Rising Rice Prices – Roots and Remedies
Rice has been the staple food and the main domestic crop cultivated in Sri Lanka since ancient times. Therefore, the production and availability of rice is closely linked to food security as well as the political stability of the country.
Since independence, all governments have focused on the goal of achieving self-sufficiency in rice. A significant amount of resources are allocated for irrigation water supply, land development, research on technological improvements, agricultural mechanization and support facilities such as credit, subsidized inputs and farmer welfare measures.
As a result, paddy cultivation and rice production have increased steadily, with Sri Lanka achieving near self-sufficiency in rice and rice imports falling to insignificant amounts. Despite these achievements, the problems related to the paddy and rice sector continue to occupy a preponderant place among the socio-economic challenges of the country. Currently, supply shortages and rising retail prices have caused serious social unrest. In this context, this blog identifies the current problems in the rice sector and suggests some policy recommendations.
Dynamics of demand and supply
Rice is an essential consumer good with inelastic demand in the local market and the consumption of rice is important not only for the economy but also for Sri Lankan culture. Based on a per capita consumption of 104.5 kg per year in 2016, the annual national demand for rice was 2.1 million tonnes, which is equivalent to 3.2 million tonnes of paddy.
After adjustment for seed paddy, processing, waste and other requirements, Sri Lanka needs to produce 4 million tons of paddy to meet the above national demand. No significant change in national needs is expected in the near future due to the balance between the gradual reduction in per capita consumption and population growth.
Sri Lanka has achieved this target in the past two years and is on track to meet the same target this year as well. The Yala 2020 production of 1.9 million tonnes of paddy (equivalent to 1.3 million tonnes of rice) produced around September 2020 was enough to feed the country for about six months.
The Maha 2020 production of 3.1 million tonnes of paddy (equivalent to two million tonnes of rice) produced around March 2021 is sufficient to feed the population for about nine months. The Ministry of Agriculture has estimated a harvest of 1.5 million tonnes for Yala 2021. Therefore, no current or speculative rice shortage is expected.
The rice market has a delicate pricing system which is associated with availability in the market. It is linked to the seasonal harvests of Maha and Yala causing a strong fluctuation in prices in certain months of the year. From January, the prices of paddy and rice gradually decline and reach their lowest in March with the great Maha harvest. It increases slightly from April and experiences a minor drop in July-August when Yala’s minor crop hits the market. The price increase for all types of rice is strong enough from September to peak in December and start falling again in January continuing the cycle. The difficulties faced by consumers due to the sharp rise in the price of rice in September-January is one of the most politically sensitive issues in the country.
In recent times, serious disruptions have occurred in the usual pricing mechanism due to cooperative decision-making and anti-competitive practices of the big and major millers who have large storage facilities, purchasing power and economic stability. Farmers are inherently disadvantaged in the market as a large number of farmers sell their crop at the same time due to the lack of paddy storage capacity and credit relationships due to the initial capital requirement during uncertain months .
Cooperative decision-making by large millers who manage a sufficiently large share (around 33.8%) of purchases in the paddy market gain an oligopolistic advantage by releasing large stocks of rice to the market during the harvest period to create a glut so that they can buy paddy at minimum prices. In addition, their anti-competitive practices such as exclusive supply agreements, horizontal cartels and forcing farmers to sell paddy only to themselves prevent small millers from buying paddy. The reduction in stocks then creates a shortage of rice to keep the price high until the next harvest period.
Different command and control methods such as ad hoc price controls and emergency regulations have been used by successive governments to control the market. These were easy to implement, but proved ineffective. Therefore, measures that ensure facilitation, monitoring and regulation should be key government strategies in the rice and paddy markets while allowing market forces of supply and demand to determine prices.
Promoting competition is the key to limiting the oligopolistic market power enjoyed by the big millers. However, small and medium millers will find it difficult to survive in the market due to stiff competition from the big and prosperous who dominate the space with a wide range of products, including high end and mass markets. Thus, small and medium-sized flour mills should be empowered, through credit facilities, to purchase paddy and modernize their mills in order to achieve economies of scale and a production cost advantage.
Moreover, organizing them under an appropriate collective business model such as cooperatives will facilitate competition while providing a sustainable solution. In the meantime, as a short-term measure, the Paddy Marketing Board (PMB) may increase its purchases so that these can be ground by small and medium millers on a quota basis and distributed by Sathosa.
While the Consumer Affairs Authority Act No. 09 of 2003 was designed to control anti-competitive practices that harm consumers, it is constrained by limited resources and information asymmetry. This can be minimized by establishing a market information system with mandatory reporting under Section 12 of the Paddy Marketing Board Act No. 14 of 1971, which provides for the recording of data on the production, sale, supply, storage, purchase, distribution and milling of paddy and rice. .
Besides anti-competitive practices, the cost of paddy production and bargaining power are also factors that determine the price received by farmers. Modern technologies should be promoted to optimize the use of inputs so that the cost of production can be minimized. The current organic farming policy could be streamlined to gradually reduce reliance on expensive imported inputs such as chemical fertilizers and agrochemicals.
Small farmers should be organized into appropriate operational units such as Japanese Agricultural Cooperatives (JA) so that their agricultural efforts are coordinated and consolidated to increase their collective bargaining power. Decisions regarding the importation of rice should be based solely on the market conditions given by the proposed market information system. These strategies can stabilize the prices of paddy and rice without severe fluctuations and make rice cultivation a viable livelihood with sustained income for small farmers.
The author is a researcher at IPS and is interested in agriculture, agribusiness value chains, food security, and environmental and natural resource economics.