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If exporting rice in the short run is a pressing political priority it could be done at positive private profits but not social profitsa
By Dr. Parakrama Samaratunga, Research Fellow – IPS
The Budget 2012 presented last month touches on agriculture at several points. However, the proposal to establish "four rice export zones" stands out as the most provocative, in an economic sense, amongst all of them. Sri Lanka has just achieved near self-sufficiency in rice. But the rice sector, including both production and consumption, is still plagued with a multitude of economic and social problems. Against this backdrop, a proposal to commit resources to promote rice export raises a number of questions ranging from "is it possible" to "at what cost and for whose benefit". This article seeks to take a deeper look into this complex issue.
Promoting exports of agricultural commodities is certainly a good thing and Sri Lanka should have done this before. But the question is whether rice is the right choice. Although we have touched self-sufficiency in a good crop year we have not yet become fully self sufficient, let alone being able to produce surpluses for export on a regular basis. Although "self-sufficiency", as defined in Sri Lanka, is not a necessary condition for becoming an exporter, having an "excess supply" or a surplus over domestic demand is a must. Therefore, in order to gainfully export rice without negatively impacting domestic consumption, Sri Lanka should (1) raise production over and above the present level, (2) through a process that is (socially) profitable and (3) find stable international markets for the surplus. A closer look at these three aspects is necessary for evaluating Sri Lanka’s possibilities of venturing into the rice export arena.
Increasing rice production
Increasing rice output to have a surplus is possible with area expansion, yield improvement, or both. The fact that Sri Lanka does not have additional area to be brought under rice is well known and if the government commits some prime land in four highly productive areas exclusively for the purpose of exports, that would reduce the supply to the domestic market. So, the only logical solution is to improve yield levels. But this is a challenge too. Rice yield levels have not been increasing significantly over the last two decades and the country’s average yield hovers around 4.5 mt/ha. The highest level achieved in high potential areas is 6 mt/ha and a quantum jump in Sri Lankan rice yields is therefore necessary to produce a surplus for exports.
Cost of production
Sri Lanka is a high cost rice producer. Cost of production of paddy in high potential areas is around Rs.15,000 per metric ton. At prevailing milling, transport and storage costs, this translates to Rs. 41,000 per mt of milled rice at Colombo. With the ceiling price of Rs. 70 per Kg of rice in the local market, the exporters are not likely to export at a lower price and the minimum price at which Sri Lanka can export rice will be Rs.70,000 per mt. As such, exporting rice produced in high potential areas appears to be feasible on private profitability grounds, if it can be exported at Rs. 70,000 per mt or more.
"Profitability" of rice exporting
However, the profit of Rs.29,000 per mt of rice achievable according to this data is a "private profit" accruing to various parties involved in the rice value chain. This private profit is possible because the state bears the costs of free irrigation, subsidized fertilizer (Rs. 25,675 per ha) and the artificially high guaranteed prices. Although private agents do not bear the above costs, the society (or the country) bears these costs for producing rice in Sri Lanka. Hence, in calculating the social cost all these should be added to the private cost. The "social profit" or the net gain to the country by exporting a metric ton of rice is the difference between Rs. 70,000 and this social cost, which is larger than the private cost mentioned above. This is not the perfect way to compute social profit but it is good enough to show that social profit is significantly lower than the private profit in the case of rice production in Sri Lanka. In fact, systematically conducted research has shown that rice is only marginally profitable at social levels even when its private profitability is substantial as in the case of high potential irrigation areas1.1.
Does Sri Lanka have the scale?
The third issue is whether exporting rice is feasible at a large enough scale on a sustainable basis. Sri Lanka produces medium and small (grain) non-sticky rice varieties for which there is no international demand. Most importers prefer long grain varieties with varying degrees of stickiness. Moreover, the quality of milled rice produced in Sri Lanka is lower than that of average quality rice traded as bulk exports. Other competing countries offer better quality rice of preferred varieties at the same price - for example, ‘Thai 5% broken’ at Rs. 70,000 per mt. Under such conditions the chances of securing an FOB price of at least Rs.70,000 per mt of Sri Lankan rice in the world market is bleak.
In addition to competitive prices and acceptable quality standards, another important requirement for being established as a food exporter is the ability to maintain a regular and orderly supply. As was mentioned earlier, Sri Lanka just managed to fulfill the domestic rice demand in good crop years and hardly produces a surplus maintained over the years. As such, Sri Lanka’s chances of securing an export market at this point in time are further reduced by this instability of production.
Yes, to niche markets?
All the above factors lead to the conclusion that Sri Lanka is not yet in a position to enter the bulk export market for rice. Nevertheless, Sri Lanka is already engaged in exporting to small niche markets. These markets comprise the Sri Lankan diaspora abroad who create a limited demand for "Samba" and red rice and another limited market for special varieties such as red pericarp long grain rice. Neither of these niche markets offer sufficient demand for Sri Lanka to embark on an ambitious export promotion programme. Moreover, the varieties for the second type of niche markets is in the possession of private firms and seed material is not available to the farming community in sufficient quantities.
If Sri Lanka wishes to be a steady rice exporter in spite of these problems some adjustments to the rice sector are essential. Obviously, these adjustments should be targeted at producing a steady surplus of better quality rice at internationally competitive prices. Although there are two possible markets to enter - i.e., average quality bulk export market and high quality special rice varieties market - the adjustments to be effected do not vary accordingly.
To be improved…
The first aspect that needs an improvement is the profitability at a social level which results from higher yields and reduced cost of production. This involves technical change in rice production which comprises breeding new higher yielding varieties and substituting the present high cost production techniques with low cost ones. Unfortunately, there is no short cut for this and the only way it could be achieved is through time consuming research efforts. Sri Lanka allocated only a marginal proportion of the GDP for agriculture research and extension during the last three decades2 and consequently, there does not exist a possibility of bridging the technological gap without investing in this area over an extended period of time.
The second requirement is that the surplus we produce needs to be of the types of rice that are in high demand in the world market. For bulk export, we do not produce the preferred rice varieties as the Sri Lankan rice breeding programme never attempted to breed such varieties which are not preferred by Sri Lankans. However, as new destinations for rice exports emerge, for example Africa, Sri Lanka may find an outlet even for lower quality grades. But exporting large volumes will only be a long run possibility. For the specialty rice category, Sri Lanka neither possesses any preferred variety nor do we have the right agro-climatic conditions to grow them.
Another aspect of quality is related to the post-harvest handling of rice. The milling quality of rice produced for the domestic market is poorer than what is expected in international markets. In fact, the cost of milling envisaged in calculating the profits relates to substandard milling. Producing better quality milled rice involves higher capital and operating expenditure, but this is a must if Sri Lanka aspires to enter the rice export market.
Conclusion
With this simple cost analysis, it emerged that an immediate or short run boom in rice exports is not possible within socially profitable limits. Private profitability could be increased through the continuation of the existing input and price subsidies as well as the introduction of export subsidies. If exporting rice in the short run is a pressing political priority, it could be done at positive private profits but not social profits. This means that the country as a whole would not be making a profit although various parties involved in the value chain will.
References
1. Rafeek, M.I.M. and P.A. Samaratunga (2000) "Trade Liberalization and its Impact on Rice Sector of Sri Lanka", Sri Lankan Journal of Agricultural Economics, Vol.3, No.1
2. Institute of Policy Studies (2008), "Does ‘ Foodflation’ Call for Agricultural Reforms?", in Sri Lanka State of the Economy 2008, Institute of Policy Studies, Colombo, Sri Lanka.
1 Rafeek, M.I.M. and P.A. Samaratunga (2000) "Trade Liberalization and its Impact on Rice Sector of Sri Lanka", Sri Lankan Journal of Agricultural Economics, Vol.3, No.1.
If exporting rice in the short run is a pressing political priority it could be done at positive private profits but not social profitsa
By Dr. Parakrama Samaratunga, Research Fellow – IPS
The Budget 2012 presented last month touches on agriculture at several points. However, the proposal to establish "four rice export zones" stands out as the most provocative, in an economic sense, amongst all of them. Sri Lanka has just achieved near self-sufficiency in rice. But the rice sector, including both production and consumption, is still plagued with a multitude of economic and social problems. Against this backdrop, a proposal to commit resources to promote rice export raises a number of questions ranging from "is it possible" to "at what cost and for whose benefit". This article seeks to take a deeper look into this complex issue.
Promoting exports of agricultural commodities is certainly a good thing and Sri Lanka should have done this before. But the question is whether rice is the right choice. Although we have touched self-sufficiency in a good crop year we have not yet become fully self sufficient, let alone being able to produce surpluses for export on a regular basis. Although "self-sufficiency", as defined in Sri Lanka, is not a necessary condition for becoming an exporter, having an "excess supply" or a surplus over domestic demand is a must. Therefore, in order to gainfully export rice without negatively impacting domestic consumption, Sri Lanka should (1) raise production over and above the present level, (2) through a process that is (socially) profitable and (3) find stable international markets for the surplus. A closer look at these three aspects is necessary for evaluating Sri Lanka’s possibilities of venturing into the rice export arena.
Increasing rice production
Increasing rice output to have a surplus is possible with area expansion, yield improvement, or both. The fact that Sri Lanka does not have additional area to be brought under rice is well known and if the government commits some prime land in four highly productive areas exclusively for the purpose of exports, that would reduce the supply to the domestic market. So, the only logical solution is to improve yield levels. But this is a challenge too. Rice yield levels have not been increasing significantly over the last two decades and the country’s average yield hovers around 4.5 mt/ha. The highest level achieved in high potential areas is 6 mt/ha and a quantum jump in Sri Lankan rice yields is therefore necessary to produce a surplus for exports.
Cost of production
Sri Lanka is a high cost rice producer. Cost of production of paddy in high potential areas is around Rs.15,000 per metric ton. At prevailing milling, transport and storage costs, this translates to Rs. 41,000 per mt of milled rice at Colombo. With the ceiling price of Rs. 70 per Kg of rice in the local market, the exporters are not likely to export at a lower price and the minimum price at which Sri Lanka can export rice will be Rs.70,000 per mt. As such, exporting rice produced in high potential areas appears to be feasible on private profitability grounds, if it can be exported at Rs. 70,000 per mt or more.
"Profitability" of rice exporting
However, the profit of Rs.29,000 per mt of rice achievable according to this data is a "private profit" accruing to various parties involved in the rice value chain. This private profit is possible because the state bears the costs of free irrigation, subsidized fertilizer (Rs. 25,675 per ha) and the artificially high guaranteed prices. Although private agents do not bear the above costs, the society (or the country) bears these costs for producing rice in Sri Lanka. Hence, in calculating the social cost all these should be added to the private cost. The "social profit" or the net gain to the country by exporting a metric ton of rice is the difference between Rs. 70,000 and this social cost, which is larger than the private cost mentioned above. This is not the perfect way to compute social profit but it is good enough to show that social profit is significantly lower than the private profit in the case of rice production in Sri Lanka. In fact, systematically conducted research has shown that rice is only marginally profitable at social levels even when its private profitability is substantial as in the case of high potential irrigation areas1.1.
Does Sri Lanka have the scale?
The third issue is whether exporting rice is feasible at a large enough scale on a sustainable basis. Sri Lanka produces medium and small (grain) non-sticky rice varieties for which there is no international demand. Most importers prefer long grain varieties with varying degrees of stickiness. Moreover, the quality of milled rice produced in Sri Lanka is lower than that of average quality rice traded as bulk exports. Other competing countries offer better quality rice of preferred varieties at the same price - for example, ‘Thai 5% broken’ at Rs. 70,000 per mt. Under such conditions the chances of securing an FOB price of at least Rs.70,000 per mt of Sri Lankan rice in the world market is bleak.
In addition to competitive prices and acceptable quality standards, another important requirement for being established as a food exporter is the ability to maintain a regular and orderly supply. As was mentioned earlier, Sri Lanka just managed to fulfill the domestic rice demand in good crop years and hardly produces a surplus maintained over the years. As such, Sri Lanka’s chances of securing an export market at this point in time are further reduced by this instability of production.
Yes, to niche markets?
All the above factors lead to the conclusion that Sri Lanka is not yet in a position to enter the bulk export market for rice. Nevertheless, Sri Lanka is already engaged in exporting to small niche markets. These markets comprise the Sri Lankan diaspora abroad who create a limited demand for "Samba" and red rice and another limited market for special varieties such as red pericarp long grain rice. Neither of these niche markets offer sufficient demand for Sri Lanka to embark on an ambitious export promotion programme. Moreover, the varieties for the second type of niche markets is in the possession of private firms and seed material is not available to the farming community in sufficient quantities.
If Sri Lanka wishes to be a steady rice exporter in spite of these problems some adjustments to the rice sector are essential. Obviously, these adjustments should be targeted at producing a steady surplus of better quality rice at internationally competitive prices. Although there are two possible markets to enter - i.e., average quality bulk export market and high quality special rice varieties market - the adjustments to be effected do not vary accordingly.
To be improved…
The first aspect that needs an improvement is the profitability at a social level which results from higher yields and reduced cost of production. This involves technical change in rice production which comprises breeding new higher yielding varieties and substituting the present high cost production techniques with low cost ones. Unfortunately, there is no short cut for this and the only way it could be achieved is through time consuming research efforts. Sri Lanka allocated only a marginal proportion of the GDP for agriculture research and extension during the last three decades2 and consequently, there does not exist a possibility of bridging the technological gap without investing in this area over an extended period of time.
The second requirement is that the surplus we produce needs to be of the types of rice that are in high demand in the world market. For bulk export, we do not produce the preferred rice varieties as the Sri Lankan rice breeding programme never attempted to breed such varieties which are not preferred by Sri Lankans. However, as new destinations for rice exports emerge, for example Africa, Sri Lanka may find an outlet even for lower quality grades. But exporting large volumes will only be a long run possibility. For the specialty rice category, Sri Lanka neither possesses any preferred variety nor do we have the right agro-climatic conditions to grow them.
Another aspect of quality is related to the post-harvest handling of rice. The milling quality of rice produced for the domestic market is poorer than what is expected in international markets. In fact, the cost of milling envisaged in calculating the profits relates to substandard milling. Producing better quality milled rice involves higher capital and operating expenditure, but this is a must if Sri Lanka aspires to enter the rice export market.
Conclusion
With this simple cost analysis, it emerged that an immediate or short run boom in rice exports is not possible within socially profitable limits. Private profitability could be increased through the continuation of the existing input and price subsidies as well as the introduction of export subsidies. If exporting rice in the short run is a pressing political priority, it could be done at positive private profits but not social profits. This means that the country as a whole would not be making a profit although various parties involved in the value chain will.
References
1. Rafeek, M.I.M. and P.A. Samaratunga (2000) "Trade Liberalization and its Impact on Rice Sector of Sri Lanka", Sri Lankan Journal of Agricultural Economics, Vol.3, No.1
2. Institute of Policy Studies (2008), "Does ‘ Foodflation’ Call for Agricultural Reforms?", in Sri Lanka State of the Economy 2008, Institute of Policy Studies, Colombo, Sri Lanka.
1 Rafeek, M.I.M. and P.A. Samaratunga (2000) "Trade Liberalization and its Impact on Rice Sector of Sri Lanka", Sri Lankan Journal of Agricultural Economics, Vol.3, No.1.
