The Sunday Times Economic Analysis

The Sunday Times Economic Analysis By the Economist

Betwixt the paddy producer and rice consumer
With the record Maha paddy harvest this year the perennial problem of lowprices to farmers looms large. It is likely that the total requirements of rice, estimated at a little over two million metric tons would be met by the Maha and Yala harvests of this year.

The Maha harvest is expected to yield around two million metric tons of paddy. This when converted would be about 1.3 million metric tons of rice. The Yala crop is expected to bridge the gap of about 0.7 metric tons of rice. If the estimates prove correct, the country may have a small surplus of rice that could carry over to next year.

Recent governments in Sri Lanka have found themselves in a quandary as to whether they should serve the interests of the paddy farmers or the riceconsumers. When paddy production is high, as in 2003, the price falls andthe government supports the farmers by curtailing rice imports by a high tariff or even banning the import of rice. When there is a shortfall in production in relation to the country's needs and prices rise, government's do not allow the full benefits of the price rise to farmers as the interests of the consumers are affected. Rice imports are permitted to stabilise prices.

The conflict between paddy farmer interests and consumer interests keep surfacing again and again. In any event, there are grievances on both sides. Farmers complain that the prices they get are too low to give them any significant benefit, even though consumer prices are high. At the best of times the rewards to farmers for their efforts and risks taken appear to be too low. Most farmers are either below the poverty line or at the edge of it. Consumers complain that rice prices are high. If the country imports its rice requirements or a large proportion of it, then consumer prices would be much less, as international rice prices are lower than ours.

The culprit is generally thought to be the Middleman. So successive governments have tried to intervene in the market in different ways. Purchasing paddy at a guaranteed price is the usual mechanism. These efforts may have stabilised prices to some extent, but they have had only a limited impact. The corruption of officials and high costs of administration have led to the abandonment of the institutional structures to ensure a guaranteed price for paddy. Nevertheless the government has from time to time put in place some ad hoc arrangements for intervention, through existing institutional channels such as the Cooperative Wholesale Establishment (CWE).

There are fundamental reasons for the irreconcilability of the interests of the producers and consumers. Sri Lanka is a high-cost producer of rice. There are once again underlying reasons for these, foremost among them being the high cost of inputs, high wages and the very smallholdings in the wet zone. In such a context there are two approaches that are needed. The first is to increase the yields on paddy lands. While the country can boast to be one of the higher yielding rice producing countries in Asia, yet the yield levels are much lower than the potential. The overall yield gap is three times the current average yields. If this yield gap can be reduced to around one half, then the cost of production per kilogramme would be reduced significantly.

The other strategy is to reduce the market margins between the producers' farm gate prices and the consumers' retail prices. All efforts in the past have failed for different reasons. Going by past experience government purchase, transport, milling and distribution does not appear to be the solution. A more participatory approach by farmer organisations with government support in terms of credit to purchase transport vehicles and increasing storage capacity are other needed efforts. Competition among wholesale purchasers is another means of achieving the result. The forward purchasing scheme introduced by the Central Bank could also be a means of stabilising prices.

What is most important to paddy farmers, and indeed any farmer, is the stability of prices within a range rather than fluctuating and uncertain prices. What is needed is a clearly articulated marketing and import policy that ensures a greater degree of stability in paddy and rice prices. The increased production of rice through increased yields must be coupled with more effective marketing mechanisms that reduce marketing margins. Higher prices for paddy farmers and lower prices for consumers is a difficult but desirable objective to achieve.

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