Saturday, April 14, 2012

The Miller’s Tale (maha moal karaya – goviyage apaya neda!)

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!

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