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Corruption, taxes, disease and imports crushing coconut industry
View(s):By Sunimalee Dias
The high cost of raw materials and production has caused a once-thriving industry to falter over the years. The coconut sector is now left out of state patronage with no subsidy and no support for the smallholders who make up 69% of the crop production.
The latest in a litany of blows came from President Ranil Wickremesinghe’s Budget 2024 proposal for 18% VAT on coconut-based products. This is likely to increase prices, making the product increasingly uncompetitive.
In this two-part series, we take an in-depth look at some of the key challenges for the coconut industry, its decline, and the shortage that has led to several issues, including the edible oil import glut that has a harmful impact on prices.
Farm gate prices of coconuts have dropped, sending land owners reeling towards fragmenting plots for sale. Some warn of an imminent collapse of the sector. What Sri Lanka needs is to use its coconuts to set things right and not allow coconut heads to run institutions, causing further disruption and damage.
Coconut auction
manipulated
In a visit to the Coconut Development Authority (CDA) auction held temporarily at a ground-floor office, a handful of brokers and sellers were seen bidding amid their regular chit-chat. Brokers are on their mobile phones constantly when the bids are called out, but there is no real call for the bids since it is more often a bargain on the prices.
According to some registered brokers, auction prices are not a clear reflection of the actual stock available. Only about 1% of the coconuts produced are sold at the auction. This indicates that the industry is controlled by middlemen, who determine the farm gate prices, which have today plunged to around Rs. 45 a nut compared with high prices at the retail level.
At a recent Committee on Public Enterprises (COPE) hearing, it was revealed that the online auction system introduced to demolish the monopoly of the ‘mafia’ has been opposed and obstructed by brokers with agendas.
At the COPE hearing, it was alleged that the online auction system was inactive because some CDA officials colluded with unscrupulous brokers and were reluctant to implement it. Thus, instructions were given to reactivate it.
But interestingly, the auction is not without political interference. Rules require that state enterprises sell their produce at a public auction.
However, it is alleged that corruption thrived during the tenure of a former state minister of plantations. He was accused of price fixing.
Having a vested interest in coconut production, he is alleged to have violated government policy and sold the Chilaw Plantations’ harvest through a private tender after pulling this institution out of the CDA’s public auction.
This issue had been overlooked by the previous plantations minister, who took little or no action to sell the nuts through the public auction, though it was pointed out that the sale of coconuts through a private tender could lead to abuses.
The CDA auction where only one percent of the production is sold. Pic by Priyanka Samaraweera
Shrinking yields
The decline in coconut production has created a shortage in the market. Households and businesses involved in the export of value-added coconut products are badly impacted.
Sri Lanka produces 3,300 million nuts per year, and the benchmark for 2025 is 3,600 million nuts. Annually, 1,800 million nuts are consumed locally, with only about 1,500 million available for industrial use.
The climate change-induced severe drought in 2022 and high-intensity rains this year have affected the crop, resulting in lower yields.
Coconut Cultivation Board Chairperson Madhavi Herath told the Sunday Times that a 12–15% decline in nut production is likely this year.
The industry has been hit by wage issues. With skilled and semi-skilled workers’ salaries going up by 100%, the industry is facing a severe strain.
A 50-kg bag of fertiliser that was offered at the subsidised price of Rs. 1,500 is now Rs. 11,500. As a result, the plantations have not been properly fertilised for the past three years, leading to low yields and reduced nut weight, Coconut Growers Association (CGA) president Chryshantha Jayawardena told the Sunday Times.
“In most instances, the farmer hardly makes any money harvesting, and home garden harvesting costs Rs. 100–Rs. 200 per tree according to the method: pole or climbing,’’ he said.
Due to the high cost of production, small farmers may not fertilise the crop, and with a low farm gate price, the industry is suffering severe losses. The farm gate price of coconut has to be maintained at least at Rs. 65 to increase production in the long term.
But farm gate prices this year have dropped to below that of the price of an egg in the food basket, it was noted.
Coconut Research Institute (CRI) officials said the drop in production due to the inadequate application of fertiliser was 10–12%.
Moreover, as a result of the economic crisis in Sri Lanka, the government suspended subsidised fertiliser for the coconut industry, leaving the farmer in the lurch.
Back in 2019, a subsidy of Rs. 7,000 was given, but this was stopped after the collapse of the economy.
It is learnt that of the Rs. 15 million allocated, only around Rs. 8 million is said to have been released to the CRI.
Worsening the crisis was the white fly disease. The CRI said the disease spreads more in plots where fertiliser use is low since the crop is unable to withstand any disease without adequate nutrition.
The disease, which spread particularly in the Kurunegala, Kalutara, and Gampaha districts, has not been fully controlled. Production has fallen by about 2%, officials said.
The king coconut crop was impacted more since this tree is not too strong and the spread of the disease is bigger due to its yellow colour.
The total nut production in 2022 was 3,391 million, with 1,848 million consumed locally and 1,543 million used by the industry. CDA statistics indicate that in 2016, total production that was at 3,011.28 million nuts dropped to 2,449.53 million nuts in 2017 with a slight pickup in 2018 at 2,623.10 nuts; 3,085.57 million nuts in 2019; 2, 792.20 million nuts in 2020; and then reaching 3,119.66 million nuts in 2021.
Millers cry out for more coconuts to increase the production of value-added products for export. In addition, coconut oil millers are facing a serious crisis as the quantities available locally are low, as a result of which large stocks of imported oils are eating into the prices of local oil producers.
Imports weigh on producers
If the coconut oil sector needs to survive, then imports need to be taxed to protect the local millers and production.
At present, Sri Lanka is importing 2 billion nuts equivalent in oil, and this year as well, about 65% of the local consumption has dropped due to the increased poverty rates. This is also seen as one of the reasons that coconuts are available at high prices in the local market.
Sri Lanka had been exporting large volumes of coconut oil, and for this purpose, the tanks at the Colombo harbour were made available in the late 1980s, officials point out.
However, today, these same tanks are being used to store large quantities of edible oil imports when they arrive at the Colombo harbour.
Coconut Marketing Board data indicate that back in 1977, coconut oil exports amounted to 2,133 MT, which increased significantly to 327,225 MT in 1978.
Sri Lanka’s dietary changes have led to a higher consumption of oil. Some 264,000 MT of edible oil were consumed in 2022 by locals. About 44,000 MT of this quantity was locally produced oil, of which 21,120 MT was coconut and 23,760 MT palm oil. Imported edible oil accounted for 220,000 MT in 2022. Household demand for oil stands at 166,000 MT, with 98,000 MT being industrial demand. Edible oil imports are estimated to be worth US$184 million at the current market price.
The imports have affected the farm gate prices, which are currently at Rs. 45 per nut, but at retail, a coconut sells for Rs. 150, with middlemen making huge gains.
As a result, authorities have proposed a higher tax and duty on edible oil imports, but this has run into trouble in the recent past. It is learnt that although the CDA has the authority to determine the amount of edible oil imports, this is today handled by the Treasury and the Trade Ministry. As a result, large volumes of edible oils are imported at low prices.
Moreover, it is learnt that when a duty was proposed, importers were attempting to hoard stocks by purchasing at least two shipments of oil. But the duties have not yet been imposed.
Industry sources point out that most imported oils sold in the retail market are refined, bleached, and deodourised to ensure they have a good odour when sold. Some say the Sri Lanka Standards Institution should ensure quality.
Additional taxes
Sri Lanka’s coconut industry is facing another new challenge, given the budget proposal to impose an 18% VAT on coconut-based products. The industry queries whether authorities are keen on assisting the industry or simply killing it. This concern was raised last week with Plantations Minister Mahinda Amaraweera.
Millers have noted the tax could lead to a drop in coconut-based products and increase fresh nut consumption locally. This would create a shortage of nuts for export.
In an industry where only 50% of its production capacity is being achieved, the government needs to support it. If not, Sri Lanka’s global competitors would overtake the local industry, CGA President Jayawardena noted.
Another concern is the fragmentation of coconut lands, as most are pushed to the edge. The onus is on the government to establish policy and not allow land to be in a speculative market.
Sri Lanka’s global market share for desiccated coconut is at 23%, at 15% for virgin oil, at 10.27% for coconut milk powder, and at 8.8% for coconut cream.
The traditional coconut triangle of Puttalam, Kurunegala, and Gampaha remains the main source of production. The southern coconut triangle in Hambantota and Matara is not provided with enough state resources following the Weligama weevil attack. Coconut production has begun in Jaffna, Mannar and Mullaitivu districts.
As a privately run industry, it generated revenues amounting to just 3.1% of total Sri Lanka’s exports at US$400.3 million in 2022. In this respect, the industry notes that the government must not consider the sector as a state-owned enterprise (SOE) and ensure state assistance to compete globally and increase production locally.
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