Monday, March 17, 2008

arbitrage another interesting coconut story

Arbitrage that happens in a market. Another interesting coconut story

I have referred to many a time before of the plight of the coconut industry, the price of coconuts and coconut related industry, which will result in a 100/- a nut scenario before too long.

In order to fulfill the demand for coconuts that I cannot supply from my own trees I used to buy from my neighbors in Polonnaruwa and take them husked to my shop and sell it there. The price discrepancy started at about Rs 15 per nut, which paid for me to buy here and sell there. However in time, over a period of about 4 months, this disparity has narrowed to Rs2, which is the same if I buy it wholesale around my shop, as the retail price of a coconut now exceeds the retail price in Colombo.

I have referred to earlier why the price in Colombo, is lower, because half the coconuts sold there are stolen from the estates by the lorry load. I have also noted earlier that a lorry of 12,500 coconuts has a retail value of Rs 500,000 a life times earnings that can be had in one day. Coconut stealing is a big business, whether it is one man climbing a tree and earning more than the average daily wage in a ten minute exercise or whether it is done collectively.

I have a man with me in Polonnaruwa, who decided to leave a 50acre coconut estate in Arachchikattuwa north of Chilaw, where he was a watcher, because of the incidence of theft, which he could not control, and his superiors were unable to provide him with adequate support to do his job. It interesting to note also that the superintendent was also playing a game with the owners in explaining crop shortfall, by pinning it on a whole host of reasons. The fertilizer purchased as per the books were not all applied by siphoned of for personal use, with nuts also siphoned off through a sorting process.

In addition to this they are sold to traders wholesale at prices below market so there is some payoff for that. For example the price shown to owners as being 20/- a nut for large quantities should in fact be 30/- which is the current going rate in his area. There again the landowner is shortchanged. These watchers are paid just a basic of 5000/- a month, and they do not want to risk their lives battling people stealing coconuts.

I am highlighting this problem, which is becoming more acute each day as the price of coconuts rise and it is a self fulfilling prophecy if one is not able to control theft at all stages and thereby regain control of the industry. There is another way of tackling this problem, which should be an experiment.

If we decide it is in the country’s interest to increase production and large efficient estates is not the answer, as being impractical, then lets give the people in the village a number of trees for an annual rental. Say the contractual period is 5 years for the experiment. They will then be responsible for their trees to sell the nuts and fertilize the property as they can be fully compensated for their sales, or being guaranteed a market price for their nuts. Actually the best alternative would be for them to be responsible for selling their nuts, but then again the trader will intervene to buy at a lower price, but it will still guarantee them an income and guarantee the landowner an income.

A fair deal would be to give the landowner Rs 1000/- a tree per annum, where a 70tree acre would yield 70,000 to the landowner. (even a 500/- a tree payment will give the landowner much more than he currently receives. If the tenant can get 5,000 nuts from that acre selling it at Rs 25/- he can gross 55,000 after paying the rental and then in addition use the land to grow intercrops for his sole benefit. Please bear in mind that if they are able to sell the nuts at 50/- which is very conceivable bearing in mind the direction such prices are heading, it is then a no brainer for the tenant.

The problem again would be how the tenant would control theft, as he wish to live in the property which would not be practical, without cutting trees. Petty theft has been a thing of the past where people around the land used to steal a few fallen nuts for their home consumption. It has now become a much bigger problem where it is becoming a marketable commodity like it has never been before.

Two things are worth remembering. We have to first attempt at all costs to increase the output of coconuts available in the market than is currently the case. So policy makers should determine how best to do this. Secondly, enforcement of the rule of law, to punish theft and therefore deter it is essential to promote entrepreneurial leanings to make the devised policy effective.


Anonymous said...

Good to see you are writing again. Interesting ideas for sure.

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