Insight into the ever important Paddy Market


SPECIAL REPORT:

Insight into the ever important Paddy Market

A combination of factors that include the return to political stability in the Eastern Province of Sri Lanka along with international market conditions have brought the issue of boosting domestic paddy production to the fore. The district of Ampara in particular has an outstanding record of paddy production and the forecast of 2008 is very positive.

Supply analysis

Rice has traditionally been the staple food of the island’s inhabitants since ancient times. All 25 districts of the island have some extent of paddy cultivation which totaled to an estimated 708,000 hectares according to the latest data from the Department of Census and Statistics.

The two cultivation seasons are referred to as the Maha season which coincide with the traditional North-East Monsoon season ( September to March) and the Yala season which runs from May to August. The crop is sown and harvested each year during these two seasons.

Whilst the island is known to have exported rice to the Asia region in times past, the current gap between local consumption and production has varied at between five and ten per cent over recent years. This is due to the fact that the entire area with paddy cultivation potential is not being cultivated due to various reasons such as water scarcity and conflict which has affected the North and East of the island. Some 250 hectares were also hit by the 2004 tsunami. Nevertheless, paddy is the most cultivated crop in Sri Lanka and accounts for some 34 per cent of all cultivatable lands.

This year, with the East of the country connecting with the wider economy, production from these areas is set to boost the overall national output toward complete self sufficiency. According to some analysts, the next five years will witness a surplus that will generate export earning from supplying the world market.


Demand analysis

Local demand / consumption of rice is comparably stable and is estimated at 100kg per capita. Current government regulations dictate that all locally produced rice is consumed in the domestic market. The production / consumption gap is currently being filled by imports which includes some 200,000mt of premium high quality rice. The higher quality varieties tend to be sold at the supermarkets and at five star hotels. The demand for these varieties tend to be inelastic – minor changes in the price of rice or in the price of substitute or complementary goods will not have any significant impact on the demand curve which is determined by other factors to a greater extent. Healthy eating patterns, the number of tourist arrivals and taste tends will tend to determine the demand for the higher quality varieties of rice.

The main share of the local paddy market is dominated by a strong demand for a number of varieties that include Nadu, Samba, Red-raw rice and White-raw rice. For these varieties which accounts for the staple diet of the population, some level of sensitivity remains with reference to the price of substitute goods. This was noted most recently during April 2008 when the price of rice hiked to a significant extent, forcing the poorer segments of the population to switch to substitutes like bread and wheat flour. Some consumers were also found to have switched to ‘manyoka’ which is comparatively cheap substitute which can be grown in a home garden.


Capacity and production

Traditionally, the sector was characterized by the prevalence of a large number of small-scale Paddy Millers at the local level. Theses Mills would employ anything from three to fifteen workers and churn out up to 5,000 kilos per day. However, with time, the trend in production has been gradually shifting away from small and micro-scale operators to large-scale millers. Technological advances in milling machinery is one of the driving forces behind this trend.

Consequently, there has been an accelerating trend of closure for hundreds of small millers each month according to reports from around the country. The economies of scale that are enjoyed by the large producers will continue to drive the small players out of business.

Rice millers are also accused of monopolizing the market that is increasingly dominated by a comparatively small number of players. According to sources, millers keep a profit of around Rs.8 or more per kilo (2008) whilst the retailer and wholesaler retains a margin of some Rs.2 per kilo. Other sources estimate that the miller keeps a profit of around Rs.225 for a 65kg bag. Recent market movements are known to have resulted in millers realizing massive profits of up to 100 per cent.

The issue of millers and market manipulation that comes as a result of oligopoly power is also one that is politically charged. A recent parliamentary debate witnessed fierce accusations and counter accusations of market manipulation on the part of large and politically influential mill operators.

There is little doubt that in the long-run, the large scale producers will look to supplying the international market as Sri Lanka passes self sufficiency. However, production quality which is a function of technology will need to be improved if international market penetration is to be realized. Currently, the best of the quality rice is sold at supermarkets as well as the five-star hotels. All constraints to producing very high quality rice, some of which are known to have medical properties, will need to be addressed at the milling stage with particular reference to the technology that is used by the rice millers where the export market is concerned.

Policy Environment

The government intervenes in the market with the rationale of safeguarding the interests of the small-scale producers who are vulnerable to exploitation. The Paddy Marketing Board which comes under the Ministry of Enterprise Development buys paddy from farmers on behalf of the government. With the state backed intervention in the market, some level of price control has been exercised indirectly in recent years. The Paddy Marketing Board (PMB) will typically offer to purchase paddy at what is considered a fair price. However, the private sector is capable of outbidding the price levels and consequently the PMB only gets around ten per cent share of the overall market.

Consequently, it is the market forces and not the PMB that tends to dictate terms on price. For example, the 2007/08 Maha season was accompanied by very high prices due to the prevailing international commodity environment and supply factors. The PMB had little influence as prices hiked. The situation led to a parliamentary debate which took place regarding the fixing of prices for paddy as one option to safeguard food security and guard against the exploitation of farmers. Regional food security was also at the fore of discussion at the recently held SAARC conference in Colombo.

The principal law governing the sector is the Paddy Marketing Act No. 14 of 1971 which sets out the guidelines for operators of mills and other activities. Various incentives have also been implemented by the Paddy Marketing Board over the years such as offering to pay one rupee per kilo extras for paddy that has been produced in the North and East. The latest directive that has come directly from the President is for Sri Lanka to keep one million metric tones as buffer stock in order to safeguard against international market volatility as well as against interruptions to the local market .

Some observes claim that it is the pro-rural development ‘Mahinda Chintane’ policies that have more recently had an impact on the sector and led to improved prices. Recent government regulations include;

• A ban on the use of paddy for animal feed as this practice had been one of the factors that had been driving up the prices.
• Halting rice exports, perhaps as a strategy to ensure self-sufficiency and food security in an uncertain international environment.

Market Forecast

Sri Lanka’s policy could be considered wise when we observe that Haiti used to be self sufficient in rice until cheaper US imports were allowed to flood the market and put local farmers and millers out of business. Currently, Haiti is completely reliant on US rice imports while suffering from acute poverty and food insecurity. The poor in Haiti are reported to be reduced to eating mud cakes when once they had a plentiful supply or rice.

During the next five years, local production is set to witness increased supply and the current five per cent gap between locally produced supply and consumption is set to be filled. Thus, imported rice will not be required. Moreover, industry sources recon that within two years, Sri Lanka will have a surplus of rice that can be exported to meet demand in foreign markets.

The current ban on the export of rice is only temporary and is expected to be lifted within one or two years. Once locally produced rise plays a role in the international markets, global prices will start to have an impact on local prices. Thus, we can expect the government to continue with various types of intervention in this sector on the grounds of food security. This appears to be the thinking in the entire Asia region.