Friday, May 14, 2010

The case for scale in Paddy Cultivation in Sri Lanka

I have been asked by a friend overseas to give him an idea of the costs of rice production in Sri Lanka, to determine if he wants to invest in an agricultural venture to grow paddy. This is like asking the proverbial “how long is a piece of string?” type question.

I tried to explain, much depends on the land extents envisaged to be cultivated, as well as the land availability that is suitable for cultivation. Usually this means that existing paddy lands have a greater suitability, as basic infrastructure is in place, but the more productive the soil, the purchase price reflects this.

In order to be practical about this it is almost impossible to come across a 50 acre minimum land size that is suitable and available for paddy cultivation, as I believe this extent is required as a minimum if one is considering giving up whatever it is including common sense to go into paddy farming.

In order to satisfy his request, I will base my assumption on a 50 acre size and make the following assumptions. The main one being that the land is available and purchased, as it would only be a wild guess as to how much such an extent of land would cost. It would be a minimum of Rs20M.(in the US rice extents are cheaper) The other assumption is the availability, of water from a canal fed by an irrigation source. Relying on rain fed paddy is too risky not something to be tried and the use of pumped water for such an extent would also change the dynamics of the project.

If average land yields 100 bushels per acre for each season, the harvest for a year will be 10K bushels or 200,000KG of paddy at an average selling price of Rs30/kg would give a gross income of Rs6M a year. If the direct costs cannot be less than Rs3M then this project is not worth it as otherwise the Rs20M can yield a better return in most other safer investments with a lower risk.

It is easier to work backwards from this direct cost, which for a season for an acre runs at Rs30,000 as a maximum. So how does this stack up with outsourcing the work. It will go as follows. A) tilling the land 3000 B) preparing the fields 3000 C)Sowing 1000 D) Fertilizer 5000 E) Pesticides 5000 F) Husbanding the land during the growing process 3000 G) Combined Harvester to cut and thresh 8000 H) Drying and cleaning as well as bagging for sale 2000. Realistically it is difficult to do it for any less, with the only flexible one being the use of the combined harvester, which due to the extent of the land can be bargained down to even Rs 5000 per acre. The important point to note is that the yield is the most unpredictable, and the most likely contributory factor for either profit or loss.


Stephen Jones said...

You're forgetting that the value of the land is going to remain constant in real terms or even increase long-term, so when you talk about getting 3M rupees out of 20M rupees investment elsewhere you need to bear in mind depreciation in other investments.

That said, with the uncertainty about the government being able to continue the fertilizer subsidy, your friend would do better to invest in coconut, which might produce less profit but will at least give the simulacrum of a leisured life style and require little else but presence on the estate.

Rajaratarala said...

you are correct stephen on the capital value increasing or at least staying the same in real terms. Additionally theoretically the profit should also rise in real terms. Hence the reason to invest in an enterprise as usually capital value of fixed assets and real returns rise while in fixed income they would fall.

Yes it is a risky investment, which I have worked out if land is rented to tennant farmers will yield 40 bushels per season per acre for good paddy land, giving a no risk return on the assumed selling price of Rs30kg, namely Rs 24,000 a season per acre, a much better prospect than farming it yourself with all the inherent risks. This return rises with inflation as it is tied to a weight of paddy per acre and not a rupee price.

The problem is now coconut land sells for double that as of paddy land, and if one buys virgin land the wait is at least 6 years and a considerable investment in the interim, and what if the coconut pest hits your land you have to cut all the trees as is being done throughout the Southern Province now.

Stephen Jones said...

I agree that it is foolish to enter into large scale paddy cultivation in Lanka. In the US maybe not.

The advantage of investing in coconut land is that you can live the life of the English gentleman farmer without having to do too much -- a long standing Sinhalese aspiration (which is why most of the coconut triangle was set up as exploitative plantation industry taking over the land given to home gardens and mixed agriculture that were traditional in the area.

I think the point is that to try and run any kind of agricultural enterprise while not living on top of it is doomed to failure. Most of Asia has small-scale highly efficient rice farming but that is because the work is done by the family unit, that puts in long hours to improving the land, including hand-weeding if necessary. Once you have to pay labour, particularly when that labour is not needed all year round, then the economics change.

jay said...

I would like to know about cultivation of basmati rice or biryani rice cultivation in sri lanka.What are the varieties of rice cultivated generally,are there any varities that require less water,is there any practice of intensive cultivation method .

jay said...

I would like to know about cultivation of basmati rice or biryani rice cultivation in sri lanka.What are the varieties of rice cultivated generally,are there any varities that require less water,is there any practice of intensive cultivation method .