Despite rapidly increasing urbanization, agriculture remains a major engine of the Vietnamese economy. Agriculture contributed 31% of the country's gross domestic product in 1997, and the sector is expected to grow at 4% to 5% annually.

Agriculture also comprises key demographic and political forces. Rural areas are home to 80% of the population, and 70% of rural inhabitants rely exclusively on farming. The reforms in the 1980s and early 1990s enabled the development of private farming, which increased productivity.

But problems in the sector are widespread. Productivity is hampered by inefficient physical and institutional markets for farm output; by inadequate infrastructure, including poor irrigation systems, roads, and energy supplies; and by processing and exporting duties. Congested ports, obsolete storage facilities and inefficient processing plants lead to low-quality products and losses in revenue. In fact, despite Vietnam's amazing economic growth in the past decade, rural communities remain overwhelmingly poor, with much of the rise in living standards occurring in urban areas.

As a result, the government, to achieve its broad objectives of equitable growth and poverty elimination, has changed its focus for further economic growth to rural and agricultural development and away from industrialization. The program includes extension and education services for producers, development of the rural infrastructure, modernization and expansion of processing facilities and diversification in agricultural output.

In addition, international lending institutions have pressed with some success for market reforms, as well as liberalization of land, rural credit, trade and investment policies. In 1998, the government issued numerous decrees aimed at furthering some of these objectives, including liberalizing rice and other export activities by the private sector and permitting increased foreign ownership in new businesses and privatized state enterprises.

As early as 2001, a total of 12 mills are projected to be in operation in Vietnam, based on projects currently under way and those for which licenses have been authorized. If actual investments are made in the licensed projects, Vietnam's total annual wheat grinding capacity by that future date would reach nearly 1.1 million tonnes.

This amazing expansion is based on the country's soaring demand for wheat flour, which is expected to continue to post annual growth rates of 8% to 10%. Demand is heaviest in urban areas, where incomes are higher and consumers are substituting wheat-based products for the more traditional rice-based products.

Typically, 30% of total wheat consumption is for bread, 50% for instant noodles and the remaining 20% for the emerging confectionery industry. Vietnam's noodle industry is expanding, and by next year could produce more than 2.1 billion packs annually both for export and the home market. If overall economic growth continues, consumers also are expected to seek a wider variety of wheat products, further boosting demand.

In recent years, Vietnam has consumed about 500,000 tonnes of wheat flour per year, with imports fulfilling a substantial share of total use. But official policy clearly has switched to favor domestic flour production instead of imports; this was confirmed on Jan. 1, when the government instituted new import duties that doubled flour tariffs to 20% from 10% and eliminated wheat duties, to zero from 3%. Another key policy shift was a decision to allow private domestic flour millers to import wheat directly.

Potential investors in Vietnam's milling sector also are encouraged by government decisions for other industries, in which foreign investors were permitted to buy out their Vietnamese partners. Considerable interest exists in pursuing 100% foreign-owned licenses for flour mills, rather than partnering with state-owned companies, but the government has not yet authorized fully foreign-owned investment in milling.

Of Vietnam's existing and planned flour milling facilities, only the original mill in Ho Chi Minh City is fully state-owned. The others are private mills, including joint ventures with overseas companies in Australia, Taiwan and other Asian countries.

The government's rural development objectives include an emphasis on growth and improvements in the livestock sector. As part of the plan, the government is promoting the development of a more intensive breeding program to improve yields, a network of modern slaughterhouses located in major livestock producing areas and upgraded processing standards and practices.

Officials also seek improved commercial and technical links between local farmers and the food processing industry. These plans focus on development of medium- and small-scale farms, with development of large integrated farms to be limited to those with an export orientation.

Another focus is to improve the quality of animal and poultry feedstuffs. Vietnam's feed industry remains small, with limited technology consisting of homemade grinders and mixers. With livestock production concentrated on small farms, feed consists mostly of local crops and by-products.

In the mid-1990s, Cargill, Inc., the U.S.-based agricultural multi-national company, invested some U.S.$24 million in a modern feedmill in Hanoi producing feed for poultry, swine, cattle, aquaculture and a hatchery and poultry breeder farm. In addition, Charoen Pokphand, a major Thai agricultural corporation, has invested in feed manufacturing as part of its poultry operations in southern Vietnam.

But some observers think further growth in the feed manufacturing sector may be stymied unless government policy changes. The emphasis on small private farms — and corresponding policy constraints on development of an integrated industry — provides few incentives to invest in commercial feed plants because of the inherent inefficiencies of working with many small producers.

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