Revolutionising Sri Lanka’s agricultural rupee

The global escalation of commodity prices in the latter part of last decade impacted Sri Lanka’s rice market, with retail prices showing sharp increases for the consumer. The regulatory forces with a ceiling on consumer prices and guaranteed price for paddy did alleviate this problem to some extent.

Today it has taken a different turn due to a bumper harvests. The current drought has impacted paddy cultivation, yet the impact would be short-term. This also highlights the need to augment the water retaining capacity of lakes by de-silting the lakes so that more rain water could be retained.

Despite plans to export a large quantity of rice, the farmers, the primary producers, are not able to get even the guaranteed price for their paddy.

In the vegetable sector too, problems are brewing with farmers not being able to sell their produce even at rock bottom prices and having to dump truck loads of vegetables in garbage dumps. Indeed, recently a local TV channel in their evening news gave an insight into how officials are flouting the guaranteed price, in this case for onions with the connivance of certain unscrupulous traders depriving the farmer of his just income. Thus it is evident that Sri Lanka is in need of a mechanism to develop the market for agricultural products in a sustainable manner.

Underpinning the failings of these sectors are a range of issues emanating from the guaranteed price for the paddy, fertiliser subsidy, a sustainable return for the farmers and the inefficiencies and inequalities in the current system. Thus the future calls for a process from the field to the plate on the table, where the influencers and the beneficiaries are the actual stakeholders.

Strategic analysis of the problem therefore needs to look both to the current situation as well as looking to the best practices internationally in order to devise a new and better strategic direction for the future

This article sets out to define the problems of the industry with main focus on rice in order to arrive at a possible solution and in no way claim to be the definitive solution. Indeed the proposed solution is no stranger to this country. Multinational companies which are engaged in paddy cultivation in Sri Lanka already practice these strategies from cultivation to processing, packaging, branding and marketing the branded end product.

Similar strategies can be implemented in the vegetable and other perishable sectors. It only sets out to contribute to a paradigm shift in the thinking and policy development in the agricultural sector. 

Rice farming in context

Nearly 40% of the population of Sri Lanka are involved in farming, with the majority of these engaged in rice farming. The farming community in the country is primarily from the poorer segment of the society. As an economically disadvantaged group, they lack effective organisation, leadership skills and representation at a political level. Lack of strength and effective voice means the community is dependent on the others, many of whom have different agendas and interests.

With an economy so dependent on the rice crop, to ignore the need for proper, fair and equitable support and policies for the farming community is to endanger the very stability of society and add further trouble to an already economically challenged country.

What is needed is a bottom-up approach to planning rather than the traditional incumbent of a top down system. This is true of the sector irrespective of the geographical location within the country. Leadership from within needs to be developed, coerced, and encouraged.

Technology and economic factors

Technology brings major change to farming, some good for the farmers and some not so good. Recent studies demonstrate that with the rupee depreciation, rising fuel costs, and increasing labour costs, the charges levies have increased to such an extent that many farmers may consider whether to remain in paddy cultivation unless the returns are worthy of their efforts. Implementation of policies that are beneficial to the stakeholders are thus an immediate need to support and enhance the sector.

The needs and wants of the rice-oriented farming community are not insurmountable and pose no major challenges to the authorities. They include:

•  Effectively managed water supply
•  Seed paddy
•  Fertilisers
•  Farm implements, pest and insect control solutions etc
•  Access to finances with least bureaucratic hurdles and at reasonable cost
•  Purchase price that reflects both costs and a reasonable return on the investment

Beyond these needs are a number of requirements in the sector that will serve to stabilise and enhance the security of the farming families. These requirements include:

• Debt relief
•  Financial strength to hold paddy stocks with them to optimise price and maximise revenue
•  Living standards that meet their aspirations
•  Higher degree of influence in their own affairs
•  Independence and inter-dependence within the community
•  Tax concessions for farming vehicles

The needs and requirements in the sector identified here are based on the degree of influence these issues have on the life of the farmer. Collectively these have the highest impact on the daily life and the future of the farmer.

The other critical issue in the farming community is one of ownership and participation in the value chain. The commerce of rice farming spans a range of activities from sowing to harvesting and milling, packaging, branding to distribution and marketing. The value addition in this chain happens at procurement to milling, stocking to distribution, and marketing.

The farmer’s benefits are only at the bottom of the value chain, with little opportunity to optimise. The major millers, on the other hand, benefit enormously with the ownership of the high end of the value chain, thus making them the real beneficiaries in the sector. 

Other countries with similar legacy problems for the farming community, for example the butter producers in Ireland, have addressed this challenge by forming co-ops where the farming community takes the ownership of creating the value addition.

In the case of Ireland and their butter industry, it resulted in the creation of world-famous Kerrygold brand under a farming co-op in 1962. This initiative saw a sudden stop in export of unblended butter to the UK, where it had been traditionally sent. The economic benefit, not just to the Irish farmer, was very substantial even to this day. The challenge in Sri Lanka is whether such an approach can be developed and, if so, who will lead and drive the initiative?

Sri Lanka’s rice sector SWOT analysis

Strengths

• Availability of land
•  Farming knowledge
•  Ability to work long hours
•  Simplicity of life style

Weaknesses

•  No access to low cost finances
•  Lack of good storage facilities
•  Lack of financial power to hold paddy for long periods
•  Limited influence in their own affairs
•  Often in debt and under obligation to the private paddy buyer
•  No say in end consumer price
•  Proxy producer for middle man

Opportunities

•  Innovate and organise to capture more of the value chain
•  Build influence in the paddy chain
•  Ensure right price for their paddy
•  Profit from any variation in the price of rice
•  Build financial strength
• Ensure steady income even after having sold the paddy stocks
•  Uplift living standards
• Overall increase in the purchasing power of farmers and benefit for other goods and services sectors
•  Create a viable, sustainable and profitable industry
• Attract those who are presently in marginal employ or under employed
•  Build and sustain marketing and distribution process
•  Establish a pension or provident fund scheme paid for from the profits
•  Dividends
•  Earn foreign exchange

Threats

•  Mega rice industrialists
•  Power of the existing mega brands
•  Administration conditioned to present system
•  Import of agricultural products
•  Reluctance of younger generation to consider farming as a worthwhile career 

Sri Lanka’s rice sector – development goals

•  Achieve independence, acquire authority and influence in the production and processing of paddy and marketing, distribution and revenue optimisation of rice and rice products by year 2017

Assumptions

•  Adequate funds will be available at low interest rates from multilateral or other lending agencies
•  Shares restricted to actual rice farmers only
•  Private sector style management

Overall objective

Develop industry co-ops or public companies where the ownership is by the farmer at regional levels based on rice growing areas. Such structures will manage the affairs of purchasing, processing and marketing bringing a ROI to all stakeholders.

It will benefit the Government too by enabling the sector to become self reliant and by increasing the attractiveness of farming. In a wider sphere it will contribute national growth and wealth distribution.

Strategy options for the sector

• Acceptance on the fundamentals of becoming organised and creating a co-operative structure by the farming community. This will necessitate developing leadership and support for the organisations.
• Educating and creating awareness among the rice farmer why he/she should take charge of the rice chain.
•  Creation of the optimal legal structure to ensure key ownership and benefit of the rice trade remains with the farming community.
• Financial support initially based on non-commercial or subsidised terms from those multilateral lending agencies who claim that their desire is to uplift the poor masses in developing countries.
•  Take and develop ownership of milling, storing, packaging facilities, and perhaps also the ownership of logistics.
• Develop branding, distribution and marketing, through own outlets, other wholesalers/retailer and supermarket chains.
• Development of effective payment mechanisms.
•  Adopting leading edge information and communication technology (ICT) solutions to support effective overall management practices.
• Gradual and systematic upgrading of quality, varieties and volume of rice of rice produced with export markets in vision.
•  Development of supplementary crops and land use to optimise use of marginal lands not suitable for rice for other crops such as vegetables, etc.

Driving the agenda

The starting point will be creating and nominating central organising committees based on growing areas/regions with representation from across the rice farming community of those areas/regions in the country. The members of these committees will be tasked with educating and creating awareness among the rice farmer why the initiative of co-operation and asserting ownership makes sense. This will include:

•  Secure necessary funding to establish and organise
• Defining the optimal legal structure
•  Defining the requirements and benefits of owning the value chain
• Develop audio visual programmes explaining the merits of this model, the benefits and what it will do for their living standards.
•  Train resource personnel to educate, communicate and get buy-in from the farmers
• Demarcate the main rice growing areas on a set of principles
•  Define the current sector in a research based study across the country 

Creating support

Present the business case to the multilateral donors. The stated mission and objectives of bodies such as World Bank too states that they are there to help people help themselves.

The WB Mission Statement states: “WB group aims to fight poverty with passion and professionalism for lasting results – to help people help themselves and their environments by producing resources, sharing knowledge, building capacity, and forging partnerships in the public and private sector.”

Quantification of the current production volumes based on the growing regions for assessments of the desired critical mass for the creation of the units and necessary structures

Agree upon the financing modalities

Use of funds

•  State-of-the-art milling facilities sited based on density of growing, ease of access, transport facilities etc. Consideration must be given to the present millers and how they could compliment the proces
•  Proper own storing facilities such as silos for storage of paddy and rice
•  Packaging facilities enabling creation of own brand/s
• Transport and other logistics support, both own and ability to secure third party services at competitive rates

(The writer has extensive experience in the airline industry, having held several positions at SriLankan Airlines from 1980 onwards, until his retirement in 2003, including as Manager Overseas Liaison, Manager – Sri Lanka and Maldives, Manager – India and Nepal, Manager – Singapore and Malaysia, Senior Manager – Marketing Services, Manager – UK and Ireland, Manager - Revenue Optimisation, Regional Manager – India, and Regional Manager – Mid East, Europe and USA. He joined Ceylinco Group as a Marketing Consultant in late 2003 till 2006 and was Head of Commercial at Mihin Lanka from 2006 to 2007. For a brief period he worked as Director Commercial at GMG Airlines Bangladesh in 2008 and is presently a Consultant to Air India GSA in Sri Lanka.)

Distribution and marketing 

• n Branding of rice products
•  Develop other rice based products such as rice flour, breakfast cereals, rice flour based products
•  Research on product development such as rice flour bread, biscuits, etc.
• Pricing and revenue management strategies
•  Develop own retail/wholesale outlets
• Promote to optimise use of rice and rice based products

Revenue management in rice

The fundamentals in revenue management are the revenue opportunity cost of the next unit of inventory or EMR (Expected Marginal Revenue). EMR is the probability of selling the next unit of inventory. In the rice market, with bumper harvests there will inevitably be pressure on the end consumer price of rice. While the consumer is benefited, the drawback will be the downward pressure on the price of paddy at the farm gate which will eventually result in cutback in the farming acreage in the next season. 

Unlike in the case of fixed inventory capacity such as airlines, hotels, cruise liners where the inventory subordinate table is built taking into account the market segmentation for optimisation of revenue (unless utilised at the time of departure or on the day of occupation the inventory will perish) the same cannot be applied in the case of non perishables where the marginal unit could determine the price if overproduced. 

Therefore strategic plans need to be in place to ensure there is optimal production with the farmer obtaining a better price. Some of the strategies could be:

•  Based on research findings work out the acreage to be farmed for local consumption
•  Incremental acreage to be farmed with high value varieties with local discerning upmarket segments and export markets in view
•  Product development, rice flour, rice breakfast cereals, rice sweets, rice-based bread, rice-based noodles, etc. Product differentiation and creating new products to existing markets as well as new markets will enable to increase the EMR of the marginal unit
• Undertake research to develop new products with both local market and export markets in view
• The need for inter-regional competition to ensure that while the farmer enjoys the benefits, that the consumer too is not disadvantaged and has choice of quality and price in which to choose from 

Developing an optimal income management process

In 2011 the per capita GDP in Sri Lanka was $ 2,863 (as per IMF world economic outlook database). The Gini Index, which is the standard economic measure of income inequality in 2010, was 40.3. The income share of the highest 20% was 47.8 while the lower 20% 6.9. With farmers in all probability making the lion share of the low income group, this will enable to increase their income and enhance the share.

This will likely be a combination of guaranteed prices for products supplied plus distribution of dividends at agreed intervals throughout the year. Within the structure, the new organisations may decide to set aside funds annually to establish and create an effective pension fund for the members. Over time, the financial strength of the organisation should be such that it will be in position to provide financing to the members on preferential terms to that of banks and current financial businesses.

Further, after a tax holiday period, the organisations could be taxed on their profits generating income to the Government. 

Developing an ICT strategy

There is need for the organisations to develop rice and other allied products commerce data. The new organisations may wish to consider making use of already existing resources within the community or develop their own resource centres for upkeep of all data:

•  Computer resource centres to create and maintain all commerce data.
•  Maintain all production, consumption, export data and build database which could be used to forecast future consumption patterns and use that data to plan growing rice, other allied products, new product development, etc.
•  Develop marketing data with consumer segmentation, consumer needs and wants, etc.

Innovation, research and development

The new organisations will adopt gradual and systematic process of implementing research and acquiring new knowledge to upgrade the rice crop in respect of quality, varieties and volumes. This will include:

•  Optimisation of production from existing acreage
•  New land cultivation
• New varieties including those with export potential as well as varieties capable of increasing yield
•  Optimising land use by utilising marginal lands and extending the activities of the new organisations to non-rice areas
•  Source markets local and international and develop new products

There are number of other areas where the new organisations can play an important role. This could include provision of farming experts to help increase production in underperforming regions and ensuring effective water management.

The activities of the new organisations could well develop to buying beyond the production of its members. Further the organisations will need to have the infrastructure in place to deal with disputes, issues and problems within the farming community and its members.

Further after an initial gestation period the organisations could be quoted in the stock exchange with members being allowed to sell certain percentage of their shares in the exchange.

Indeed the outcome of this exercise could be in line with the teachings of the Enlightened One Buddha, as taught in Sigalovada Sutta, leading to the four types of happiness;

•  Aththi Sukha – being in possession of wealth or means
•  Bhoga Sukha – being able to utilise same for self and others
•  Anana Sukha – not be in debt to others
•  Anavajja Sukha – being not a burden to society

In conclusion, the model that develops will provide itself for adoption by other sectors within the Sri Lankan farming community and will serve the economic development of the country well for the future. Also such a modality/s will pave the way for not to seek faults of others, what others have done and not done, but one’s own deeds done and undone. (Dhammapada)