Tackling agricultural surpluses – a new dynamic!

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.