New Year festivities diminished by low paddy prices

By the Economist

The National New Year is a period of rejoicing. Festivities of the New Year are closely associated with the harvest. It is the time to sell the paddy, settle debts, buy new clothes, make sweet meats, play the rabana and herald the New Year. This New Year could have been a joyous one indeed had paddy farmers received the promised price for their plentiful harvest. Regrettably in many paddy growing areas farmers continue to face a market failure. The promises of the government of an assured price have turned sour once again. Instead of celebrating the New Year some farmers are in dire financial straits. A few have even committed suicide.

One half or more of the population live in rural Sri Lanka and about a third is estimated to be dependent on farming. This is especially so in the dry zone areas of the North Central, Wayamba, Eastern and Northern provinces, as well as in the South. These are areas of lesser rural diversification as well. For these rural people the New Year is preceded by the reaping of the Maha crop. The paddy is sold, creditors paid and monies spent on new clothes, gifts and the New Year celebrations. Their relations in the urban areas too return to the villages to celebrate the New Year with the traditional customs of centuries. This year's celebrations should have been one of the best as the country reaped a record paddy harvest of nearly 2 million metric tonnes of paddy on top of good harvests in the last two Maha and Yala as well. A third successive bumper harvest commencing from 2005 is providential; a cause for celebration. Unfortunately it was not to be as auspicious a festivity as in many homes the unsold paddy or paddy sold at low prices, sometimes below cost of production, troubled the poor villagers.

This year’s Maha paddy harvest is estimated by the Department of Census and Statistics at 93 million bushels or 1.95 million metric tons. In 2006 too there was a record paddy harvest for the two seasons of 3.3 million metric tonnes. In 2005, paddy production rose sharply to an unprecedented level of 2.01 million metric tonnes in Maha and 1.23 million metric tonnes of paddy in Yala that resulted in a domestic supply of 3.24 metric tonnes that was adequate to meet the country’s need of rice. We have had three successive record harvests that were adequate to supply the domestic needs of rice. Arguably the country has reached self-sufficiency in rice. Yet paddy farmers who toil to achieve this are hardly better off. Farmers are reported to be worse off as the rich harvest of the golden grain has turned sour for many.

In the last three years the government was aware of the impending problem before the harvest and decided to offer guaranteed prices of around Rs.16.50 to Rs. 17.50 per kilogram, depending on the variety of rice. The objective was not to buy the entire stock but for this guaranteed price to stabilise paddy prices at the farm gate level. Had this been achieved by even an average price of around Rs. 15 per kilogram, it would have been adequate to cover costs of production and provide an adequate income. Regrettably in all three years, this government intervention did not achieve the desired result. It is reported that some paddy farmers have sold their paddy at as low a price as Rs. 8 per kg. The average price realised by farmers appear to have been around Rs. 10 a kilogram that hardly covers the costs of production and farmers on small plots of land end up with an inadequate income for their livelihoods, especially as their other basic necessities have soared in price.

There are regional differences in the situation. Polonnaruwa and Annuradhapura farmers appear to be relatively better, with their being able to sell paddy at around Rs. 16.50 owing to better farmer organisation and adequate storage capacity. In contrast, once again Dambulla, Amparai and Batticaloa farmers are not faring too well, mainly due to inadequate storage capacity. Very little of the money apportioned by the government for purchasing paddy benefits farmers. There are others who reap the benefits of government money. Storage capacity, strength of farmer organisation, political interference and the integrity of officials are the factors determining the extent of success or failure of the government’s market intervention.

The large stock of paddy coming into the market in a short period of time on top of a good stock position is the basic reason for the problem. Fundamental factors bearing on the issue require to be recognised as economic laws operate irrespective of the actions of governments. It is crucial that the fundamental problems are resolved rather than find emergency measures to cope with the current crisis. The lack of adequate storage space in many paddy-producing areas is a fundamental problem that requires resolution.
Government intervention is itself somewhat inadequate to make a dent on the problem. The government is expected to purchase about 15 per cent of paddy production. Perhaps targets of around one quarter of the estimated paddy produced should be set for each and every paddy producing area. The agencies purchasing paddy should be diversified and increased. The problem is of course compounded by the corruption of officials, supported by influential persons and vested interests of important persons, including politicians. There is also a need to bring in the private sector in a more organised manner to truncate the producer-consumer chain and reduce market margins. Improved transport facilities are also needed.

These fundamental factors have to be addressed not when the problems arise, but as part of the infrastructure development of the country. The government must assume production levels to be around current levels or even project higher amounts and develop silos for storage of paddy that could be in the hands of a diversified number of agents such as banks giving credit to farmers, farmer's organisations, other community groups and government agencies themselves. Such facilities within the paddy growing areas would reduce immediate transport requirements as well. Increasing milling capacity is another requirement which would also reduce storage and transport needs as well.

The problem has now been repeated for three successive years. It must not be allowed to recur again. The government must plan out a strategy to develop the required infrastructure and have it ready for the Yala crop this year that is expected to yield around 50 to 60 per cent of the Maha crop. The problem may not be as severe in this year’s Yala but during the next Maha it would surface again if the requisite infrastructure is not in place. If the constraints to effective marketing are removed market forces themselves will resolve most of the paddy marketing problems and ineffective government intervention may be unnecessary. This is a serious problem that requires to be addressed in a systematic manner with a long run perspective.