24 September, 2020

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Macroeconomic Adjustment Needs For Food Crops Sector

By Hema Senanayake

Hema Senanayake

Hema Senanayake

On Monday of this week, President Maithripala Sirisena met with top level agriculturists and agricultural administrators of the country. It is a good sign that the president himself took a greater interest to emphasize the essential need of establishing a vibrant and viable non-plantation agricultural sector. I like it but there is a serious problem or an issue which has not been paid due attention. What is it?

Even if we assume that all technical issues in regard to productivity have been resolved, this important sector of the economy cannot thrive or cannot be made reasonably efficient and viable unless we make an important macroeconomic adjustment in regard to this sector. In fact the problem has reasonably been identified. But the required macroeconomic adjustment has not accurately been identified. It is about the prices or the marketing.

When farmers are about to harvest their crops, the crop could be big onion, potato, chilies or even something else, the prices in the market plunge. Farmers cannot sell their produce at a reasonable price. This has been a recurrent phenomenon year after year in recent times. This is a problem that needs to be resolved. How do we resolve this?

According to Dr. Harsha De Silva, other than the work of racketeer importers, there is a significant information asymmetry in this sector. This means that farmers are not getting true market information in regard to the demand. So what the farmers do is that all farmers begins to cultivate crops which had good prices in the previous season and as a result in the current season there would be more produce than the market demand. According to him, therefore the problem is not in the free market mechanism but in the information asymmetry. So, he promised during a TV program that the issue of information asymmetry would be tackled and resolved after the next government is established after the coming parliamentary election. Unfortunately, I am beginning to feel that this is a hypothetical solution for a hypothetical issue. The practical and true problem is a different one. Let me submit it.

Maithripala FBThe country has a goal in regard to agricultural produce. That goal is that we need to ensure self-sufficiency in producing certain agricultural products. For example we need to be self-sufficient in rice production or in chili production or in big onion production etc. If we want to be self-sufficient in producing crops identified by agricultural technocrats, then we need to produce them in abundance. You may please read the next point carefully. But abundance is something that free-market mechanism cannot ensure. I am not sure whether Dr. Harsha De Silva will agree on this point.

However, this does not mean that we need to ignore the market mechanism in regard to these crops. If we destroy or ignore the market mechanism again we will not achieve the goal of self-sufficiency while ensuring efficiency of the sector. Hence, let me explain my point through an example.

Let us assume that we want to produce big onion. Also, let us assume that the country’s big-onion demand is about 10,000 metric tons per season or per annum. As far as I know this is a crop that cannot be cultivated without imported seeds. This means that there is a technical difficulty for Sri Lankan onion growers in producing their own seeds to cultivate big-onion. Therefore big-onion seeds have to be imported. Therefore, the production of big-onion can be regulated if we can regulate the quantum of imported seeds or land area that cultivates onions. There are known administrative measures to regulate both. If this is done effectively, there will be no overproduction which would lead to reduce prices offered to farmers. In this case we do not need any adjustment to the market mechanism. But abundance comes with a little bit surplus production. This is where we need a macroeconomic adjustment.

If onion farmers had produced 12,000 metric tons, then there would be a surplus of 2,000 metric tons. If this surplus comes into the market the price would plunge. Hence the surplus needs to be prevented from coming into the market. Let us assume that the government absorbed the surplus and as a result market prices would prevail and farmers could sell their produce reasonably well. The purchase of surplus has nothing to do with the government buying big-onion under guaranteed price system. The purpose or the objective of purchasing the surplus is to maintain the viable market prices – and this is how that we can ensure self-sufficiency (abundance) in perishable food crops. The best example I found in regard to this kind of macroeconomic adjustment is from the United States.

When the United States wanted to be self-sufficient in wheat production, the U.S. government did the same thing. The government bought the surplus. The government stored the surpluses or found special uses for them. For example, surpluses generated in the United States have been shipped to developing countries as grants-in-aid. A few decades ago, under such a program Sri Lanka too got wheat flour from the U.S. under PL-480 agreement. And also it was rumored that they sometimes dumped the bought surplus in the sea.

After the objective of self-sufficiency was achieved in wheat production, the U.S. government made a variation on this program to reduce acreage put under wheat cultivation in order to limit the size of the surpluses. After 1973, the U.S. government stopped buying the surpluses. But still the U.S. agricultural sector is supported with various kind of macroeconomic adjustments. My point is that the purchase of surplus by the government is required in order to ensure abundance in any perishable food crop. Because, abundance is something that cannot be ensured under free-market mechanism even though the hypothetical question of information asymmetry is completely resolved.

Why I call the purchase of surplus by the government as a macroeconomic adjustment. It is not to complicate things but it is about defining the concept accurately and separating it from microeconomic adjustments which usually take the form of subsidies; but subsidies cannot resolve the question of ensuring abundance while stabilizing prices.

Now, you may apply this theory to all other crops on which we need to be self-sufficient. The macroeconomic adjustment that might be need for different crops can be vary, but such measures are required if we talk about self-sufficiency. Then only Sri Lanka will have a dynamic non-plantation agricultural sector.

Perhaps, certain free trade experts might advise the President that this kind of programs would violate WTO (World Trade Organization) rules, but that notion is wrong.

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Latest comments

  • 0
    0

    A Timely Proposal
    =================
    To witness the sight of disappointed and disgusted farmers dumping into way side drains of Dambulla, loads and loads of Wattakka, Puhul,
    Kekiri, water-melon etc. every year ( first seen by me thirty years ago ! ) is a heart rending tragedy. Surely, to their much expectant families they return empty handed.
    It is troublesome to imagine their grief!
    What a shame !!

  • 2
    0

    Excellent article, pragmatic and informative.

    Respective governments have hardly done much to improve the productivity of the farms and agricultural sectors of Sri Lanka. It is hoped that this government, specially considering that the President is from the farming districts will do something useful.

    Areas that need attention is the rehabilitation of tanks and water-ways, establishing better marketing channels to get produce faster and in fresher condition, doing away with unfair trade practices such as the “dambulla Mafia”.

    Let us also improve the fruit production in the country. Pears, oranges, rambuttans, Mangosteens etc can be better organized and implemented. We need good people to address each of these many issues. It is my hope that we will see changes that will definitely bring down the C.O.L and improve the well-being of the people.

    Incidentally, have you noticed that we can seldom pick a fruit like papaw, mango, wood-apple etc from the market that has not been subject to “forced ripening” by chemical application ?

  • 1
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    /My point is that the purchase of surplus by the government is required in order to ensure abundance in any perishable food crop./

    Very strange suggestion. Didn’t we learn from last January where ex government bought big onion in Dambulle, Doing so we can assure one thing, ensure whole lot perished away at public money.

    the government job is to facilitate farmers to grow in off seasons, reduce seasonal fluctuation for perishables.

  • 1
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    This has nothing to do with importing GMO-onion-seeds from the US, is it? It isn’t anything to do with keeping food production to a global-constant, by scientifically-engineering the production and costs in tandem with a global-formula, is it? Free-market mechanism should be exclusively a Sri Lanka enterprise; macroeconomic adjustment, entirely a Lankan venture.

    All Sri Lanka needs to do is increase the farm-lands and the population of farming community in proportion to her growing population. If they used exclusive Sri Lankan onion-seeds, and traditional farming techniques, there wouldn’t be surplus or deficit- they would balance themselves out. Natural and traditional insects and weeds, and traditional and natural farmer-work, and storing of excess traditional seeds would take care of such pitfalls.

    Instead, we are destroying (have destroyed) our farmlands for the global-market of industrial goods, and have almost killed our heritage. Not too late to turn the clock.

  • 1
    1

    It is not enough superficially extending support to agriculture unless you address the problems of rapid deforestation carried out by the previous regime, falling water tables and industrial pollution. The devastation caused by the previous regime will take many years to rectify.

  • 0
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    In Thailand there is a farmer’s radio station where they share information. TV is ubiquitous in Sri Lanka and can be used effectively to provide cropping information. This is a job for the Dept of Agriculture.
    Sri Lanka also is blessed with a variety of agro climatic zones where the cultivation seasons differ. If production is planned taking this into consideration some form of leveling of supply can be achieved.
    There is a big difference in intervention in the supply management of perishable products and non perishables like grain.
    One way of meeting gluts in production in perishables is cold storage and by preserving them in the form of canning and bottling.
    In countries like Japan and Korea preserved vegetables in polythene packs are affordable and popular.
    For this cold storage and packaging industry must be provided with incentives and investments in the industry must be encouraged.

  • 0
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    Sri Lanka should take examples from Thailand, a country well advanced in this filed and follow there principle of increasing Agricultural research. For example with extensive agricultural research they have acquired knowledge to manipulate the controlling the sugar content of fruits to suit the different markets like less sugar content. In the western market where the customers prefer less sugar. In Sri Lanka the research budgets are extremely low and the efficiency is affected as a result. They are under staffed and cannot spend time and money on the most important aspect, the research itself!

  • 0
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    This is another crazy proposal to increase corruption, wastage, expand the size of the inefficient public sector which is throttling the economy of Sri Lanka, with the Salaries & pensions absorbing nearly the entire tax revenue.

    Access to information on commodity prices week by week or month by month on the web for all the agricultural products and educating the farmers on how to access this information is the best way to guide the farmers. The second approach is to encourage the processing of perishable agricultural commodities by removing VAT from such produce, while discouraging imports. It may be of interest to the readers to know that 95% of the Tomato sauce produced locally is made from imported tomato concentrate, while mountains of tomatoes rot during the season.

    Lastly, the biggest problem facing the entire agricultural sector is the absence of weedicides to control weed growth, after banning practically all the cost effective weedicides and the absence of labour for manual weed control. If this issue is not resolved early, there will be no more excess of agricultural produce, as the production will drop by more than 20% year on year, until the problem is resolved.

  • 0
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    Increasing agricultural production to achieve self-sufficiency in food crops is good and should be attempted, but not at the expense of additional resources that have comparative advantage elsewhere. This include the importation of the extra quantity of food we require, if it is cheaper than producing it locally. But that does not mean that we should not allocate more resources to produce better scientists and give them more facilities to improve our technology and improve our extension system to reach the farmers who have not benefited from improved technology or provide more irrigation facilities to expand the land extent that has not been utilized. This also include the extra effort that has to be taken to initiate better storage, marketing and processing facilities, reduce the production cost with the use of organic fertilizer, integrated pest and disease management and subsidies for soil conservation.

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