By W A Wijewardena –

Foodflation raising its ugly head

As at end-January 2020, both price indices that record Sri Lanka’s consumer price levels have shown a sudden upsurge mainly due to increases in food items, a situation known as ‘foodflation’. The Colombo Consumers’ Price Index or CCPI that covers only the consumers in the Colombo District accelerated 6.2% by end-February compared to the price levels that had prevailed a year ago. While non-food items had recorded an increase of only 2.9%, the food items had increased by 14.7%, up from 6.3% two months ago.

Following the same trend, Sri Lanka’s National Consumers’ Price Index or NCPI that covers the whole island too recorded an increase of 7.6% by end-January, compared to 1.2% a year ago. Of this, the non-food items rose only by 3%, while food items steeped by 13.7%, up from again 8.6% a month ago. According to NCPI, the main culprits have been vegetables, coconuts, red onions and fresh fish which had recorded a sharp increase compared to their levels in December 2019.

In Colombo District, in addition to these four culprits, the prices of three popular varieties of rice too had recorded sharp increases compared to the prices that had prevailed a year ago. Against this foodflation, the consolation for consumers had been the slower rise in the non-food items that had been included in the indices. That component in NCPI constitutes 56% of a consumer’s budget.

This time, it isn’t a seasonal issue

Food prices are seasonal and therefore with the expected entry of the Maha crop to the market in about two months’ time, they could be expected to reverse. However, in this year, in addition to the seasonal factors, they have been adversely affected by the prolonged drought and warm weather conditions in most of the food producing areas in the country. This is also shown by the reversal, by the end of the year, of the downward trend in the producer prices which had been the salient feature till mid-2019.

According to the Producer Price Index or PPI compiled by the Department of Census and Statistics, the prices faced by the agricultural producers continued to fall till August 2019. Accordingly, the index value for this sub-category which stood at 160 in December 2018 fell to 138 by August 2019. But since, then, it took a sharp upward trend ending at 162 by December. This is a 17% increase in the agricultural producer prices in the last four months of the year.

Though we do not have the later data on producer prices, the increasing trend portends that agricultural prices will continue to be high for a few months more, despite the entry of the Maha crop to the market. This is bad news for the government and sweet-music for the opposition, since Sri Lanka’s voters are mostly driven by emotions surrounding the stomach and not by rational views that rule the head.

Suggestion to eliminate the middleman

The reaction of President Gotabaya Rajapaksa, fondly called Gota, to this unwarranted increase in food prices happens to be based on his firm belief that prices are high because of monopolistic manipulation of prices by a few wholesalers. Addressing the officials of the Ministry of Mahaweli Development and those from the Trade Ministry, he is reported to have directed them to intervene in the market and put an end to the ongoing price increases.

He has drawn their attention to the structural issues in the vegetable market in the form of vegetables being transported to specially established wholesale markets – known as special economic centres such as Dambulla – from producing areas and then being re-transported to those areas for use by consumers. In this two-way transit, according to Gota, a large quantity of vegetables gets destroyed causing vegetable prices to remain high even when the supply conditions may have improved significantly.

He has also suggested that lands belonging to the state, especially those assigned to plantation companies, should be used to cultivate vegetables thereby increasing their supply to the market. But this cannot be fulfilled before the elections and therefore, it can be considered as a medium to long-term remedy to the problem.

The charge against so-called oligopolistic paddy-millers

The general perception of many is that the middlemen are exploiting both the producers and consumers. As a result, they claim that producers are getting a price lower than what they should get. At the other end, consumers are paying a price higher than what they should generally pay. Hence, the suggestion is either to eliminate the middlemen or handover the middlemen’s functions to a governmental authority. This charge is specifically levelled against the middlemen who are operating in the paddy/rice markets in the country.

It is generally believed that a few large-scale paddy millers operate in the market as an oligopoly and control both the quantity and the price of rice to the detriment of paddy farmers as well as rice consumers. This ‘anti-middlemen sentiment’ is being cultivated among even the students studying in the commerce stream. I have observed that one of the most popular items performed by commerce students on stage in their Commerce Day Events is a short drama depicting the curse of the middlemen in the market. This is despite the fact that they themselves train to be middlemen, since commerce means buying and selling, the job of the middlemen.

The exploitation theory not supported by evidence

This popular claim is not borne out in empirical evidence. Two economics dons attached to the University of Colombo – S.M.P. Senanayake and S.P. Premaratne – have worked backward from the retail price of rice in two markets in the Western Province in 2012 – one in Kirulapana and the other in Gampaha – to the price received by paddy farmers to identify the margins earned by each participant in the rice/paddy value chain in Sri Lanka. This they had done in a paper submitted to Australia-South Asia Research Centre in 2016.

In both cases, out of the price paid by consumers, paddy farmers have collected between 80 and 82% of the final price. The balance has been earned by wholesalers, retailers, millers, transport agents and collectors in the supply chain. The cost of processing by the miller has been about 7%, while his margin has been only 3% of the final price paid by consumers.

In the case of vegetables, the comparison of the farmgate price with the market price paid by consumers reveals that there is a price-gap of about 40%. However, this high price gap is due to the high transport costs, on the one hand, and the high waste of vegetables, estimated to be around 40%, in transit, on the other. An improvement in post-harvest handling systems through improved technology will certainly reduce this high waste costs, thereby narrowing the price gap significantly. It would benefit both the producer and the consumer.

Foodflation increases the cost of living

Foodflation causes an increase in the cost of living of people. In the case of the present increases in food prices, the increase in the expenditure by a consumer on food items from end-August 2019 to end-January 2020 has been Rs. 2,010, according to NCPI. It records an increase of 11% on the food budget of a consumer over the budget as at end-August 2019. This is a significant increase and intolerable by an average consumer in the country. To relieve the consumers of the high cost of living two measures can be taken by the government. Immediately, it can increase the market supply by permitting imports to come into the country.

However, since there is a time lag of about one month for any imported food item to reach the market, the relief to consumers will be delivered not earlier than early April. But, by that time, the Maha crop will come to the market and if the market is inundated by both the locally produced food items and imported ones, the prices would fall worsening the conditions of the local farmers. Hence, the decision to import food items should have been taken some time in November last year and, therefore, it is too late to resort to that strategy now.

The other strategy is a medium to long term strategy to increase the productivity and the output in food items so that the market would be kept supplied by a bigger quantity of food items in line with the increase in the population. The improvement in the productivity in food items is essential to keep the costs of production in check and prevent them from percolating to the markets through an increase in the supply prices.

A technical report covering all the subsectors in the agriculture sector

A technical report released in May 2018 and authored by Verite Research for the National Planning Department and the European Union on Sri Lanka’s agriculture sector has listed out the measures to be taken in the medium to long-run to improve both the productivity and the output. It is a comprehensive report covering all the subsectors in Sri Lanka’s agriculture: paddy, field crops, vegetables, fruits, tea, rubber and coconut, sugar, floriculture, inland fisheries, livestock and agroforestry.

The previous government did not consider it necessary to implement these strategies despite it being commissioned by it. As a result, Sri Lanka has already lost nearly two years without a comprehensive agricultural implementation strategy. In this background, the present government run by Gota cannot ignore it since the problem has hit the country head-on today. The longer the country would postpone the implementation of these measures, the worse would be the destiny of its agriculture sector.

Rice paradox: produce more and become bankrupt

Rice is a part of Sri Lankans’ DNA and therefore, early measures are needed to address the existing issues faced by the sector in the style of a ‘rice paradox’. With low productivity, the paradox faced by Sri Lanka’s paddy farmers is that when the harvest is bountiful, they become bankrupt due to prices falling below the production costs. Hence, it is to the benefit of farmers if the country’s rice output is low.

However, this does not sit well with consumers who are great rice eaters compared to their counterparts in other major rice eating countries. On average, a Sri Lankan eats about 110 kg of rice a year, compared to a world average of just 54 kg. Hence, it is necessary to resolve the paradox in the rice sector if it is to sustain.

Diversify the use of rice

The permanent solution lies in improving the yields of rice farmers, on the one hand, and creating a demand for rice as an industrial input, on the other. The former will help farmers to beat the rising costs of production. The latter will facilitate Sri Lanka to absorb a glut in the market, use it to produce industrial goods and export such goods since it cannot export its short grain rice as a food item. If there is no surplus of rice for industrial use, such surplus can still be generated if Sri Lankans learn to eat less rice and more meats and fats.

Even a reduction in average per head consumption by, say 20 kg, will generate a sufficient surplus of about 42 million kg of rice for this purpose. These are long term strategies based on proper awareness, changes in relative prices of rice as against meat and inventions made through the development of science and technology base of the country. The science part is the handiwork of a new subject area called ‘biotechnology’ which has now been added to the curricula of some state universities and private higher learning institutions.

Rice: the water guzzler  

The problem with rice compared to maize or corn is that it is a ‘water guzzler’. In farming, paddy fields are flooded by water and about a half of that is lost through seepage and percolation. It is the balance half which is used by the rice plant for its own purposes, known as evaporation and transpiration.

The researchers at the Manila based International Rice Research Institute or IRRI have computed, after verifying a vast amount of data collected from field surveys conducted throughout the globe, the amount of water used by rice plant to produce 1 kg of rice. Total flooding of the paddy fields from sowing to harvesting will use about 2500 litres of water to produce 1 kg of rice. About a half of this is lost through seepage and percolation; accordingly, the real use of water by the rice plant to produce 1 kg of rice is about 1432 litres.

Imagine the price of rice if water is costed at one rupee per litre. Fortunately for consumers, water is supplied to rice farmers almost free of charge either through rains or government sponsored irrigation schemes. But, shortage of water due to droughts will affect both the production and productivity of rice farmers. This is a serious problem in many rice producing nations like China, India and Sri Lanka.

Developing drought resistant paddies

Scientists in IRRI and in leading universities are now engaged in developing water-efficient paddy cultivation methods. IRRI has come up with an ‘alternative wetting and drying’ method. In this method, a field is flooded for a few days and after that water is used up, kept it dry for a few more days before it is flooded again. This method is to save about 30% of water normally used in paddy farming without affecting the rice yield.

Another method suggested is sprinkling water to the field producing ‘aerobic rice’ just like watering a leafy vegetable field. This would save water up to 50%, but there would be a reduction in the output by about 30%.

Hence, it is useful in cultivating paddy in relatively water-scarce regions. But scientists in the University of Western Australia or UWA have attempted at developing a new rice variety which is drought resistant so that it could alleviate the drought-stress experienced by paddy plants. This is the best method of cultivating rice in arid places like Hambantota or Mannar districts in Sri Lanka.

The solution lies in improving farmer productivity

The long-term solution to foodflation is to improve productivity and yield levels in main agricultural crops in the country. For this, Gota needs a medium to long-term strategy. The current approach outlined by him has been to win the elections by pacifying both the consumers and farmers. While keeping it as the immediate objective, Gota should assemble all the stakeholders in the agriculture sector of the country to a common platform and get them to implement a comprehensive agriculture reform strategy targeting medium to long-term.

*The writer, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at waw1949@gmail.com