Sunday, April 29, 2012
Saturday, April 28, 2012
Thursday, April 19, 2012
I was taken to task by a one advocating export of surpluses by my criticism in yesterday’s blog entry about the efforts of the agricultural department to export varieties of rice. I know I was rather harsh on the Secretary to the Ministry, who in the past would have initiated a common sense approach, but in the current heavily politicized climate, is just doing the bidding of his Minister, even though he may vehemently disagree with him.
That took me back to 1950 when CP de Silva who was in the Ceylon Civil Service, and was working in the Land Development Department (historians please correct me on some of these facts) had a disagreement with his Minister Mr Dudley Senanayake who was the Minister of Agriculture under the DS Senanayake administration and promptly resigned from the Civil Service, when he could have just requested and got a transfer to another department under a different Minister.
Just for the record DS tried to persuade him to withdraw his resignation, but he refused, and left on the second anniversary of independence. He bought a 50 acre plot of land in Tabbowa in the Puttalam District where he had served many years ago and began a simple life of a farmer, when in 1952, SWRD himself personally turned up into his shed like cabin, and persuaded CP to join him in Politics. CP went on to win the Polonnaruwa seat in the 1952 election which UNP won with Dudley. It is also worth noting that Dudley asked CP to be the Prime Minister when he won the 1965 election, so even disagreements do not make enemies!!!
I am sorry I digressed completely from my point, which is to illustrate that I am not anti export of agriculture. In fact I am a proponent of export of our produce. It is the cynical way those who do not understand the topic go about it that angers me.
There is a huge export market for our produce, fruit, vegetables, and rice. I know vegetable and fruit exporters, whose daily grouse is that they do not have SUFFICIENT QUANTITY of standard quality products to meet the demand. We do not have enough large scale producers who will use the latest techniques to get productivity and consistency to supply the export market. The Govt, is giving incentives to foreigners, by leasing them large tracts of land for projects (they sold Polonnaruwa farm of 2000 acres a few months ago to an Israeli company, to bring in cows to produce milk.)
A person in SL with 50 acres is considered big. The average peasant cultivator only works about 1 hectare(2.5 acres) as a maximum. Given this reality, we cannot cater to all comers and try to save the smallest farmer from going under as well.
In my previous entry, I recommended a guaranteed minimum price for export quality crops, of the varieties required for export, of Rs50/kg as a way to go. The reality is that the efficient farmers anywhere in the country, will work productively to produce that quality, and make a lot of money, however the small farmer who we are targeting to help will only marginally benefit. That is the nub of the prob!
This comes back to the point of productivity and economies of scale in agricultural production. The govt. must have a policy on how each segment is treated, incentivized and compensated. Agriculture being a high risk venture requires high reward to encourage private sector investment. Land is the scarce resource for the large scale investor who does not want to tie up large amounts on buying up land. So leasing large tracts to the private sector is a way to go to solve some of the pressing problems, but with it one has the costs attached to it, of local people working for a wage, who have had to give up farming due to their inefficiencies. Intensive mechanization, so that few benefits accrue to local villages, with most of the profits going to the providers of capital who live elsewhere and overseas can result. No wonder the JVP views on equality hold so much sway in the rural areas, but which never gain traction, as they do not have a viable method of getting them out of poverty due to the lack of critical mass in the market to make a difference.
The transfer of the pricing determinant from the Miller, the wholesaler and intermediary to the grower, is what economists the whole world over are even now grappling with without answers, leaving agriculture to Market supply and demand dynamic that is only in the farmers’ favor when shortages are in the horizon. The farmer must be equipped with the tools to understand this complicated risk and to mitigate it in his favor. The answer we can give each farmer heavily depends on his or her personal circumstances, there being no cookie cutter formula that applies to all, to resolve individual differences in this sector.
Anyone who comes with a satisfactory solution will be the farmers’ savior. So let’s begin by challenging the price fixer to increase commodity prices. The productive producer has an incentive to grow. The smaller producer is encouraged to get to that level of productivity or perish. There is no point designing a system to help the marginal producer, which only helps the big boys, as the butter, milk and beef mountains of Europe have shown as clear examples of policies gone wrong.
I was only yesterday asked to start by accumulating a cash reserve, purchasing quality paddy at a higher price, and converting to rice and selling, forcing the Millers to raise the price they offer, thereby being able to take credit for the act!!!
I have to restrict my purchases to only buying from a pre-agreed list of people who are those that are dependent only on paddy farming, and farm less than a hectare each. I offer a price higher than that the Govt. say Rs30 but conditions have to be met. Cash on the table when the product is supplied. The model is similar to that which Food City currently use with its farmers and the product they purchase from them. However if they offer more than the State for the paddy, will the big Millers really raise the price they offer as they are the oligopolist price fixer?
The answer is NO. They know there are enough farmers who can supply, and even if I offer a high price, I can only buy so much, my economies of scale are much less, and my distribution costs also are higher, resulting in much smaller margins to my enterprise that will not sustain me for long enough to be a threat in the long term. Even the Govt. dare not take on this role of competing with the Miller on price as even they know from past experience they end up holding stock of paddy that just rots. The intricacies of Govt. inefficiencies and greasing of palms that compromise the quality of the paddy that is bought and all the good intentions of helping the farmer and the consumer both at the same time is just a costly exercise of losses to the state enterprise that engages in this.
The alternative I fear is that we will see many small farmers going out of cultivation, and the threats of the Govt. forcing them to cultivate will create tensions that boil over into a full scale agitation. This is a distinct possibility if sufficient people are badly affected.
Do we then go for the other option of increasing the price level of the commodity, by removing the surplus from the market place? We would otherwise not be able to keep the price high if there is leakage at lower prices. The big Miller’s profits will rise still further giving him unassailable clout to market manipulate even further, by forcing a temporary rise in prices, to suck up the supply and then dump the farmers by lowering the asking price later, when there is no one else to help them.
As one can see a proper management of the surplus to achieve macroeconomic goals of price stability and the survival of small farmers is a very tricky one. They are two issues and cannot be combined. Export markets are the only solution to surpluses so they do not either waste produce or have an overhang which will lead to price instability, that may wipe out an entire sector. The protection of the small farmer is an entirely different issue as his survival depends on productivity and efficient and productive units. For that the marginal farmer will have to disappear, replaced by a professional farmer from the ranks of the educated youth, who will be able to manage an economically feasible lot profitably in the long term.
Wednesday, April 18, 2012
It was reported a short while ago today, April 18th 2012, that the Secretary to the Ministry of Agriculture, KA Sakalasooriya, has announced the creation of four zones for export. One in each of Mannar for growth of Keeri Samba, Hambantota for growing red rice, (presumably long grain) and Polonnaruwa and Anuradhapura for growing BG 357 a variety of white rice. It was further announced that in the next Yala season this paddy would be purchased at Rs40/kg.
Why is this announcement insulting? He has no clue about rice farming, about yields on different soil and growing conditions, and on different varieties of paddy.
I have planted 6 varieties of paddy, and I have personally sold door to door, 14 varieties of rice arising from this paddy. I have also grown keeri samba a particularly fine grained white rice. Its yield is usually a lot less than other varieties and I have sold the rice for around Rs100/kg which is about what the price is for the par boiled variety even now. I like to say they look like ‘podi muthu ata’
Rs 40/kg is not enough to compensate for the lower yields. At this price I can buy the paddy, and mill it and sell it at Rs80/kg and still make a profit of Rs10/kg, after taking account of transport. A large miller will make a profit of Rs20/kg as he has other cost savings that I do not have as I pay a small miller to do so. Further I wish to reiterate that I grew Red basmati as an outgrower for CIC and lost a lot of money. I was promised Rs 42/kg for paddy, for rice they sell at over Rs150/kg.So I do not trust these statements.
I really suspect that if farmers produce paddy at this price for the quality that is required for export, it is the Miller who will make the profit again, as he has the market sown up, and all the Government is doing by making this promise is doing the bidding of the Millers who have given the Govt. an undertaking to buy this paddy at this price, something they cannot do at the moment, due to the lack of sufficient quantity of paddy of these varieties to meet export orders.
I trust the reader can understand where I am getting at with this argument. The Miller has seen a greater opportunity using the auspices of the Govt. to try an ensure sufficient quantity of product to meet their market. So they can increase the profit they make. I ask him to pass on the commission he makes on this to the farmer by offering the paddy farmer at least Rs50/kg for the paddy of these varieties to ensure sufficient supply. There is NO way farmers will fall for the Govt. ruse in sufficient quantity for export to ensure viability in economies of scale. SAKALA go back to your drawing board please and TRY AGAIN
A Govt. that presents itself as the friend of the farmer has been the one that has ruined farmers forever by their lack of a comprehensive agricultural policy. Due to their expert media effort at fooling the Agricultural community, they have successfully hidden their deception from the public, and I am attempting by using actual real world examples to show that they have no idea of what they are doing. The farmer is being crucified by this government and the farmer seems to be going to his crucifixion like a lamb to slaughter, what a sad sad reality!!!
Tuesday, April 17, 2012
I am enraged at the comments of the Secretary to the Provincial Agricultural Ministry of the Wyamba Province.
How out of touch with reality is he? Does he not know that farmers always try to identify demand and plan cultivation of vegetables, and when the product comes to the market they discover that the price they were led to believe they will get in fact has dropped drastically.
The Tobacco Company has a very sophisticated system of outgrowers that the Agricultural Department would do well in emulating. Instead of blaming the farmer, see how his lot can be improved by the examples of success stories in practice. I have pointed this out in my earlier blogs too. They help the farmer all the way from seed to harvest and to top it all they guarantee the price for the quality they expect. It is important to a farmer that his risk factors are minimized.
I am physically unable to be at my fields this season due to my disability. I have rented my land to a farmer. He will plant tobacco as he has calculated that given the circumstances it is the best bet for him. Farmers are NOT irrational people,, they make decisions based on inadequate information, and training, which turn out to be wrong later. This is a perennial problem that has not been solved YET.
Frankly the fertilizer subsidy is a red herring and irrelevant. In fact it is counter productive to farmers as they make incorrect decisions due to this interference in the market dynamics. The Govt. has got all its calculations wrong. The whole Divi Neguma process, is about increasing self reliance, which then reduces demand of the farmers, leading to the farmer to lose money as the govt. HAS NOT found an alternative market for the excess supply, such as overseas.
The Divi Neguma program is going to devastate the farmers, in a way one cannot even imagine. The need of the hour is to immediately find an outlet overseas for the surplus, as a small surplus wipes out the price of produce.
Today, I have organically grown Okra and Pathola, and as I am only a small producer I have no market for it! There is no point in growing this or anything else.
Monday, April 16, 2012
There is no profit in growing paddy on an acreage that is less than 5 acres which comprise, 70% of the paddy land grown today. So REMEMBER the rice we eat is grown by people making a sacrifice!!! For no gain, not even enough to pay for a daily wage of Rs200. So what does the future hold?
I spent the best part of today, going through a file of Newspaper clippings of the farmers’ plight throughout the land this year, on not obtaining a fair price for their produce, with various calculations about the cost of production. It also shows in contrast, the costs rising steeply since 2005, whilst the guaranteed price from the state has not changed in this same period. They are clamoring for the Govt. to raise the minimum price to Rs40. The reality is at that price are we asking the state to suffer a loss on account of the farmer. The market price WILL NOT rise if the Govt. raises its price due to the surplus and due to people prepared to undercut as the state is unable to absorb all the surplus at that price, let alone even at the current price, where the state only purchases less than 10% of the harvest.
It is moot about the guaranteed price as in this season due to the surplus, most farmers had to dispose of their harvest at a lot less than this price. I am a paddy farmer so I know the pros and cons. And I also know that I have bought paddy a few years ago when we had a shortage, at prices at least 50% above the guaranteed price. So then it was viable at that price, and then we treated the guaranteed price as a floor or safety valve, where if the market price is higher, no farmer worth his marbles will sell to the state!!
The reality, in a period of shortage, farmers will not complain about price, in a period of surplus prices are rock bottom. Costs in the meantime continue to escalate. Is it any wonder if they just stop farming? The clamor for the state to pay Rs40 is because the relative cost increase and when compared with other costs, the price of rice is too low. A kg of paddy commands the same price as a bulath vita they say, when in few years ago you could buy 4 bulath vita with it!! In addition if one says the Govt. cannot spend money buying the paddy at higher prices, then the argument is that the Govt. is wasting huge sums on wasted PR exercises such as Dayata Kirula for personal glory of the administration at the expense of the people.
If one takes the example of Japan, the price of rice in Japan is about 5 times the world market price, as the Govt. has made a policy decision to assist the small rice farmer in Japan who farms small plots to stay in business by guaranteeing a price and holding this price at retail level, charging a very high tax on imports. Unlike Japan, where less than 4% are farmers, we in Sri Lanka are an agricultural nation still, and to improve productivity before we save all the marginal farmers from extinction, we have to determine what the policy should be.
Should we encourage larger lost sizes, as it is inevitable, when fewer people go into farming? I believe YES. We must change the land holding laws, and stop distributing land to landless people, except a max of 8 perches for a home. We MUST encourage professional farmers using latest technology to maximize yields. The small uneconomical farmer will disappear and will find alternative employment where they WILL BE better off. Until yields improve we will see this cry for a better price.
Yes it is true that in relative terms the price of rice has fallen substantially, and it should realistically be 50% higher. The Govt. does not intend to pass this on to the consumer as they are acutely aware of the other price increases the consumer has had to bear today, and adding rice to this will further turn them to bread, a lose lose alternative in a period of surplus.
The current argument goes that a family meal with a KG of rice will cost Rs60 and three loaves of bread the substitute will be Rs165, so it is fair to increase this to say Rs80, so both producer and consumer can be in balance!!!
If the price increases to Rs40 for paddy, it must also be remembered that the efficient producers of paddy will increase production. It called profit motive, and so the surplus will grow not fall. The hard decision whether to let the marginal fail is the political hot potato!!!
My contention is that we have skewed data of who this marginal population is. I do not believe anyone can survive on one and a half acres of paddy, let alone bring up a family of 4. So even today those who call for an increase only rely on paddy for less than 30% of income except for a small minority who we should identify and assist by other means.
In either scenario, before any of these are even contemplated, there HAS to be better storage facilities which I do believe the Mill owners will relish as they will obviously believe they will be the biggest beneficiaries of Govt. storage investment. After all it is they who will buy the shipments of paddy from this storage to run their mills with!!! However there has got to be safe storage for the additional paddy both for a reserve buffer stock, and to suck up the excess from the market, preventing a drop in the price of paddy and therefore rice. It is important that all these factors are taken into account for the farmer requests to be practical.
Sunday, April 15, 2012
The Miller’s tale in my previous blog entry illustrated quite clearly, that the Miller cannot be unseated by Government intervention, unless the state wishes to get further into a hole to help the farmer. As it is they are in the Rs50B fertilizer subsidy hole not to help the farmer as I have amply illustrated, but to get the farmer vote. I have also said that even if 20% of one’s income (not even profit) is from farming the person claims they are farmers and in the Census they will be counted as such even though he runs a small kade, where most of his income comes from.
The person or his wife does not want to mention the kade, to the census enumerator because they fear that samurdhi(welfare) benefit will be cut. So the census records a huge error in the number of farmers. The subsidy therefore is the sacred cow, dragging development of the country and of the farmer as well, as he is making incorrect agricultural decisions based on this false price he pays for this input.
In that context when farmers have no control over the price they receive and if market forces offer a price far lower than the cost of production, the state with the limited resources at their disposal cannot further subsidize them by either purchasing their produce or by increasing the unit price offered to them, without affecting other resources they are committed to.
Farmers at the margin will just have to change the crop, leave their land fallow, or rent it to another which may be the most practical, as at least there will be some net income and not an outlay. He will have to sell his services, for wages and the daily wage on labor is now nearly Rs1000 far more than these marginal farmers can expect to earn as their own boss in planting a few acres of paddy.
It is important that this reality is explained and all alternatives they could adopt are also explained. The fact that many farmers have for say 30 years grown the same crop in the same way, expecting the state to bail them out if something goes wrong is not a reason to continue in the same age old tradition. Times have changed, we now have a visible surplus of paddy over our consumption patterns and we must tackle this problem head on making hard choices, rather than delay them by way of subsidy or state purchase.It is time we drastically improve productivity, by using the large earthmovers to change the fields to those that large 4 wheel tractors can be used and realize the days of the two wheel tractor is over. We do not have labor to operate them let alone change the wheels each morning before putting the machine into the fields.
Saturday, April 14, 2012
A fictional story though based on the real world tale of a successful miller.
Once upon a time a man had a vision of making a lot of money, taking advantage of the disunity and lack of vision of the farmers, to buy paddy at rock bottom prices from the farmers and sell rice to the retailers at huge profit margins. In order to do this he realized that he must be able to control the price paid to farmers, and in order to do that he also realized he must be a big player in a rice growing area, and have access to free, that is preferably government stores for storing his paddy, and in order that he has minimal holding costs also relying on the state to purchase paddy and store it until such time he is able to buy it off them for his to use.
When he embarked on this venture, he was fortunate enough to find a friendly bank which also subscribed to this vision and obtained a loan facility to build the best Rice Milling factory in Sri Lanka. Its capacity was in excess of 60,000 tons per annum working round the clock. He also wanted to ensure that he used all the byproducts of the milling process. The chaff from the paddy was determined as the input raw-material to use for either the par boiling in large vats of the paddy or even easier to produce electricity, so that not only could he par boil, electrically but also run the whole factory and then some from the power generated from this chaff. He therefore built a power-station producing electricity and any additional power generated could be passed on to the National Grid, which was offering very high rates. He could therefore save a fortune in the high electricity tariff that was being levied at the time, and which was bound to increase with time.
There was one very important matter that had to be attended to in order that he obtain sufficient paddy to run his factory round the clock all year round. Every working day a minimum of 50 lorry loads of paddy are required to serve the mill, so how was he to obtain so much paddy? He had to do something about the competition. There were about 150 rice millers in Polonnaruwa district who were of comparative size, producing rice and selling them to the retail market. They were mainly Muslim owned and they had a network to market their rice through their intermediaries they had built up relationships with. With so many mills the competition amongst themselves for paddy was also high, which was of benefit to the farmers, as when there were shortages, the millers had to compete on price to get the paddy from the farmers driving the price of paddy up.
The answer was to buy them all up and shut them down!! This eliminates the competition at one stroke, and the farmers with little choice as to whom to sell to.
Hey presto that is what he did, and initially the foolish farmers were highly thrilled, as the Muslim miller was a feared man, who they saw as ready and waiting to buy their at the point of harvesting, as they had borrowed money from him for the cultivation and he waited on them to sell the paddy to him, as part of the bargain sometimes at prices below the market rate. To this day, some foolish politicians still say the Muslim miller who the farmer was indebted to was taken out by this magnanimous big miller who has helped us!
The small mills that are left are those that mill the paddy for home consumption, with none large enough to compete for the purchase of paddy. This is how the dominance of the small mills that provided employment to about 4,000 people in Polonnaruwa ended. Now the massive plant just employs 150 people just to take the paddy from the trucks and put them into the machines, and then take the bagged finished product and load them on to the trucks for delivery round the country to the retailers. Even the driver of the truck must get out of the truck at the gate and employees of the mill take it from there, weigh in and weigh out and give him the cash for the consignment at the agreed rate at the time the truck is returned.
The Mill makes Rs5M a day in profits if it runs at 80% capacity and so due to this incentive of running at capacity to maximize on profits, all efforts are made to ensure that the raw material keeps pouring into the factory day in day out. He can determine the price and there is no competition to purchase the paddy. So today when the state pretends to purchase as Rs28, when its stores are full, he buys at Rs23 and his cost of production of rice leaving the factory is Rs35. The same rice retails at between Rs 60 and Rs65 as the reputation of his brand, as he has the best machinery around for the milling, allows him to charge a premium price also.
His cost is so low unlike other mills because he uses all by-products and generates his own power from one. The rice bran commands premium prices of over Rs30 a kg, which is used for animal feed, the most nutritious part of the paddy milling process. It is a great if you can ensure your factory runs all the time, so the name of the game is to prevent the paddy from going elsewhere which may affect the inputs. There was a time, when check points were in operation, that the paddy could not leave the area, as the security personnel found every reason to not to let a lorry pass, insisting on them emptying the lorry to search behind for contraband.
He now uses wholesalers who do his stocking and transport for him to bring him the paddy, so they do the preparatory work of informing him of the quality, quantity and type so that he can have a smooth input, with the latter earning Rs2kg for that privilege. That is the reality and nothing can change it now.
Do not forget that as other mills are inefficient they cannot compete, so he has no worry about reducing his price, if he reduces his price theoretically other mills will go out of business, but why should he do that when he is making super profits of an oligopolist by just pricing at the market.
In order therefore for the excess paddy in Sri Lanka to be absorbed, the Govt. must purchase and store at least 6 months supply in large silos around the country and also have a plan to build a large mill for export quality rice, that requires special standards of quality control to compete with international standards, which this mill also has. This mill owner makes more money selling to the local market, the export market to him is actually more competitive!