Mary, Mary, quite contrary, how does your garden grow?

Wednesday, 12 September 2012 00:01 -     - {{hitsCtrl.values.hits}}

Amid increasing hunger pangs and the sheer number of people to feed, world food supply is barely in sync with demand.

The Food and Agricultural Organisation of the United Nations (FAO) estimates the daily calorific intake to rise by about 12% by 2030, to 3,050 calories per person. Meanwhile, the world population, now some seven billion, is expected to hit 10 billion by the turn of this century.

As these increases follow on the heels of diminishing land available for agriculture and falling crop productivity, world food trade is expected to vastly benefit; global exports of fresh fruits and vegetables, for example, have steadily risen by 9% a year and currently stand at $ 160 billion.

But has Sri Lanka taken the biggest possible bite out of this market opportunity? Although boasting arable land equivalent to the total size of Puerto Rico (around 9,500 km2), the nation is still a net importer of fresh horticultural products.

In addition, compared to countries such as Jordan and the Czech Republic which had similar horticultural export values as Sri Lanka in 2000, the country has made little progress in the subsequent decade. In fact, if Sri Lanka grows at the same average rate of its peer group, it could increase the value of its horticultural exports from about $ 150 million a year to more than $ 1 billion by 2022 (see chart 1).

This $ 1 billion aspiration can become a reality if Sri Lanka approaches agriculture with a more commercial mindset. Three strategies are wholesome food for thought: focusing on high-value, effectively linking farmers to end-markets and promoting better practices and arrangements. These provide a high level view of moving from the question of “why” to the “what” and “how”, without compromising on food security.

Gold bells alongside silver ones

Simple logic suggests that export values can be increased through exporting large quantities of certain crops or sufficient volumes of selected high-value crops. Straight-forward as it may appear, many countries do not seem to recognize the latter as a valid strategy in itself.

Many nations have reversed their floundering export performance simply through focusing on high-value crops that are in demand globally and yet differentiated enough to suit the local climate. Morocco, for instance, has nearly doubled its horticultural exports by focusing on citrus-fruits and tomatoes. Kenya, on the other hand, has tripled its horticultural exports to $700 million annually through a focus on pineapples, French beans and avocadoes.

Most fruits and vegetables command a higher retail price in the world market compared to staple products such as paddy. Despite this, only 6% of the land cultivated in Sri Lanka is currently used for horticultural products (see chart 2).

Since local consumption of fruits and vegetables is also unsatisfactory (98g per day against the recommended 200g), this poor land allocation not only affects export performance but has an important consequence to national nutrition as well. An urgent re-think on land utilisation for agriculture is thus required. This is certainly not to say that traditional crops such as paddy and coconuts should be side-lined but that it is necessary to re-balance land usage to release underperforming arable land.

A sufficient focus on high-value crops not only increases export values but is also a lucrative venture for the farmer. According to the latest statistics, agriculture accounts for about 12% of Sri Lanka’s GDP while employing over 30% of the populace. Since those employed mainly fall into the low-income bracket, a high-value strategy has the potential to reduce poverty levels in the country as well.

Cockleshells or not, know your grower

The Sri Lanka Export Development Board counts 355 players in the fresh fruits and vegetables export business. Out of this number, only a handful are actively involved in the upstream portion of the value chain (i.e. seed selection and cultivation). The majority source their produce from various “collection centres” which act as local deposit hubs for farmers.

Since screening of produce is mainly visual in the latter case, export of such crops is restricted to the less stringent markets. The lack of traceability/standardisation that this system creates would likely prove to be a barrier if expansion to Europe or the US is considered since these locations expect products to be certified according to GAP (Good Agricultural Practises).

In addition to compromising on quality, the absence of integration puts farmers at the mercy of middle-men. Although these middle-men can play a vital role in linking farmers to markets, they can, in the process, exploit the farmer. Moreover, since these middle-men are not contractually bound, growers do not have a stable purchasing base. To counteract this, the state could play an enabling role by helping organise farmer groups, establishing ground rules for contracts, sharing lessons learned from successful contract schemes and providing market information.

A successful small-holder approach to farming depends on the availability of a wide range of private institutions and marketing arrangements. This institutional innovation is vital given the dynamic and diverse nature of the fresh fruit and vegetable sector and is required with the state’s role restricted to facilitation and mediation.

And pretty practices all in a row

Export performance in Sri Lanka seems to be hemmed in by the predominantly small-holder structure as well as a lack of institutional innovation. For the small-holder structure to be successful on its own, dedicated investment is required at every level. China, for instance, focused on small-holders but the agricultural support that was offered in every village, the investments in R&D at every level and agricultural engineering that emphasised small tools and machines would be hard to replicate in Sri Lanka.

Although the country has extension services to distribute seeds and educate farmers through the National Agribusiness Council, they do not seem to have sufficient depth or breadth. As a case in point, Sri Lanka’s productivity can improve by nine times if crop yields are similar to the top players (see chart 3). This performance is a reflection on the poor-quality seeds used, unsustainable farming practices (crop rotation, for example, is hardly practiced) and poor post-harvest handling.

Given the low yields, post-harvest wastage levels of 20-40% point to a dire state of affairs. Regulation such as the requirement for produce to be transported in plastic crates would help in slashing wastage but in reality, without changing the inherent system, these regulations would not achieve much. A small-scale farmer, operating on his own, would worry more about the extra cost incurred to him when transporting back empty crates rather than quality control.

Contract-farming arrangements between exporters and farmers should address the above issues. An arrangement that would function effectively in Sri Lanka is that of “nucleus” farming where the government leases out a portion of land to a commercial farmer who in turn commits to work with surrounding small-holders in an “out-grower” system.

The commercial entity generally provides the seeds, know-how and facilitates access to finance in return for implicit purchase exclusivity (generally at a premium price). This arrangement can also lead to equity between out-growers and nucleus farmers. Morocco, for example, has initiated 30 such partnerships within the last two years.

Developing new and varied institutional arrangements such as small-holders selling in spot markets, personal relationships with traders, explicit contracts, implicit contracts, farmer organisations or vertically-integrated producer-exporters is vital for the long-term success of horticultural exports. Meanwhile, enforcing contracts would encourage small farmers to pursue high-value horticultural cultivation and export. And high time it would be too.

(The writer read Chemical Engineering at Cambridge University and is now part of an M&A advisory and strategy consulting start-up in Asia.)

Recent columns