The food crisis - a way out

by Lloyd F Yapa

A food crisis is upon us in this country- without warning? No, not at all.

In true Sri Lankan style we seem to blame it all on external circumstances like the depreciation of the US $, higher consumption in countries such as India and China due to their rising prosperity, the trend towards use of grain in the manufacture of ethanol as a substitute for petroleum, the price of which is sky rocketing and global warming.

We do not realize that the crisis here has been gathering momentum in this country during the last 50 years or so due to the mismanagement of the economy in general and of agriculture in particular by our politicians in collusion with policy makers.

The policy followed by the country with regard to rural agriculture during the last few decades has failed. This is the main reason for the crisis and the persistence of high poverty (and malnutrition) levels especially in the Uva, Central and the Eastern provinces as well as the war ravaged and tsunami hit areas of the country.

Objective

The prime objective of our policy with regard to rice production (and agriculture) has been self sufficiency; higher productivity, an adequate return to the farmer or his wellbeing have always come second or way below.

In other words policy attributes like the Guaranteed Price Scheme (GPS) and compulsion to grow paddy only in irrigated lands have tended to ensure for the pampered voter/consumer his staple at a low price and not a fair return for the farmer who has been extended some mercies like the fertilizer subsidy with a good dose of bribery and corruption by officials and politicians.

This has been made worse by right royal rips off by input suppliers and monopolistic millers hiding behind selfish politicians.

The demonstrated ability of the principle of large scale production to reduce costs, as well as that of the price mechanism and markets determined by supply and demand to ensure a fair price both for the farmer and the consumer - most of the time, when there is no market failure have been ignored.

In addition neglect in the provision of extension services and interference with the market by an incompetent bureaucracy guided by semi literate politicians have ensured government failure in the form of low returns and poverty for the farmer and ultimately a food crisis for all consumers in the country.

Inertia

It is not only the officials and the politicians who are responsible for the crisis. Professionals who should know better have been watching the worsening crisis from the side lines with intellectual inertia.

In fact at a seminar on the subject held recently, a leading professional presiding over the meeting declared with simplistic pomposity that the best solution is to ban the import of all food items as ‘even a broom stick planted on this blessed soil will take sprout’- meaning that scarcity will compel everybody in this country, to produce enough food!

He and others present substantiated the statement by saying the country was the granary of the East in ancient times, (meaning why can’t it be done now?).

They ignored the arguments of a person from the audience, who tried to explain that the best course of action, in this day and age, to produce enough food was for the state to think in terms of ensuring a remunerative return for the farmers, while encouraging large scale production and enforcing competition as well as innovation among them, intervening only to support the market mechanism to work smoothly, strengthen infrastructure and to cushion the poor from market failure.

Way out

Let us try to elaborate on this line of thinking. First if there is a food crisis, the country has to arrive at a short term solution, (as hungry mobs will not wait for time consuming permanent solutions).

The logical short term action is to induce farmers to increase the acreage under paddy by offering better prices/returns, a good extension service and water for irrigation.

In addition home gardening to produce other food varieties can be encouraged by providing quality planting material and, an efficient extension service; (no, not by banning the import of all food items).

Government agencies can also maintain buffer stocks of essential food items like rice to be released to the market when prices shoot up; but this needs careful planning and monitoring of supply and demand conditions.

Study the value chain - remove the kinks

Permanent solutions require medium to long term action. For this purpose study the value chain in respect of food production - from input supplies to primary production to storage, processing, distribution and marketing - wholesale and retail trade and remove the kinks.

The first of these kinks may be that around 80% of the rice farms are less than an acre in size - too small to be viable as paddy cultivation is essentially a large scale operation.

Therefore introduce land reform (first on a pilot scale) i.e. give ownership (and clear titles) of the land to farmers to enable those who find themselves making losses, to sell the land to others so that farms of a larger size can emerge.

Fortunately this is not a difficult task since over 80% of the land is owned by the state. If there is a fear that most farmers will sell their land and join the queues of the unemployed, encourage farmers to form corporate bodies like joint stock companies; in order to gain economies of scale.

Such companies should control a large area (preferably a geographically and socially uniform area of about 4000 acres).

They should not be compelled to grow un-remunerative crops; if growing paddy is not profitable, careful planning and incentives (for growing and processing on a large scale and differentiation of products to earn high prices) can be used to make it remunerative.

In any case, the state has to support these companies until they can stand on their own feet, like other well-run businesses in the country.

Infrastructure and services

Then provide the rural areas with infrastructure facilities like well maintained roads irrigation works, electricity and services like credit on reasonable terms, an efficient extension service, transport, storage, milling and marketing facilities.

At the present time government agencies (both central and local) tend to spend very little on maintenance of infrastructure facilities not only due to scarcity of funds but also due to over spending on unproductive vote catching welfare programmes and on corruptible (large) projects.

Widespread corruption with regard to award of maintenance of contracts leading to low quality repairs has also to be eliminated. (At present 30-40% of perishables transported is reported to be lost due to absence of packaging and poor road conditions)

Provision of inputs like seed, planting material, chemicals, extension services as well as milling and marketing by the private sector should be regulated to maintain quality, reduce costs/prices and prevent the sale of harmful substances.

This is the responsibility of state agencies although it does not mean that they should take over such services; at present officialdom is too incompetent and inefficient to do so due to the politicization; that is why introduction of good governance, especially separation of powers among the legislature, the executive and the judiciary (through the implementation of the 17th Amendment) to eliminate politicization of the public service (and the courts) is essential.

Money lenders with their usurious practices still hold sway in rural areas. Sri Lankan banks should therefore be roused from their slumber to spread out into the rural areas and develop schemes to lend on collective guarantees of groups of creditors like the ‘grammeen’ banks of Bangladesh since the poor do not posses assets of high value.

Currently milling of paddy is reported to be a monopoly in the hands of a couple of tycoons with political backing enabling them to dictate the selling prices of rice.

For open markets to function smoothly to deliver a fair price to the producer and sell a product to the consumer at the lowest possible price, competition among suppliers (as well as buyers) has to be enforced by law.

Such pressures will induce producers/suppliers to reduce costs and sell the produce at the lowest possible price so that they could win the largest possible market share. They will also at the same time be pressured to innovate to differentiate the products e.g. by increasing quality and packaging to secure a premium price, thereby increasing their profit margins.

This is why competition policies including anti trust/monopoly legislation (plus innovation policies) have to be enforced with impartiality, (for which good governance has to be practiced as stated earlier).

Marketing

Now let us take up the question of marketing of farm produce. Earlier we stated that a smoothly functioning open market could ensure that the produce is sold at a fair price to the consumer and the required quantities are produced (the state will of course have to keep up a vigil to ensure that consumers are not exploited in any manner and that there is fair competition among the suppliers by appointing a regulator).

In fact it is now reported that farmers are increasing the area under paddy in response to the prevailing high price of rice. What is implied here is that there need not be a rigid instrument like the GPS for this purpose; no one can divine the right price at which the demand can be met and a fair return is ensured for the farmer; only an efficiently functioning market can meet the challenge; if the price is too low and hardly meets the cost of production, the farmer will not be motivated to produce and supply a higher quantity of a better quality.

However, marketing is not a mere matter of supply and demand only; products should conform to the needs of consumers, be delivered at the right time and at the right place by informing the consumers how much and what and where it is available and what price.

This is where information and promotion come in along with branding to satisfy customer preferences, to secure premium prices. This cannot be delivered by officialdom even if they are efficient and honest.

It is obvious that farmers with small holdings too cannot deal with such a process due to paucity of resources and expertise.

Joint stock companies

The joint stock companies that we referred to earlier could be vested with this responsibility as they would be in a position to secure the required inputs for the purpose such as credit, the expertise, the equipment and other assets, being large corporate bodies recognized especially by banks. They will even be able to undertake the milling of paddy and other types of processing as well.

Product oriented urban clusters

Since they cannot be expected to undertake all the operations in the value chain concerned another instrument has to be devised and that is the urban cluster or township consisting of other enterprises dealing with various services ranging from research, extension, ploughing, transport, storage, milling/processing, packaging, wholesaling and retailing.

This is in line with the concept of integrating the vertical functions in the value chain from supply to production, distribution and marketing to reduce costs practised by the Japanese companies like Toyota.

For this purpose the rural areas have to be divided into large geographic zones where certain crops which can earn the highest possible margins could be cultivated on a large scale.

A town in the centre of the region will have to be developed to service the production in the zone.

For example if the area around Ampara is best suited for paddy production, Ampara town can be developed as a service cluster/centre, the planning and the provision of infrastructure of which is the responsibility of the state; the private sector could be incentivised to undertake the rest of the work/services required.

The whole system could be commenced as a pilot project so that the experience required for extending the idea to the rest of the country could be acquired.

Benefits from clusters

Product oriented urban clusters will not only provide the sophisticated services required by the primary producers but also will extend the concept of large scale production to reduce costs.

They will also provide employment to those exiting agriculture due to various reasons. Thus it will increase the productivity of agriculture as well; currently it is quite low due to the high man/land ratio of the sector (as high as 31% of the labour force).

Above all, such an approach to development will increase the incomes of rural populations. Higher rural incomes will increase the demand for various industrial goods and services.

The already developed areas like the Western Province will respond by producing more goods and services. Sri Lanka’s economy will then begin to grow faster especially if an appropriate policy mix to ensure stable economic policies and open markets (supported by good governance and peace) is introduced along with strategic planning to suit changing conditions.

If the state could at the same time introduce measures to ensure an equitable distribution of incomes as well as opportunities for upward mobility (like quality tertiary education), poverty levels could also be slashed.