the supply side, the research team conducts two surveys in Maha Sarakam and Nakorn Pathom provinces, two locations with both organic and non-organic rice farmers. Organic rice farmers have all switched to organic less than 2 years ago. Both are areas of operation for Green Net Cooperative. This part of the research focuses on the following key research questions: 1. What are the demographics, farmland characteristics, planting practices, and financing profiles of organic and non-organic farmer? 2. For organic farmers during the conversion period: what are the key obstacles they face from switching to organic? 3. For non-organic farmers: are they interested in switching to organic? If yes, what are the key obstacles which prevent them to? If no, what are the main reasons? 4. What are the key criteria they use in deciding where to seek financing? 5. Rank the level of interest both organic and non-organic farmers have in the following financial incentives: Thailand Voluntary Emission Reduction Program (T-VER), BAACâ&#x20AC;&#x2122;s Green Credit soft loan, Low Emission Support Scheme (LESS), forward contract, and grant/subsidy. 6. What are their concerns for each of the incentives mentioned above?

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8.4.1 Supply side incentives test 1: Maha Sarakham Figure 33: Maha Sarakham province location

Geography Maha Sarakham province is situated roughly in the center of Thailandâ&#x20AC;&#x2122;s Northeast region. It is 5,267 square kilometers wide, or 3.3 million rais. Most of the land is relatively flat, with some minor modulation, about 130-230 meters higher than sea level. The West and North regions of the province together constitute the highest area, covering approximately half the land, slowly sloping down toward the East and South. Climate Maha Sarakham is typical monsoon climate, alternative between wet and dry. The weather is cold and dry between October and February, and rainy between mid-May through October. Temperature and rainfall In 2014, all-year temperature averaged around 27.91 celsius. April was the hottest month, while December was the coldest month. Rainfall measured 1,493.7 millimeters total, peaking at 149.5 meters, totaling 90 days. Local Administration and Population Maha Sarakham is divided into 13 districts (Amphoe), 133 subdistricts (Tambon) and 1,944 villages (Mooban). There is one provincial administration, 18 municipalities, and 123 Tambon administrations, totaling 143 offices. The province has 276,824 households, comprising a population of 960,588.

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Rationale for fieldwork The research team selected rice farmers in Tambon Nong Saeng and Tambon Wai in Wapee Patum District for the first supply side survey due to the following reasons: 1) Maha Sarakham province is one the main areas of rice cultivation in Northeast region, with a high concentration of farmers, both organic and traditional. Therefore, data collection is relatively easy and the team can compare data between organic and non-organic farmers who grow the same crop in the same area. 2) Organic farmers in this area concentrate on one crop: rice. They also have only switched to organic for one year or less. Green Net Cooperative has a good relationship with the group, since the Cooperative is the NGO that convinced Thai Baan members to switch to organic farming, and has begun the training, certification and buying processes. This make data collection relatively easy, and their one-year-or-less profile is also suitable for the focus of this research: exploring financial incentives for organic farming during the conversion period (0-3 years).

Demographics and methodology The research team did fieldwork in Tambon Nong Saeng and Wai in cooperation with the Thai Baan (ไทบ้ าน) group, a grassroots organization whose members recently switched to organic. The land is flat with little modulation and low-level plateau. The central area is plains that is often flooded in the rainy season, but never had problem with mudslides. Members of the Thai Baan group started organic farming in April 2015. They are currently undergoing the certification process by IFOAM Accreditation Programme and Organic Agriculture Certification Thailand (ACT). There are 29 organic farming members in the group; research team was able to conduct a focus group discussion with 23 of them. They reside in 5 villages in Tambon Nong Saeng, and 3 villages in Tambon Wai. Their lands together comprise roughly 690.8 rais, 365.5 rais of which have been converted to organic farming. The main organic crops are jasmine rice and Gor Kor 6 sticky rice. The research team used both qualitative and quantitative methods in the fieldwork and divides all farmers into two categories: 1. Thai Baan Group members who have just started organic since April, 2015: The data was collected through conducting 3 focus group discussions (FGDs), with 7-9 participants per group. The questions covered 5 main topics including conversion period obstacles, rice cultivation process, income and costs from growing rice, organic farm financing, and thoughts and concerns on the proporsed financial incentives.

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2. Conventional farmers: The data was collected through a survey, which was collected in a face-to-interview face by Thai Baan members who went to interview their non-organic neighbors. In total, 50 households were surveyed and all were randomly selected. The head of each household was interviewed using a structured questionnaire, which covered 5 main topics including conversion period obstacles, rice cultivation process, income and costs from growing rice, conventional farm financing, and thoughts and concerns on the proporsed financial incentives.

Farmers’ Feedback and Analysis From the focus group discussion with 23 organic farmers, and questionnaire from 50 nonorganic farmers, the research team was able to construct and compare the profiles of an average organic and non-organic farmer in the area. The results are shown inTable 26 and Table 27.

Table 26: Average income and expenses : organic vs. non-organic farmer in Maha Sarakam Costs of non-organic rice 1. Soil preparation 2. Seeds 3. Labor – seedlings 4. Chemical fertilizer 5. Hormone 6. Water 7. Labor – harvest 8. Costs of tillage Total costs of non-organic Income: price 9.94 Baht / kg. x average yield 307.7 kg. per rai Net profit from non-organic

Baht/rai 650 223 599 199 650 375 2,696

Costs of organic rice* 1. Soil preparation 2. Seeds 3. Labor – seedlings 4. Organic fertilizer 5. Hormone 6. Water 7. Labor – harvest 8. Costs of tillage Total costs of organic Income: price 11.5 Baht / kg. x 3,059 average yield 377 kg. per rai 362 Net profit from organic

Baht/rai 650 40 1,150 50 199 650 450 3,189 4,336 1,147

Source: Fieldwork, February 2016.

*Note: Excluding expenses related to switching to organic and certification process, since such expenses are borned by Green Net as their operating costs. Such expenses total 158,000 Baht incurred during the conversion period, comprising: organic training – 60,000 Baht, farmer group registration with Green Net and IFOAM – 18,000 Baht, and organic standard certification – 80,000 Baht.

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Table 27 Profile of organic vs. conventional farmer Topic

Organic farmer

Conventional farmer

Total farmland

The amount of farmland held by Thai Baan organic farmers is highly varied, from the minimum of 3 rais to the maximum of 65 rais per household. The median is 25.77 rais.

The amount of farmland held by non-organic farmers is highly varied, from the minimum of 4 rais to the maximum of 60 rais per household. The median is 20 rais, slightly less than organic counterparts.

Organic farmland

None. The amount of farmland converted to organic rice by Thai Baan organic farmers is highly varied, from the minimum of 1 rais to the maximum of 40 rais per household. The median organic farmland size is 5.75 rai, roughly one-fifth of their total farmland. The average is 11.62 rai.

Farmland type

Organic farmers’ land comprises the following categories: 1) Hilly (parched sandy soil) – least yield 2) Plains (rice paddies) – good yield 3) Flood plains (clay or loose soil) – best yield Most organic farmers in the group have land 1) or 2) Rice cultivation Almost everyone plant by sowing; method only 1-2 farmers still plant by transplanting seedlings. Rice is cultivated once per year.

Non-organic farmers’ land comprises the following categories: 1) Hilly (parched sandy soil) – least yield 2) Plains (rice paddies) – good yield; most farmers have this type of land

Rice yield

Yield per rai sees high variance, similar to organic farmers, but there seems to be no clear correlation between land type and yield. Non-organic farmers report an average yield of 308 kg/rai, roughly 18% lower than organic farmer. The median is 290 kg/rai,

Yield per rai sees high variance, due mainly to type of land. Farmlands situated in plains and flood plains yield higher than hilly farmland that lacks irrigation and tends to be alkaline soil. Organic farmers report an average yield of 377 kg/rai. The median is 360

Almost everyone plant by sowing. Rice is cultivated once per year.

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Topic

125

Organic farmer

Conventional farmer

kg/rai, with the minimum at 166 kg/rai and maximum at 550 kg/rai.

with the minimum at 95 kg/rai and maximum at 700 kg/rai.

Cultivation expenses

Thai Baan organic farmers spend 4,007 Baht per rai on average during each season. See Table 26 for details on income and expenses. The largest expense category is “organic fertilizer” which constitutes 42% of total costs, followed by “labor” at 23% of total costs. Organic farmers have no seeds-related costs, because most of them keep their own seeds from previous harvest. However, significantly larger amount of organic fertilizer used (120 kg/rai, 3-4 times the amount of chemical fertilizers that nonorganic farmers use) during the conversion period led to organic farmers incurring higher expense than conventional farmers.

Non-organic farmers spend 2,516 Baht per rai on average during each season. See Table 26 for details on income and expenses. The largest expense category is “labor” which constitutes 44% of total costs. Other major costs include seeds, water, and chemical fertilizers.

Source of funds

Both organic and conventional farmers use similar sources of funds for farming: loans from BAAC, saving groups, village funds, payment for labor work, and money transfer from their children and grandchildren.

Non-farm household expenses

Organic farm household reported that they had non-farm household expenses of approximately 6,600 Baht per month.

Conventional farming household reported that they had non-farm household expenses of approximately 8,800 Baht per month.

Source: Fieldwork, February 2016.

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Obstacles to organic farming For organic farmers in Thai Baan group who have switched some or all of their farmland to organic rice one year ago, the consensus by a wide margin is that draught during the past few years is the most significant obstacle to organic farming, because they cannot see a way to cope with it. Draught directly affects farm yield and nutrient in the soil. The second biggest obstacle in their view is “stunted rice” compared to rice grown with conventional farming methods. In their perception, organic farming may lead to stunted rice, which would then lead to lower price and lower yield, because organic fertilizers are less effective than chemical fertilizers. It must be noted, however, that this concerned is not matched by data from fieldwork, which the research team found that organic rice yields an average of 377 kg per rai, 18% higher than chemical rice yield in the same area which is reported at 308 kg per rai. Other obstacles cited by organic farmers, although not to the same extent as draught and “stunted rice,” include: lack of support from family members who see no reason to switch, and critical peer pressure from others in the community who regard them as the “weird” minority. Some farmers also say that they need to use a large amount of organic fertilizers compared to chemical fertilizers, at least during the first few years. A survey of 50 non-organic farmers in the same area during the same period found that 32 of these, or 64%, say they are “interested” in switching some or all of their farmland from conventional rice farming to organic rice. Among these, over one-third cited “safe / good for my health” and “will resuscitate soil” as the main reasons for their interest. When asked what prevented them from actually switching, roughly one-third answered “stunted rice” as a major concern. The next two obstacles most commonly cited are: “my health is too poor / I am now too old” (18.7%) and “cannot find labor to take care of the fields” (since they heard organic farming requires much more care) (15.6%). Details are summarized in Table 28.

Table 28 Non-organic farmers' interest in organic: reasons and major obstacles Reason for interest in organic Safe / good for my health Soil will be fertile again No chemicals Good price Save on expenses Want to be ‘in trend’ Fish, frogs, other animals can live Want to prove sufficiency principle

Number (out of 32) 12 11 9 7 5 3 3 2

Key obstacle that prevents actually switching to organic Stunted rice Impaired health / too old Cannot find labor Low yield Differing opinions in the family Can only rely on rainwater Cannot stop using herbicide Alkaline soil already; cannot do

Number (out of 32) 11 6 5 4 3 3 1 1

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Reason for interest in organic Did organic before; saw benefits Relatively low costs Freshwater animals will return Self sufficiency purpose Helps global warming Good quality rice

Number Key obstacle that prevents (out of 32) actually switching to organic 2 Does not have enough land 2 Fear of flood 1 1 1 1

127

Number (out of 32) 1 1

Source: Fieldwork, February 2016.

The remaining 18 out of 50 (36%) non-organic respondents who said they are not interested in switching gave a variety of reasons. Over one-third cited fear of “stunted rice” as the key reason they are not interested in switching. The other reasons cited are: lack of water, poor soil, low yield, unfamiliarity, etc. Results are summarized in Table 29. Table 29 Reasons non-organic farmers are not interested in switching Reason cited for those “not interested” in organic Fear of stunted rice Lack of water Poor soil Waterway (carries chemicals from other non-organic fields) Rice grows too slowly Low yield Cumbersome Difficult to plant on hilly fields Heard bad experience from others Other family members disapprove Unfamiliar Non-organic price is the same as organic Have to wait 2 years before produce is ready Has too little land No access to organic fertilizer Rice would suffer from leaf mosaic disease Too much grass; need to use herbicide Source: Fieldwork, February 2016.

Number (out of 18) 6 (33%) 3 (18%) 3 (18%) 2 (11%) 2 (11%) 2 (11%) 2 (11%) 2 (11%) 1 1 1 1 1 1 1 1 1

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Farmers’ considerations regarding source of funds When asked about which factors affect their considerations when borrowing for farming, organic farmers gave similar answers as non-organic farmers, except that the former group as a whole is more reluctant to borrow, and more seriously consider their own capacity to service debt. This is evidenced in the fact that organic farmers interviewed cited “having enough collateral to borrow” and “necessity of the loan” as the primary factors that influence their decision, while non-organic farmers cited “low interest rate” as the main factor for them when deciding where to borrow. Other factors that are important to both groups include: interest rate (the lower the better), size of monthly installment (the smaller the better), and credibility, flexibility, and friendliness of lender. Details are shown in Table 30.

Table 30 Considerations when borrowing: organic vs. non-organic farmers in Maha Sarakam

Factor Interest rate Having collateral to borrow Necessity of loan Flexibility (e.g. ok if late some months) Friendliness / credibility of lender Terms & size of installment payment Convenience Loan term (longer=better)

Level of importance (1=highest) Organic Non-organic Farmers Farmers 2 1 1 1 2 3 3 4 4 5 6

Source: Fieldwork, February 2016.

Level of interest in financial incentives When asked about their interest and concerns regarding the five financial incentives chosen for this project, the majority of farmers in both organic and non-organic groups express interest in “grant or subsidies” the most. Most of them say they would feel relieved if such incentive comes without onerous conditions tied to farm yield, which many feel is fraught with uncertainties. They also expect the government to give grant or subsidies to support organic farming in the long run. However, some organic farmers say that they are worried that some farmers may lack the incentive to farm effectively, if they were given grant or subsidies with no strings attached. Some also express skepticism about government programs, of which they say many “never continue for long,” and are wary of grant conditions that may be out of their reach.

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The scheme that attracts second-highest interest from organic farmers is T-VER by TGO. Most organic farmers who express interest in this mechanism say that this would amount to “bonus income” for what they are doing anyway, i.e. organic farming. They also believe that the longer they stick to organic, the more their farms would have the potential to reduce global warming, and therefore they could get T-VER certification and carbon credit income sooner or later. Several farmers express concerns that they may not be able to meet T-VER conditions in the first few years, but they are confident for the long run. LESS by TGO is another mechanism that attracts a similar level of interest as T-VER from organic farmers. Many farmers who say they are interested say that companies should help farmers improve farm management and production plans, rather than simply give them financial support. A few farmers are concerned that LESS might be an opportunity for companies to take advantage of farmers. Therefore, they would adopt a wait-and-see attitude, wanting to see exact terms and conditions before making decision. Soft-loan mechanism also attracts a considerable interest from both groups. Non-organic farmers see this as an opportunity for them to reduce interest burden on their existing debt (most of which is also from BAAC, the provider of “Green Credit” soft loan scheme). Organic farmers are also interest, since soft loan interest rate would be lower than what they currently pay. A few organic farmers express skepticism of BAAC’s commitment, saying that the bank announced several programs in the past, such as “tree bank” and “solar roof loans” that they did not carry through. Forward contract mechanism attracts least interest from both groups. They like receiving money up front, but are worried that they would not have enough rice (due to lower than expected yield from draught, etc.) to deliver as per contract. Table 31 summarizes key reasons for interest and non-interest cited by non-organic farmers.

Table 31 Key reasons for interest and non-interest cited by non-organic farmers 1. Grant/Subsidy Reason for interest Additional cash income No strings attached

No. (out of 36) 24 (67%) 2 (5%)

Reason for non-interest Family doesn’t approve Too difficult to do

No. (out of 14) 3 (21%) 3 (21%)

2. T-VER Reason for interest Additional cash income Can help improve soil

No. (out of 32) 11 (34%) 6 (19%)

Reason for non-interest Too difficult to do Family doesn’t approve Farmland too low in quality Doesn’t understand concept

No. (out of 18) 5 (28%) 2 (11%) 2 (11%) 2 (11%)

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3. Soft Loan Reason for interest Lessen interest burden Price premium from organic

No. (out of 32) 20 (63%) 1 (3%)

Reason for non-interest Land cannot do organic Family doesnâ&#x20AC;&#x2122;t approve

No. (out of 18) 3 (17%) 2 (11%)

4. LESS Reason for interest Clear promise to buy Better price than market Feel better than sell to mill

No. (out of 32) 12 (38%) 4 (13%) 3 (9%)

Reason for non-interest Too little yield to deliver Family doesnâ&#x20AC;&#x2122;t approve Land cannot do organic

No. (out of 18) 4 (22%) 3 (17%) 2 (11%)

5. Forward Reason for interest Additional cash income

No. (out of 22) 15 (68%)

Reason for non-interest Would be further in debt Fear that cannot deliver

No. (out of 28) 9 (32%) 8 (29%)

Source: Fieldwork, February 2016.

Results from demand-side survey and supply-side survey can be summarized in Table 32. The three financial incentives that attract the most interest from farmers and potential funders are grand/subsidy, T-VER, and LESS. Table 32 Level of interest in financial incentives: supply vs. demand side in Maha Sarakam Ranking

Organic Farmers

Non-Organic Farmers

Demand Side

Grant or subsidy

LESS/T-VER

T-VER

T-VER/Soft Loan/LESS

LESS/T-VER

LESS/Soft Loan

T-VER/Soft Loan/LESS

Grant/Soft Loan

LESS/Soft Loan

T-VER/Soft Loan/LESS

Grant/Soft Loan

Forward

Source: Fieldwork and interviews, 2015-2016.

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8.4.2 Supply side incentives test 2: Nakhon Pathom Figure 34 Nakhon Pathom province location

Geography Nakhon Pathom is located on the west side of Thailandâ&#x20AC;&#x2122;s central region. It has an area of 2,168.3 km2 or 1.35 million rais. The geography is largely plains, with declining slop from north to south and west to east. The province has no mountain or forest, and is higher than sea level 2-4 meters on average. Ta Chin River bisects the province from north to south, full of natural and dug streams for transportation and irrigation. Climate Nakhon Pathom lies in the monsoon area, with heavy rain between July-October of every year. Summer between March-June is relatively hot, while the whether is mild during the cold season, from November-February. Temperature and rainfall In 2013, Nakhon Pathom registered average year-round temperature of 27.9 celcius, with 40.1 celcius maximum and 12.0 celcius minimum. Rainfall totaled 134 days, with 957.4 millmeters of rain. Local Administration and Population Nakhon Pathom is divided into 7 districts (Amphoe), 106 subdistricts (Tambon) and 885 villages (Mooban). There is one provincial administration, 14 municipalities, and 83 Tambon administrations. The province has population of 720,337. Rationale for fieldwork

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The research team selected rice farmers in Tambon Nin Phet, Bang Len District for the second supply side test survey due to the following reasons: 1) Nakhon Pathom province is one of the main areas of rice cultivation in Central region, with a high concentration of farmers, both organic and traditional. Therefore, data collection is relatively easy and the team can compare data between organic and non-organic farmers who grow the same crop in the same area. 2) Organic farmers in this area concentrate on only one crop: rice. They also have only recently switched to organic, one year or less. This makes data collection relatively easy, and their status as organic newcomer is also suitable for the focus of this research: exploring financial incentives for organic farming during the conversion period (0-3 years). 3) The ALRO is already supporting organic farming in the area with the help of Green Net. ALRO officers and farmer contacts in the fileldwork area are familiar with Green Net and would like to volunteer information.

Demographics and methodology The research team did fieldwork in Tambon Nin Phet in Bang Len District in cooperation with Agricultural Land Reform Office (ALRO). Most land in Nin Phet lies in plains, with farmers owning their own land; only a minority rent ALRO land for farming. Although Nin Phet generally has access to irrigation, farmers who participated in this supply side survey are among the last who receive water for irrigation, because their farmlands lie far from the water source, so they would have to wait some time for their turn. Land in Nin Phet has been under intensive farming for more than 5 years, with two crops per year. A small minority of farmers has switched some of their land to organic, and some to â&#x20AC;&#x153;safe agricultureâ&#x20AC;? (e.g. reducing chemical use). The soil pH ranges from 4.5 to 6.0, signifying moderate to high acidity. The research team used both qualitative and quantitative methods in the fieldwork and divides all farmers into two categories: 1. Organic farmers: The data was collected through conducting 1 focus group discussion (FGD) with 9 participants. The questions covered 5 main topics including conversion period obstacles, rice cultivation process, income and costs from growing rice, organic farm financing, and thoughts and concerns on the proposed financial incentives. 2. Conventional farmers: The data was collected through conducting 2 focus group discussions, with 6-11 participants per group, plus a structured questionnaire with 30 farmers, totaling 50 participants. The questions covered 5 main topics including conversion period obstacles, rice cultivation process, income and costs from growing rice, conventional farm financing, and thoughts and concerns on the

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proposed financial incentives. Rice cultivation process data was also collected through a survey, which was collected in a face-to-interview face by one of the farmer members who interviewed their non-organic neighbors. Additional 30 farmers were surveyed using a structured questionnaire and all were randomly selected.

Farmers’ Feedback and Analysis From focus group discussions with 9 organic farmers and 17 non-organic farmers, as well as questionnaire from 30 non-organic farmers, the research team was able to construct and compare the profiles of an average organic and non-organic farmer in the area. The results are shown in Table 33 and Table 34.

Table 33 Average income and expenses: organic vs. non-organic farmer in Nakhon Pathom Costs of non-organic rice 1. Soil preparation 2. Seeds 3. Labor – seedlings 4. Chemical fertilizer 5. Labor – fertilizing 6. Chemical pesticide and fungicide 7. Water 8. Fuel 9. Labor – harvest 10. Transportation cost Total costs of non-organic Income: price 6.92 Baht / kg. x average yield 781.67 kg. per rai Net profit from non-organic Source: Fieldwork, March 2016.

Baht/rai 335 545 50 647 100 1,328 40 261 300 91 3,697 5,409 1,712

Costs of organic rice 1. Soil preparation 2. Seeds 3. Labor – seedlings 4. Organic fertilizer 5. Labor – fertilizing 6. Organic pesticide and fungicide 7. Water 8. Fuel 9. Labor – harvest 10. Transportation cost Total costs of organic Income: price 7 Baht / kg. x average yield 655 kg. per rai Net profit from organic

Baht/rai 470 325 50 680 100 110 40 360 325 91 2,551 4,585 2,034

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Table 34 Profile of organic vs. conventional farmer in Nakhon Pathom Topic

Organic farmer

Conventional farmer

Total farmland

The amount of farmland held by organic farmers is moderately varied, from the minimum of 3 rais to the maximum of 35 rais per household. The median is 15 rais.

The amount of farmland held by non-organic farmers is highly varied, from the minimum of 2 rais to the maximum of 50 rais per household. The median is 15.5 rais.

Organic farmland

The amount of farmland converted to organic rice by organic farmers is slightly varied, from the minimum of 1 rais to the maximum of 10 rais per household. The median organic farmland size is 5 rai, roughly one-third of their total farmland. The average is 5.43 rai.

None.

Rice cultivation method

Almost everyone plant by sowing. Rice is cultivated twice per year.

Rice yield

Yield per rai sees high variance. Organic farmers report an average yield of 655 kg/rai. The median is 650 kg/rai, with the minimum at 420 kg/rai and maximum at 900 kg/rai.

Yield per rai sees high variance, similar to organic farmers. Nonorganic farmers report an average yield of 781.67 kg/rai, roughly 19% higher than organic farmer. The median is 850 kg/rai, with the minimum at 418 kg/rai and maximum at 975 kg/rai.

Cultivation expenses

Each organic farmer spends 2,551 Baht per rai on average during each season. See Table 33 for details on income and expenses. The largest expense category is “organic fertilizer” which constitutes 27% of total costs, followed by “soil preparation” at 18% of total costs.

Each non-organic farmer spends 3,697 Baht per rai on average during each season. See Table 33 for details on income and expenses. The largest expense category is “chemical pesticide and fungicide” which constitutes 36% of total costs. Significantly larger amount of chemical pesticide and fungicide used led to conventional farmers incurring

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Topic

Organic farmer

Source of funds

Both organic and conventional farmers use similar sources of funds for farming: loans from BAAC, loans from Agricultural Land Reform Office (ALRO), and informal loans.

Non-farm household expenses

Organic farming household reported that they had non-farm household expenses of approximately 2,000 to 6,600 Baht per month.

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Conventional farmer higher expense than organic farmers. Other major costs include chemical fertilizer and seeds. Both organic and conventional farmers use similar sources of funds for farming: loans from BAAC, loans from Agricultural Land Reform Office (ALRO), informal loans, and money transferred from their children and grandchildren. Conventional farming household reported that they had non-farm household expenses of approximately 4,000 to 15,000 Baht per month.

Source: Fieldwork, March 2016.

Obstacles to organic farming Most Nin Phet organic farmers said that the most significant obstacle for them during the transition period is “too much weeds” because they find it frustrating to deal with weeds without the herbicides they are used to, in accordance with organic farming principles. Other obstacles cited include: worms that destroy rice stalks, birds and rats, and the perception that “rice does not look attractive compared with chemical rice” – implying both about the quality of produce, as well as expected farm yield. As for non-organic farmers, 5 out of 17 chemical farmers interviewed in focus group discussions were interested in switching some part of their land to organic. The most cited reasons in the order of frequency are: 1) want to grow organic rice to consume in their own household, because they feel confident that it is safe, and would save money (not having to buy rice from the market), 2) want to recover soil quality, and 3) would like to try after seeing some organic farmers sell organic crops successfully. As for the remaining non-organic farmers who said they are not interested to switch, the main reasons in the order of frequency is as follows: 1) afraid of getting lower yield, 2) convinced that weed could not be eradicated without using herbicide, 3) do not want to try something new aside from what they are already familiar with, and 4) afraid that organic rice would be hard to sell.

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Farmers’ considerations regarding source of funds When asked about factors that influence their decision to borrow, organic farmers in Nakhon Pathom cited “flexibility” (e.g. grace period when they face repayment difficulties) as the most important factor, followed by “low interest rate” and “low interest payment frequency.” “Emergency loan” is also cited as important, but not as much as the other three factors. Non-organic farmers have similar concerns as organic farmers, although they cited “low interest rate” as the most important factor, followed by “flexibility” (e.g. allow them to repay after rice sales), and “credibility of lender.” To a lesser degree, they cited “no collateral condition” and “loan necessity” (i.e. they would consider whether or not they need the loan; this borrower’s perspective is indicative of borrower groups who are more used to thinking of themselves as “asking for favor” from lenders, not as “consumers” of financial products, who have the rights to demand service). Details are shown in Table 35. Table 35 Considerations when borrowing: organic vs. non-organic farmers in Nakhon Pathom

Factor Low interest rate Flexibility (e.g. can periodically repay late) Credibility of lender Frequency of interest payment Having collateral to borrow Emergency loans service Necessity of loan

Level of importance (1=highest) Organic Non-organic Farmers Farmers 2 1 1 2 2 2 3 3 4

Level of interest in financial incentives Feedback from organic farmers on 5 potential financial incentives to encourage organic farming is quite different from the feedback from non-organic farmers. Organic farmers were interested in T-VER scheme the most, saying that because they already farm according to organic principles, they are not afraid of assessment procedures of the scheme. Many view this scheme as a “bonus” to their organic practice, and say that it would help the environment in the long run. The scheme that attracts the second highest level of interest is grant/subsidy, although many question the conditions, and voice concerns about not being able to meet those conditions. Soft loan comes third in the level of interest; farmers see this as better than borrowing from informal lenders, although most of them said that they “already have high enough debt” and do not want to take out more loans. Forward and LESS schemes attract very little interest, due to concerns about not being able to deliver the amount promised

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(forward), or they had a bad experience with CSR program of a company that did not ask what the villagers want (LESS). Non-organic farmers had a very different take on the 5 proposed incentives. They were most interested in soft loan, because they said that low interest would help reduce their debt service burden, allowing them to have more savings. The second most attractive incentive in their view is LESS scheme by TGO, especially if companies can help them increase yield. As for the remaining incentives, forward came third; farmers see the upside of having a guaranteed buyer, but most are concerned that they may not be able to deliver as much as promised, since they are inexperienced with organic farming. This concern over inexperience is also the main reason they are not interested in T-VER, i.e. they are not certain whether they would get registered, and whether the carbon credit price could compensate for costs. Similarly, nonorganic farmers said they were unsure whether they could meet conditions of grant/subsidy incentive. Some also said they doubt that the government would subsidize for free. Results from demand-side survey compared with supply-side survey in Nakhon Pathom can be summarized in Table 36. Table 36 Level of interest in financial incentives: supply vs. demand side in Nakhon Pathom Ranking

Organic Farmers

Non-Organic Farmers

Demand Side

T-VER

Soft Loan

LESS/T-VER

Grant or subsidy

LESS

LESS/T-VER

Soft Loan

Forward

Grant/Soft Loan

Forward

T-VER

Grant/Soft Loan

LESS

Grant or subsidy

Forward

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8.4.3 Model outputs The primary data from supply-side surveys (FGDs and structured questionnaire) and secondary data from Green Net Cooperative, TGO, and research references are used to construct a cash flow profile of an average organic and non-organic farmer, as well as financial profile of 5 incentives tested for this research. The financial profile of each incentives are then applied to cash flow profile to estimate key terms and conditions required for each incentive to ‘lift’ the cash flow profile to net positive, and for farmers to be able to cover their household expenses.

Baseline organic farming (without any financial incentive) As shown in the previous section, the organic farmer and non-organic farmer in Maha Sarakam had an average profit of 1,147 and 362 Baht per rai respectively. In Nakhon Pathom fieldwork area, the organic farmer and non-organic farmer had an an average profit of 2,034 and 1,712 Baht per rai respectively. Table 26 and Table 33 are shown here again for ease of comparison. Table 26: Average income and expenses : organic vs. non-organic farmer in Maha Sarakam Costs of non-organic rice 1. Soil preparation 2. Seeds 3. Labor – seedlings 4. Chemical fertilizer 5. Hormone 6. Water 7. Labor – harvest 8. Costs of tillage Total costs of non-organic Income: price 9.94 Baht / kg. x average yield 307.7 kg. per rai Net profit from non-organic Source: Fieldwork, February 2016.

Baht/rai 650 223 599 199 650 375 2,696

Costs of organic rice 1. Soil preparation 2. Seeds 3. Labor – seedlings 4. Organic fertilizer 5. Hormone 6. Water 7. Labor – harvest 8. Costs of tillage Total costs of organic Income: price 11.5 Baht / kg. x 3,059 average yield 377 kg. per rai 362 Net profit from organic

Baht/rai 650 40 1,150 50 199 650 450 3,189 4,336 1,147

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Table 33: Average income and expenses: organic vs. non-organic farmer in Nakhon Pathom Costs of non-organic rice 1. Soil preparation 2. Seeds 3. Labor – seedlings 4. Chemical fertilizer 5. Labor – fertilizing 6. Chemical pesticide and fungicide 7. Water 8. Fuel 9. Labor – harvest 10. Transportation cost Total costs of non-organic Income: price 6.92 Baht / kg. x average yield 781.67 kg. per rai Net profit from non-organic

Baht/rai 335 545 50 647 100 1,328 40 261 300 91 3,697 5,409 1,712

Baht/rai 470 325 50 680 100 110 40 360 325 91 2,551 4,585 2,034

Source: Fieldwork, March 2016.

These figures do not include non-farm household expenses, which average around 6,600 Baht per month per household in both areas, or 79,200 Baht per household per year. Using this figure combined with average landholding per household data reveals that for all fieldwork groups, net income from farming is not sufficient to cover household expenses. Table 37 summarizes net annual income of an average farmer in both fieldwork areas. Table 37 Net annual income after household expenses, Maha Sarakam and Nakhon Pathom

(1) Average landholding (2) Farm income per rai (3) Number of crops/year (4) Total annual farm income (1x2x3) (5) Farm expense per rai (6) Total annual farm expenses (1x3x5) (7) Household expenses/year Net annual income after household expenses (4-6-7) Source: Fieldwork interviews

Maha Sarakam Organic Non-organic farmer farmer 11.62 23.75 4,336 3,059 1 1 50,384 72,651 3,189 2,696 37,056 64,030 79,200 79,200 -65,872

-70,579

Nakhon Pathom Organic Non-organic farmer farmer 5.43 18.00 4,585 5,409 2 2 49,793 194,724 2,551 3,697 27,704 133,092 79,200 79,200 -57,111

-17,568

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As shown in the above table, an average farmer would have o savings left Therefore, the data shows that although organic farming yields a net profit which is higher than conventional farming, net profit amount is still not sufficient to cover household expenses, and farmers may face difficulties when they need to re-invest for future seasons. To construct base case projection for financial model, the research team used the above income and expense profile, and an average of 6,600 Baht/month household expenses for both organic and non-organic households. The â&#x20AC;&#x153;base caseâ&#x20AC;? model is constructed using the following assumptions:

1. Thailand Voluntary Emission Reduction Program (T-VER) To apply T-VER mechanism to the financial model, research team calculated greenhouse gas emission reduction according to â&#x20AC;&#x153;Good Fertilization Practice in Agricultural Landâ&#x20AC;? methodology announced by Thailand Greenhouse Gas Management Organization (TGO) which is represented by the following formula: đ??śđ??´đ??şđ?&#x2018;&#x2026; = (đ??śđ??ľđ?&#x2018;&#x2020;đ??ż â&#x2C6;&#x2019; đ??śđ?&#x2018;&#x192;đ?&#x2018;&#x2026;đ?&#x2018;&#x201A;đ??˝ ) + đ??śđ?&#x2018; đ?&#x2018;&#x153;đ?&#x2018;&#x2013;đ?&#x2018;&#x2122; given CAGR CBSL CPROJ CSOIL

= greenhouse gas emission reduction from project (tCO2e/year) = baseline greenhouse gas emission (tCO2e/year) = project greenhouse gas emission (tCO2e/year) = cumulative carbon sequestered in soil (tCO2e/year)

Data for baseline and project greenhouse gas emission are estimated from chemical fertilizer usage data of non-organic farmers surveyed in Maha Sarakham (most of whom used 16-8-8 fertilizer formula), together with results from analysis soil sampled from the same location, done by Forestry Faculty, Kasetsart University. Carbon credit sale price is drawn from an interview with Phayao project developer (as the price at which the agricultural T-VER project would be feasible in his opinion). Table 38 and Table 39 shows estimates of greenhouse gas emission reduction and income from carbon credit sale for Maha Sarakam and Nakhon Pathom fieldwork areas respectively:

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Table 38: Estimates of Greenhouse Gas Emission and Income from Carbon Credit Sale: Maha Sarakam Item

Output (per year)

Average baseline greenhouse gas emission (1)

10.91 tCO2e/project

Average project greenhouse gas emission (2)

7.73 tCO2e/project

Average total carbon sequestered in soil (3)

1.52 tCO2e/project

Average total greenhouse gas emission reduction (4) = (1) â&#x20AC;&#x201C; (2) + (3)

4.70 tCO2e/project

Carbon credit sale price (5) Proceeds from carbon credit sale (6) = (4)*(5)

200 Baht/ tCO2e 940 Baht/project

Total project area (all organic farmers) (7)

220.75 rai

Proceeds from carbon credit per rai (8) = (6)/(7)

4.25 Baht/rai

Source: Soil analysis performed by Kasetsart University

Table 39: Estimates of Greenhouse Gas Emission and Income from Carbon Credit Sale: Nakhon Pathom Item

Output (per year)

Average baseline greenhouse gas emission (1)

4.02 tCO2e/project

Average project greenhouse gas emission (2)

2.52 tCO2e/project

Average total carbon sequestered in soil (3) Average total greenhouse gas emission reduction (4) = (1) â&#x20AC;&#x201C; (2) + (3) Carbon credit sale price (5) Proceeds from carbon credit sale (6) = (4)*(5) Total project area (all organic farmers) (7) Proceeds from carbon credit per rai (8) = (6)/(7) Source: Soil analysis performed by Kasetsart University

tCO2e/project

1.49 tCO2e/project 200 Baht/ tCO2e 298 Baht/project 38 rai 7.84 Baht/rai

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From the preliminary calculation and soil sample analysis, each household is estimated to help reduce greenhouse gas emissions by 4.70 tCO2e per year for total organic land of 220.75 rais in Maha Sarakam, and 1.49 tCO2e per year for total organic land of 38 rais in Nakhon Pathom. At the current market rate carbon price of 200 Baht/tCO2e, an average organic farming household in Maha Sarakam would receive a total of an average 4.25 Baht per rai per year; this figure is 7.84 Baht per rai per year in Nakhon Pathom. These figures do not include T-VER project development costs, such as validation, verification, or monitoring costs. Such costs are estimated by TGO to be approximately 200,000-300,000 Baht for the entire process.

2. Soft Loan The soft loan incentive used in this model is patterned after BAAC’s existing “Green Credit” scheme, with the relaxed condition that this loan would be granted to organic farmers during the conversion period even before they receive organic certification (a key condition in BAAC’s loan). The loan amount would be equal to 60% of farming costs; interest rate starts at 7%, with a bullet repayment year-by-year, rollover on an annual basis. Interest rebate of 1% per year is granted from the second year forward, to the minimum of 4%. Both “base case” and “best case” scenarios assume that the average organic farmer and chemical farmer has no existing loans (i.e. interest rate differentials are not taken into account).

3. Low Emission Support Scheme (LESS) T-VER modelling in the previous section estimated that organic farm has the potential to reduce greenhouse gas approximately 4.70 tCO2e/year in Maha Sarakam for 220.75 rais, and 1.49 tCO2e/year in Nakhon Pathom for 38 rais. Therefore, there exists incentive for companies to apply for TGO’s LESS mechanism to get greenhouse gas reduction recognition for their support of organic farming. The base case model assumes that they would pay enough for organic household to cover both planting costs and household expenses for at least one year. The research team therefore used this assumption in the “base case” model.

4. Forward contract For forward contract, research team used price premium (over market rate for organic rice) at 20% based on company interviews, and spot rate at 11.50 Baht/kg for Maha Sarakam (Green Net Cooperative number, i.e. the price they currently offer organic farmers) and 7 Baht/kg for Nakhon Pathom (from farmer interviews).

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5. Grant and subsidy Preliminary demand side survey found that some companies, e.g. PTT PCL, expressed interest to cover both household expenses and planting costs in their support for organic farming. The research team therefore used this assumption in the “best case” model, but for “base case,” only farming costs are stipulated to be covered by grant/subsidy, based on interviews with Office of Agricultural Economics (OAE), Ministry of Agriculture and Agricultural Cooperatives. For “best case” model, the research team “goal-seeked” conditions for each financial mechanism that would yield a positive cash flow for an average organic farmer in every year between year 1 and 7. Key assumptions for “base case” and conditions and goal-seek assumptions for “best case” are summarized in Table 40.

Table 40: Assumptions and conditions used for “Base Case” and “Best Case” Item Income and cost profile of an average farmer T-VER carbon credit price (Baht/tCO2e) Soft Loan (% LTV - ratio of loan to planting costs) CSR – LESS (Baht)

Support 100% of total farm costs and household expenses in the first year only

Forward (% premium)

20% premium over market price of organic rice

Grant/subsidy (Baht)

Support 100% of farming costs during years 1-3

Financial Incentives to Encourage Organic Farming in Thailand : Final Report

Financial model results from “base case” scenario for Maha Sarakam and Nakhon Pathom fieldwork districts are shown in Figure 35 and Figure 36 respectively. Figure 35 Base Case Net Cash Flow – Maha Sarakam

THB/Household

Base Case Cash Flow of CA , OA and OA with Financial Incentives - Maha Sarakam

200,000 100,000

(100,000) (200,000) (300,000) (400,000) (500,000) (600,000) 1 3 5 7 9 11131517192123252729313335373941434547495153555759616365676971737577798183 Month CA Cash Flow OA CF before FI Mechanism CF TVERs Mechanism CF of Soft Loan Mechanism CF of LESS Mechanism CF of Forward Mechanism

Note: CA = Chemical Agriculture (non-organic), OA = Organic Agriculture, CF = Cash Flow Figure 36 Base Case Net Cash Flow - Nakorn Pathom

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THB/Household

145

Base Case Cash Flow of CA , OA and OA with Financial Incentives - Nakhon Pathom

200,000 100,000

(100,000) (200,000) (300,000) (400,000) (500,000) 1 3 5 7 9 11131517192123252729313335373941434547495153555759616365676971737577798183 Month CA Cash Flow OA CF before FI Mechanism CF TVERs Mechanism CF of Soft Loan Mechanism CF of LESS Mechanism CF of Forward Mechanism

Source: authors’ calculations

It is clear from the above two figures that in “base case” scenario, net cash flow for an average household is negative for both chemical and organic farmers in all years, under every financial incentive, except for LESS in Nakhon Pathom which helped net cash flow to be positive until around month 19 for Maha Sarakam, and month 21 for Nakhon Pathom. After that, all financial incentives yield negative net cash flow because income from organic rice sales plus incentives is not enough to cover both farm costs and household expenses. 



T-VER: the current carbon credit market rate at 200 Baht/tCO2e, plus the relatively low carbon emission reduction amount at both Maha Sarakam and Nakhon Pathom fieldwork areas (organic farming in Maha Sarakam reduces only approximately 4.70 tCO2e/year for the organic lands totaling 220.75 rai, while Nakhon Pathom reduces only approximately 1.49 tCO2e/year for 38 rais) lead to relatively low carbon income that is insufficient to cover farming costs plus household expenses. Soft Loan: since organic farmers already cannot cover household expenses from organic farming, taking out soft loan would incur addition costs in the form of interest payment if the household has never borrowed before (this is assumption in our “base case” scenario). Even if the family already has loans, interest savings of maximum 7-4% = 3% per annum, or roughly 3% x 37,056 farming costs = 1,112 Baht per year, would still be far from the amount needed to cover household expenses (79,200 Baht per year).

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

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LESS: due to first-year only support of 100% farming costs plus household expenses, net cash flow will be positive for both Maha Sarakam and Nakhon Pathom for about 18 months, and then will be negative in all other years. Table 41 Base Case LESS Mechanism – Maha Sarakam

Nong Saeng, Maha Sarakam Money received from LESS Carbon price equivalent

Year 1 116,300 24,768

Year 2 -

Year 3 -

Year 4 -

Year 5 -

Year 6 -

Year 7 -

Year 6 -

Year 7 -

Table 42 Base Case LESS Mechanism – Nakhon Pathom Nin Phet, Nakhon Pathom Money received from LESS Carbon price equivalent  

Year 1 106,900 71,514

Year 2 -

Year 3 -

Year 4 -

Year 5 -

Forward: 20% premium over market price is insufficient to cover household expenses for both fieldwork areas. Grant/subsidy: With only support for 100% of farming costs, organic farmer would still face negative net cash flow throughout 7 years.

Table 43 Base Case Grant Mechanism – Maha Sarakam Nong Saeng, Maha Sarakam Total money received Money received per rai/crop

Year 1 37,100 3,194

Year 2 37,100 3,194

Year 3 37,100 3,194

Year 4 -

Year 5 -

Year 6 -

Year 7 -

Year 6 -

Year 7 -

Table 44 Base Case Grant Mechanism – Nakhon Pathom Nin Phet, Nakhon Pathom Total money received Money received per rai/crop

Year 1 27,700 2,551

Year 2 27,700 2,551

Year 3 27,700 2,551

Year 4 -

Year 5 -

For “best case” scenario, we sought to find the set of conditions under which organic farmers would not be net cash negative in any year during years 1 through 7. Overall results are shown in Figure 37 and Figure 38. Figure 37 Best Case Net Cash Flow – Maha Sarakam

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THB/Household 600,000 500,000 400,000 300,000 200,000 100,000 (100,000) (200,000) (300,000) (400,000) (500,000) (600,000) 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 Month CA Cash Flow OA CF before FI Mechanism CF TVERs Mechanism CF of Soft Loan Mechanism CF of LESS Mechanism CF of Forward Mechanism

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Figure 38 Best Case Net Cash Flow - Nakorn Pathom THB/Household 600,000 500,000 400,000 300,000 200,000 100,000 (100,000) (200,000) (300,000) (400,000) (500,000) 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 Month CA Cash Flow OA CF before FI Mechanism CF TVERs Mechanism CF of Soft Loan Mechanism CF of LESS Mechanism CF of Forward Mechanism

From the above “best case” Figures, it should come as no surprise that significantly more support for each financial mechanism (except for soft loan which would not have helped) would be required in order for organic farmers to have net cash flow positive throughout 7 years. Details are as follows: 



T-VER: given the amount of organic land (220 rai in Maha Sarakam, and 38 rai in Nakhon Pathom), and the same carbon emission reduction figures as “base case” scenario, the carbon credit price would need to be 606,450 Baht/tCO2e for Maha Sarakam, and 616,676 Baht/tCO2e for organic farmers to be net cash flow positive. LESS: A CSR program would need to support both farming costs and household expenses at the rate of 100% in year 1, reduced by 15% annually for years 2-5, and maintain support at 40% of farming costs plus household expenses in years 6-7 as detailed in Table 45 and Table 46. In total, the program would need to fund approximately 483,000 Baht per household (given average landholding of 11.62 rai per household) in Maha Sarakam, and 447,090 Baht per household (given average landholding of 5.43 rai per household) in Nakhon Pathom throughout 7 years.

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Table 45 Best Case LESS Mechanism – Maha Sarakam Nong Saeng, Maha Sarakam Money received under LESS Equivalent carbon price

Year 1 116,300 24,768

Year 2 98,855 21,052

Year 3 81,410 17,337

Year 4 63,965 13,622

Year 5 46,520 9,907

Year 6 46,520 9,907

Year 7 46,520 9,907

Year 6 42,760 28,606

Year 7 42,760 28,606

Table 46 Best Case LESS Mechanism - Nakhon Pathom Nin Phet, Nakhon Pathom Money received under LESS Equivalent carbon price  

Year 1 Year 2 Year 3 106,900 90,865 74,830 71,514 60,787 50,060

Year 4 58,795 39,333

Year 5 42,760 28,606

Forward: the buyer would need to pay a premium of 247% over market price in order to enable net cash flow positive for organic farmer. Grant/subsidy: the amount of grant/subsidy must be 100% of farming costs plus household expenses for 5 years, to enable net cash flow positive for organic farmer. The total amount of support required is approximately 500,090 Baht per household (given average landholding of 11.62 rai per household), or 10,013 Baht per rai per year in Maha Sarakam, and 534,500 Baht per household (given average landholding of 5.43 rai per household), or 9,846 Baht per rai per year. Table 47 Best Case Grant Mechanism – Maha Sarakam

Nong Saeng, Maha Sarakam Total money received Money received per rai/crop

Year 1 Year 2 Year 3 Year 4 Year 5 116,300 116,300 116,300 116,300 116,300 10,013 10,013 10,013 10,013 10,013

Year 6 -

Year 7 -

Year 6 -

Year 7 -

Table 48 Best Case Grant Mechanism - Nakhon Pathom Nin Phet, Nakhon Pathom Total money received Money received per rai/crop

Year 1 Year 2 Year 3 Year 4 Year 5 106,900 106,900 106,900 106,900 106,900 9,846 9,846 9,846 9,846 9,846

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Model results from both “base case” and “best case” scenarios suggest that landholding size is a major determinant of whether or not an organic farmer is likely to be net cash flow positive after switching to organic farming, since annual household expenses of 79,200 Baht per household per year on average is a significant burden that farmers need to pay no matter how much land they own. The small average size of landholding (roughly 11 and 5 rai per household across two fieldwork studies) means that significant support would be required for any financial incentive that intends to help the farmer become net cash flow positive. Without any incentive and taking farming income and cost profiles as a given, each organic farmer household in Nong Saeng, Maha Sarakam (who could grow rice only once a year) would need to own 1,075 rais of land in order to cover farming costs and household expenses. They would breakeven in year 2.75, and their farm would reduce carbon emissions by approximately 22.87 tCO2e per year. Equivalent figures for Nin Phet, Nakhon Pathom organic household (who could grow rice twice a year) would be 53 rais, with a breakeven in year 1.42, and 2.08 tCO2e carbon emission reduction per year. Details are shown in Figure 39 and Figure 40 respectively. Figure 39 Break-even Organic Rice Area Size – Maha Sarakam Net cash flow - Baht 100,000.00 (100,000.00) (200,000.00) (300,000.00) (400,000.00) 12 50 100 150 200 250 300 350 400 450 500 550 600 650 700 750 800 850 900 950 1,000 1,075 1,150

(500,000.00) Rai

Figure 40 Break-even Organic Rice Area Size – Nakhon Pathom Net cash flow- Baht 14,000,000 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 0 -2,000,000 5

100

150

200 Rai

250

300

350

400

450

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9. Recommendations and Conclusion

As the preceding chapters illustrate, the rate of adoption of organic farming in Thailand is hampered by many factors such as: lack of market access, lack of know-how, high costs of certification, inconsistent government policies, lack of technical know-how, and the lack of sufficient financial support during the first 3 years, the so-called “transition period” between the point of adoption and the point at which farmers receive organic certification. After the initial three years, organic farmers are expected to be able to enjoy price premium over conventional agriculture products, as well as enjoy increased farming yields after they become sufficiently familiar with organic farming methods, and the soil quality has improved. This research is focused only on one factor, i.e. the lack of transition period support. It aims to survey, compile, and test possible financial incentives that would entice more chemical farmers to switch to organic, as well as preventing organic farmers to abandon organic farming during the transition period. Feedback from the supply side (two farming communities) and demand side (government agencies, potential corporate sponsors, and international organizations) can be summarized again in the following table: Level of interest (1=highest)

Nakhon Pathom

Maha Sarakam

Demand Side

Organic Farmers

Non-Organic Farmers

Organic Farmers

Non-Organic Farmers

T-VER

Soft Loan

Grant or subsidy

LESS/T-VER

Grant or subsidy

LESS

T-VER

T-VER/Soft Loan/LESS

LESS/T-VER

Soft Loan

Forward

LESS/Soft Loan

T-VER/Soft Loan/LESS

Grant/Soft Loan

Forward

T-VER

LESS/Soft Loan

T-VER/Soft Loan/LESS

Grant/Soft Loan

LESS

Grant or subsidy

Forward

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were genuinely interested in promoting organic farming. Some farmers further suggest that these three mechanisms should be integrated with knowledge transfer and market solutions, such as combining LESS with guaranteeing the price at which they could sell their products. Soft loans are the most preferred mechanism only for chemical farmers who already have significant debt burden, and therefore expect their debt burden to go down precipitously if they can receive soft loans that incentivize organic farming. However, as preliminary results from our financial model has shown, soft loan is the only mechanism that could not generate positive net cash flow for farming household, because the interests saved would never be sufficient to cover household expenses. Results from preliminary financial model suggest that no mechanism in the “base case” scenario, which is based on all available market prices, as well as income and expense profile of chemical and organic farmers in two test communities, can cover household expenses during the transition period. However, it must be stressed that the research team based the model on two very conservative assumptions: 3. Assume that an average farming household only receives income from rice plantations, while in reality many farmers have non-farm income, e.g. from fruit plantations, vegetables, as well as tranfers from their children. 4. Assume that the income and expense profile of an average organic farming household will not change throughout the 7 years of projection, while in reality the organic farmer would receive higher price premium after the transition period, and would be better able to manage farming costs. Certain faming costs such as organic fertilizer that may be higher than chemical fertilizers during the transition period will also decline once farmers are more familiar with the practice and their soil quality recovers. The research team used very conservative assumptions in order to estimate what might be the “ceiling” in terms of dollar value for each financial mechanism tested. Given the demand and supply side survey and preliminary findings of financial model, the research team has four major recommendations for further development of financial mechanisms for organic farming in Thailand: First, due to their attractiveness in terms of offering an “organic bonus” to compensate organic farmers for positive environmental externalities they help create (e.g. reducing carbon emissions), both T-VER and LESS merit further exploration. TGO as the host of both mechanisms in Thailand has expressed interest in helping to set up organic farming pilot projects and help absorb validation and verification costs. To that end, an “ideal” project to apply for T-VER should have the following characteristics: 5. Total project farmland should be of sizable amount, preferably in the scale of at least 1,000 rais, in order for total carbon emission reduction to be sizable, e.g. at least 20 tCO2e, which is the size that many companies say they look for in a carbon offset project. Since a typical organic farming household holds 5-10 rais of farmland, this is

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likely to require some coordination e.g. agreement across several farmer groups in nearby areas. 6. The amount of carbon emission reduction from T-VER comprises three components: less use of fossil fuel, less use of chemical fertilizer (particularly fertilizer with high nitrogen content, a source of nitrus oxide which is a kind of greenhouse gas), and more carbon sequestered in the soil. Therefore, the kind of organic farmland that has high carbon reduction potential is one that used to use intensive chemical fertilizer (particularly nitrogen content) and has low-quality soil that is likely to be significantly improved after switching to organic. 7. It is imperative to continually measure the amount of carbon in soil. In our study, both test communities in Maha Sarakam and Nakhon Pathom have only recently switched to organic farming (6 months to 1 year), which partly explains why the estimated amount of carbon reduction is negligible compared with chemical rice plots. Future carbon reductions are expected to rise in future years, as organic farming yield more benefits. More research is needed to quantify the amount of organic matter, carbon content, bulk density, and soil pH in the soil of organic farmland for 10-20 years, to improve coefficients and other parameters in the T-VER formula. TGO is continually trying to improve T-VER methodology and welcomes all inputs. 8. The carbon price to use in T-VER carbon offset transactions and LESS support does not need to be the same as the price for other kinds of carbon offset projects, since by nature the carbon offset sale or support of both T-VER and LESS will be done over-thecounter, on a private negotiation basis. TGO has informed the research team that, while our “best case” carbon price of over 600,000 Baht per tCO2e is next to impossible, the price around 30,000 Baht per tCO2e (seen for a similar project in Japan) might be feasible depending on the level of interest from corporate sponsor. This is much higher than the 200 Baht tCO2e market price we use for base case analysis. Second, while none of the financial mechanisms explored could be said to to be the “magic bullet” that could be implemented right away and guaranteed to entice farmers, structuring a combination of several mechanisms, with involvement by different stakeholders including the private sector, government agencies, and government banks, deserves further exploration. An example structure could be: the state provides initial grant funding for farmers who are committed to switch to organic, private company then gives more financial support through LESS mechanism, or a combination of LESS and forward, and simultaneously government bank such as BAAC also commits to reducing existing debt burden for farmers. Third, many farmers expressed skepticism of government’s support, citing lack of consistent organic farming policies in the past. The experience of other countries, particularly EU, shows that government can play an important role by giving direct grant or subsidies for organic farming that are easy to understand (e.g. area payment that pays per unit of land according to benchmarks, depending on the type of crop), and not project-specific, i.e. giving the farmers themselves freedom to choose whichever crop or knowledge provider they desire. Thai government should stop picking their “favorite” organic projects to support, and instead

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support organic farmers more generally using a condition-based concept (e.g. they could reimburse 100% of training or certification costs no matter which training course or certification they choose). Fourth and lastly, the research teamâ&#x20AC;&#x2122;s fieldwork analysis makes clear that making ends meet, i.e. being able to cover household expenses, remains a major challenge for organic and chemical farmers alike. Given the myriad uncertainties of farming, coupled with an increasing tendency of extreme weather (severe draught or flood), it is not likely that anyone would be able to entice farmers to switch to organic or to stay on the path during the transition period without helping them cover household expenses and responding to their fears of increased debt burden and lesser yields in the future. To that end, other financial instruments that can help farmers manage risks more directly, such as weather index insurance, could play an important part in structuring a suitable suite of financial mechanisms to encourage more organic farming in Thailand.

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