Tuesday, July 28, 2020

The Government Purchase Price of Paddy, sets the bar which determines open market prices and must be done in advance of any commencement of cultivation.

It was just announced that the Treasury has allocated Rs10.4B for the purchase of 200,000 MT of paddy this Yala season where harvesting had just begun in the Kurunegala District, before untimely rains disrupted the plan. This year it appears that Rs50 is the price for both Nadu and Samba, and even Keeri Samba as they account for 95% of the paddy planted at present.

The Yala season generally has less land under cultivation, as it is done in the dry season, under irrigation, rather than rainfed cultivation in the Maha season.

Unless you are a paddy cultivator, all these edicts are for the General Public’s consumption, as very little paddy is actually purchased by the Government for their stores, and I will explain why below. It is possible that NO paddy in fact is purchased by the Government despite the fanfare of this allocation. It all depends on how the paddy cultivator disposes of his harvest.

The real scenario

Sri Lanka has finally got to the stage due to lack of manual labor in agriculture, to use combine harvesters for paddy harvesting. The latest versions harvest and bag them in one go in bags of approximately 60kg.

Due to the method of mechanical harvesting, the newly harvested is not sufficiently dry for the government stores. The moisture content is checked prior to purchase and is rejected if they fall outside of those parameters. If the farmer is to sell to the Government, he has to transport his paddy to places where they can be dried. Often main roads are used in places to dry the paddy, but other areas are used as well, and it is a costly, time consuming and labor intensive process for a small farmer to undergo and transport. The reality then is for the majority of farmers who don’t have transport and storage facilities, is to sell at farm gate to the wholesale purchasers who come in their trucks at the present going rate of Rs42/kg.

Generally, these wholesalers are subcontracted by the larger millers, to buy this paddy, as they have the facilities to dry and store this paddy in a manner suitable for their milling and bagging for retail sale at the right time. Up to 5 large millers control this market and therefore set the retail price for rice, and any price control that the Govt. sets is also fixed by the same millers, as they are big contributors to the political campaigns. They have massive credit lines from Banks used to buy and store the harvest and use this buying power to control the price.

So what is the purpose of the Paddy Marketing Board and their warehouses?

This is a mechanism set up for bribery and corruption from the highest to the lowest levels. You only have to ask any farmer, how much he has to give to get the State to purchase his paddy. He is at the mercy of the man with the gadget to test the moisture level of his paddy when he brings it at his expense to the stores to sell to the State via the PMB. Much of the corruption comes in where lower quality paddy is purchased at the stores with moisture content and poor storage where bribes are taken.

Assume then that a certain amount of paddy is in fact purchased and stored, what then happens to that paddy? Again the large millers use the PMB as their private storage depot, paid for and financed by the state. Depending on their needs and stock and movement into the market, they may purchase the good paddy from the stores where their agents pick and choose what to buy from the stock. They rarely but at Rs50 and in fact give some excuse to buy for less. In theory if the Govt. is spending money to store, they should at least make a profit and sell at a higher price to the highest bidder, but this is usually not the case due to corruption at the highest levels.

What then happens to the paddy that is of poor quality and often unfit for human consumption? This is sold at rock bottom prices to the animal feed processing industry, where the Govt, incurs a loss by this storage.

It is interesting that a gazette notification was recently made to prohibit any paddy being used for animal feed, usually for the processing of chicken feed, due to the high price of maize and the resulting shortage due to the banning of imports of maize recently as one aspect of import controls.

To cut a long story short, my guess is that most farmers will prefer to sell at farm gate @Rs42/kg and those that do not have the capacity to dry and store their own paddy selling it at the open market to small millers in the locality at the prevailing price, which they hope a month or two after harvesting will be much higher than at harvest time.

I have followed this price movement with interest, as I used to buy paddy at rock bottom as soon as harvest was done, dried and stores and then milled rice as and when I need and transport to Colombo to feed my household. This way, I am able to cost my paddy (excluding transport costs, as I usually bring it down if someone is returning to Colombo. My cost turns out to be around Rs65/kg while the prevailing market price is around Rs100. One can then understand how profitable this business is to the large millers, who use all the parts, husk, rice bran, to reduce their rice costs more than I can and clear around Rs30/kg net profit after costs.

The moral of this story

The real profit is being able to buy at the prevailing farm-gate, today’s price being Rs42/kg, dry it and store. When the wholesale market price rises, usually keeping between 40-50% gross margin, you sell it to a small miller on the open market. Say if my holding and drying costs, as well as loss of weight in drying all come to half that margin, I make at least 20% return on cash investment, usually within 2 months, for an annualized return of 120% on investment.

So it is so ironic that I see wealth in the village where the farmer is dirt poor, and the local school master who has studied the subject, and able to store say 30 Tons at a time, being able to make more money than in teaching and the result is the house he lives in and the car he drives from this nice little side income!

Don’t forget the market price rises over Rs50/kg a few months after harvest and the Govt. stores don’t have sufficient quality to paddy stored to make a profit, and as it is a state enterprise, bureaucracy and corruption are the order of the day, while in the private sector, it is YOUR OWN MONEY at stake and the private operator is sufficiently savvy to know when to cash out.

This is the reality of the rural economy, where those that put the most effort have the least reward and those with capital and staying power reap the rewards. That is capitalism at work and the only means to improve the farmer’s return is to raise the guaranteed price sufficiently high, that the discounted farm gate is high enough for the farmer to get some return.

The other point not appreciated is that the large scale farmer, who has his own equipment because he has the larger acreage to cultivate, has economies of scale, and lower per unit costs of production, and can benefit. The small farmer is merely eking out an existence on his tiny plot that by itself is not economical anyway, but encouraged by a political system designed to enslave a section of people in order to live of the promises to farmers for electoral sustenance.

In paddy farming the average unit of land a farmer farms today is only 1 acre. So those farming 30 acres are able to reduce their cost of production by at least 50% of the small farmer, who if his labor is valued at all is losing big time in farming this land, where he would definitely better of doing something quite different in life to sustain and feed his family. There is lack of unity among Sinhala villages in pooling their lands as I have seen many Muslim families in the Eastern Province give all the land to a group to farm the whole area using the skills, equipment and better use of irrigation, where the profit is shared, as a rent in proportion to the land that is used for cultivation, where the owners DO NOT get involved in any cultivation and can pursue other economic activity instead.

This is a story of how a rural teacher, bank manager, who has access to say Rs1M credit line or cash in his mattress, can buy at farm-gate and sell when the market price climbs in two months, where all he has to do is dry and store at a warehouse next to his home! He can do this twice a year and make more than his salary for 12 months as an extra and not even declare this profit, as he is under the radar.

No wonder if a school teacher can supplement his income this way, as shown, you can imagine the Rs Billions made by the large millers before amortization of their Billion rupee investments in plant and storage, even in this recession, where the rest of the Country are suffering. Make no bones about it, the farmer again draws the short straw!

All this money is made on a staple that is the largest contributor of NCD in the Island. (non-communicable disease) and we are taxing alcohol and cigarettes as sin taxes, instead of sugar and rice not far behind!

Ruwan Hulugalle does capitalism not work? why doesn't 'the profit motive' increase competition for achieving these fabulous returns, thereby increasing competition for purchase of inputs and sale of outputs (increasing prices for inputs and decreasing prices of outputs) ? what's not working in the system?

Risk and access to cash. Farmers live hand to mouth. There is no perfect knowledge.

 they don’t like messing around farm gates as the big miller mafia are thugs

I don’t have to remind you of the harassment I faced during civil war checkpoints in bringing my rice to Colombo to sell to my customers as the mafia had told the security forces to stop any transport of rice

They can’t as the big millers have the muscle to reduce the price if people try to enter. That is why I said only those under the radar in localities survive in the game

No one wants to fight the big boys as they bankroll the politicians and are the politicians, so no different to the mafia cartel. You don’t mess with them.
It’s simply not worth it, they are playing other bigger games with alcohol. Interesting to see how the rice to ethanol investment will play out now that imports are banned. I am sure they may think that is the next best thing for a Rs10B investment

In investment there is something called first player advantage crowding out new comers. It’s similar. Just like Tesla is so far ahead in the game all others are playing catch-up

Read the article and understand it is seasonal and annualized return made in two tranches. Occasionally a loss is made if you read the market wrong or imports are allowed. Remember in rice world market prices are half and the poor SL consumer is screwed eating poison at double the price when they can import less poisonous starch for half. This is what you get in a country ruled by donkeys voted in by sycophantic jackasses

The uncertainty of policy is another factor that deters entrants. Who knows what the government will do after the elections? They may realize the least of the bad options available may in fact be to float the exchange rate and allow equilibrium at Rs300 a dollar. That maybes what IMF demands as a condition for emergency life line. I can’t predict which way the crony capitalists and their benefactors will turn.
 as you can see I like writing stories to annoy the jackasses following the donkeys blindly not realizing that there is something called the real world they have left behind, living instead in a make believe caccoon

The above open communication shows the disconnect between theory and practice, which is the single most annoying thing on FB when I have to deal with morons, who are not educated in understanding how everything works in practice.

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