Financial Times

Impact of cess on agricultural commodities

By Lal de Mel Chairman, Board of Trustees - National Agribusiness Council

Concerns have been expressed on a possible adverse impact on consumer prices, by the cesses on imported agricultural commodities in the Budget. The impact of rapidly falling prices of commodities should be considered when predicting the impact. The facts presented below show that these cesses on commodities produced in Sri Lanka will not have a negative impact on the consumer prices. Further increases will be required in few months time to provide local producers a satisfactory market price.
The cess on maize was increased from 20 to 25 %. International corn prices show a decline from US$625 in July 2008 to $380 in December 2008. This is a drop of nearly 40 %. The 5 % increase in the cess on maize will be insufficient to protect maize growers when December shipments of maize reach our market. The increase in the cess on maize will not have a negative impact on the cost of animal feed.

The cess on imports of milk powder was increased from Rs. 5 per kg to Rs. 15 per kg in the budget. According to a news report, the Fonterra export price of milk powder has fallen from $4375 in July 2008 to $2435 for shipments in December. The increase in the cess of Rs. 10 per kilo is equivalent to a cess of $91 per metric ton. The drop in the price of milk powder is $1,940 per ton. A further increase in the cess on milk powder will be required in a few months, to encourage milk production in Sri Lanka.
The LC margin for imports of palm oil was increased to 200 % to minimise the negative impact of falling palm oil prices on the coconut and coconut oil producer prices. Palm oil prices has declined from a peak of RM (Malaysian dollars) 4500 in March 2008 to RM 1500 in end October. Careful monitoring of the landed cost of palm oil is required to provide adequate producer prices for the large number of coconut smallholders.

The levy on imported sugar has been increased by Rs. 2 per kg. The international price has declined by 15 % from the peak in July 2008. Hence, the increase in the levy on sugar will not have a negative impact on consumer prices. The alarming drop in the production of sugar cane, shown below, needs sympathetic consideration. The electrified fences will help to minimise the damage to cane sugar plantations from elephants.

A 15 % cess has been imposed on imports of black-gram, kurakkan and cowpea. The production data of these items is shown here. Thousands of small-scale producers without access to irrigation depend on these crops for their living. Further incentives may be required, if the falling commodity prices have a negative impact on these subsistence farmers.

International wheat prices have declined by 35 % between July and October 2008. Prices quoted for December shipments are marginally lower than current prices. The 5 % cess on imported wheat will arrest a significant drop in the price of wheat flour, leading to a reduction in the demand for rice.
The President called all the producers of agricultural commodities few weeks before the Budget to assess their needs. The above-mentioned cesses are based on the representations made by them. A similar needs assessment was carried out before the Budget to assess the needs of the industrialists. These tariff revisions will minimise the negative impact of the steep decline in international commodities on employment and poverty alleviation in the rural areas of Sri Lanka.

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