The European Union began a deal this month to allow Cambodian rice to be imported duty-free, but many challenges remain before Cambodia can be a powerhouse rice producer.

The deal would open a market of 500 million people from 27 countries and “provide a price incentive for European importers to import the product from Cambodia,” said Rafael Dochao Moreno, Charge d’Affaires of the European Commission in Cambodia.

“So by providing this zero-duty entry for Cambodian rice, we are promoting Cambodia’s development, especially in the sector of rice production.”

The duty-free status for Cambodian rice is part of the EU’s “Everything But Arms” initiative, which was established in 2001 and gives preferences on all goods, except weapons, entering the EU from 50 least-developed countries.

Moreno said the very last product to become duty free will be sugar, which will be covered from Oct. 1. From that date onward, all products exported from Cambodia to the EU will be duty free, unlike Thailand and Vietnam, which are ineligible for the initiative.

Cambodia’s rice export pales in comparison to its neighbors and other countries. According to US figures, Cambodian rice export was around 500,000 tons in 2008, compared to 10 million tons from Thailand and 4 million tons from Vietnam.

Of 2008 rice exports for Cambodia, only 2,700 tons reached the EU, for a value of $2 million.

Nevertheless, Agriculture Minister Chan Sarun welcomed the duty-free status. “It will benefit our farmers, who are producing rice for export to the EU,” he said, adding that he hoped exports would increase with the new status.

However, challenges remain. Cambodian farmers need to improve the value chain, upgrade milling equipment, create standards for the rice market and enhance market prospects, Moreno said.

Without these improvements,Cambodia will likely benefit little from duty-free status, said Chan Sophal an agricultural economist.

“I expect that rice exports will increase to the EU, but not much, because we still face shortages of better mills,” he said. High costs for export and small ships at Cambodia’s ports are further challenges, he said.

Exporters were optimistic, however.

“Before, there were some brokers who wanted to export rice from our country, but the negotiation always failed, due to high costs of exporting,” said Kim Savuth, president of the Khmer Food company. “But now that is not a problem, because we are duty free. So compared to neighboring countries, rice exported from Cambodia is cheaper.”

He acknowledged that some exporters were not confident with the quality of Cambodian rice.

Phou Puy, president of the Rice Milling Federation of Cambodia, said quality would not be a concern, as a new mill of international quality would start operation at the end of the year. More and more mills will follow, he said, but a main challenge would continue to be a shortage of money to buy un-milled rice from farmers.

Sun Kunthor, president of the State Development Bank, said the government will provide an $18 million package for loan disbursement to rice mills between 2009 and 2010, enough to buy 90,000 tons of un-milled rice.

Cambodia has a total 3 million hectares of agricultural land, and 80 percent of the population depends on agriculture. Vast tracts of land are still underdeveloped.