Wednesday, February 10, 2016

A possible solution to the impending Paddy Purchasing and Price Fixing Conundrum

10th February 2016


It was a pleasure meeting you at dinner last night, and as promised, I am summarizing how I see the impending paddy crisis of the next two months until the harvest is over by Sinhala and Tamil New Year, along with a possible solution. It must be remembered that this issue is a recurring one and has been for as long as we have been self sufficient in paddy production, and so it is not a permanent solution, but one to achieve TWO main objectives without delay.

The problem was further aggravated by the purchase of 250,000 tonnes of rice from overseas at the closing stages of the Mahinda Rajapakse administration, with the attendant corruption scandal and Sathosa, and tonnes of rice rotting, unfit for human consumption, and in some instances for even animal consumption. Waste of public resources has been the order of the day under that administration, and it is time we identified the problem and provide solutions that are at the lowest cost to the producer and the consumer, both of whom are caught in a trap created by the unscrupulous businessmen, taking advantage of the lack of coordination and chaos created by Govt. policy gone completely berserk! 

1                   To ensure that the Govt. is able to absorb and store the paddy that the small farmer wishes to sell to the Govt. without agitation and the opposition using it as a weapon to incite public discontent.

2                   That the Govt. can promise the consumer the benefit of a price reduction in the basic staple of our Country, at least by a drop of Rs15/kg, without the producer farmer being hurt by a reduction in income.

Suggested Plan to solve issue 1

1                      A bumper harvest is forecast this Maha season, and the relevant Govt. institution can give the policy makers, the volume by District of what it will be. It is also best to forecast what the expected purchases of Paddy from each District will also be as offered by the small farmer, so that the treasury can allocate the necessary funds for the purchase without the delay to prevent a repeat of the agitation that took place last season.

2                      A further report is required on how this purchase will be stored in Govt. or private warehouses, without farmers having to queue for days outside warehouses that have closed their doors due to lack of space etc. It is very important that the storage space is reserved in advance and responsibility for ensuring this taken by the relevant officials.

3                      A detailed report must be prepared and updated weekly until the end of the purchase period, to keep abreast of the status, so action can be taken immediately if there are changes to the original forecasts.

Suggested Plan to solve issue 2

1                   Araliya Rice, (Dudley Sirisena) and Nipuna Rice (Siripala Gamlath) work together to control the price of Rice in Sri Lanka. In an impending situation of a bumper harvest, the word is out that prices are likely to fall, and the farmgate prices offered are ALSO set by this duo. Currently it is between Rs 20 and Rs22 per kg.
2                   The govt. guaranteed price is Rs38/kg dried and brought to their stores, say a Rs16/kg difference. That is for a maximum of 2000kg for a farmer. Any excess will anyway be sold at the prevailing market price, unless the farmer is financially and storage wise able to keep the paddy with him.

3                   On the basis that there has been a sudden drop in price of paddy, the Govt. MUST insist on price controls to bring the maximum price down by Rs 15 by showing quite clearly to the millers, that they can still make a good profit even at the lower price, as their input cost has come down significantly.
4                   The millers will play hardball, as they know the Govt. does not have the resources, or milling capacity to compete with them, by buying at higher prices at the farmgate, and milling it and selling Rice through Sathosa at the revised price to force a price reduction.

5                   Further the millers know the Govt. does not have the warehouse space to buy to force the price up, or to compete with their agents in purchasing excess production. The laws of perfect competition do not apply here, due to the fractured state of the market with the rest of the milling unable to organize themselves as a counterweight to them, and tendency of those who can hold on to their harvest till prices rise, will do so.

6                   Unless forced to sell, the two millers can refuse to sell their rice at the lower price, and thereby create a scarcity and maintain a high price, negating the plan to reduce the cost of living, by lowering the Rice price.

7                   The only solution to force this price reduction, is to come to an agreement with 20 smaller millers for them to mill the paddy of the Govt. and the Govt. to sell this rice at Sathosa at the reduced price, but ensure that the Sathosa network DO NOT RUN OUT of rice. They will then be able to inform the public that they reduced the price, and the two Oligopolists will also be forced to do so, if they are not willing to agree to the Govt. proposal suggested earlier.

The Impending Paddy Crisis – Updated as at 10th February 2016

Facts as I have been able to glean from my sources in Polonnaruwa. I returned from a week’s stay at my home in Minneriya on 7th February 2016.

1                   The Government is expected to begin purchases of Paddy effective 20th February 2016. The purchase price farmers are expecting is Rs38/kg Nadu and Rs41/kg Samba.

2                   The two biggest millers, have just emptied the Govt. stores of Paddy stocks, with Araliya purchasing Samba at Rs40/kg (purchased 8 months ago at Rs50/kg) and Nipuna purchasing Nadu at Rs33/kg (purchased 8 months ago at Rs45/kg) Note the subsidy cost eaten by the state which is the basis on which the complaint has been made to the FCID.

3                   Paddy is currently being harvested in Kantale, Kurunegala and Eastern Province, and the Kantale paddy is going at farm gate for Rs22/kg today.

4                   If allowance is made for moisture, the cost of production for rice for an average miller is Rs 34/kg(can sell the by-product rice bran for Rs30/kg)

5                   The current market price of Sudu Kekulu is Rs68/kg and no small miller will want to undercut this price due to threats of shutting off their inputs, and so they conform to this price, as they too share in part of the profit.

6                   The oligopoly of the two main millers control the price of Rice in Sri Lanka. Their combined  capacity of their mills is 2.5Million kg of paddy per day, which extrapolated amounts to a DAILY gross margin, before transport and retailer margins of Rs57M (monthly based on 25days production is Rs1.425Billion)

7                   The Govt. is reliant on these millers, to buy this excess stock from last season, to empty warehouses to accept the new harvest. Will the remaining space in Govt. warehouses, be sufficient to purchase the paddy that the farmers (restricted to 2000kg per farmer) wish to dispose of? or will it create agitation, that the PMB is not purchasing the paddy brought to its stores after drying to the requisite, maximum moisture content?

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