Rice Under Siege: Story Of How Price Controls And Tariffs Broke Sri Lanka’s Staple Supply Chain

By Ranul Seneviratne Trainee Research Analyst - Advocata Institute.

A LESSON FROM HISTORY AND THEIR RIPPLE EFFECTS ON SRI LANKA'S RICE SUPPLIERS

Sri Lanka’s rice market is crumbling under the weight of contradictory government policies. Price controls and import tariffs have created an artificial scarcity of rice, pushing millions into hunger and malnutrition. Instead of addressing the core issues, policymakers keep repeating the same mistakes done in the past. At this point one has to question its intended purpose and effectiveness, is this the best way to ensure the welfare of the people? History, not economics, offers insight. First noted centuries ago, during Emperor Diocletian (A.D. 284 - A.D. 305) of Rome, whose attempt to cap prices of several goods, including that of wheat, by imposing the death penalty led to fleeing traders, vanishing supplies, and widespread starvation. This scheme of price controls created so much chaos that the Romans didn’t try it again for the next 1,600 years. Despite their goal of lowering costs for consumers, price controls often cause unintended consequences. At least the Romans learned from their mistakes. Sri Lankans however now face the consequences of rice shortages caused by the most recent imposition of price controls which took place on the 7th of December, 2024, this being a brain child of the Consumer Affairs Authority (CAA) a state agency responsible for the task. These shortages are worsened by the natural dip in production during the drier Yala season (May–September) and increased demand during the December tourism peak. Despite this, the government has set price caps for rice:

  • Nadu rice: Rs. 225 (wholesale), Rs. 230 (retail)

  • Imported Nadu: Rs 210 (wholesale), Rs 220 (retail)

  • Samba rice: Rs. 235 (wholesale), Rs. 240 (retail)

  • Keeri Samba: Rs. 255 (wholesale), Rs. 260 (retail)

Simultaneously, a Rs. 65/kg import tariff has made imported rice 50% more expensive, worsening malnutrition and contradicting the goal of lowering prices through price caps. This tariff is still in place at present. Sri Lanka first imposed this Special Commodity Levy (SCL) of Rs. 65/kg all the way back in October of 2021. However, at present there is a debate within the government on whether to remove this. This mix of policies defies economic logic and creates harmful market distortions.

RICE MILLERS, WHOLESALERS, AND RETAILERS

Prices guide resource allocation and reflect scarcity, but price controls disrupt this mechanism, leading to misallocation and shortages. Sri Lanka’s rice millers faced losses under these caps when forced to sell below cost. For instance, back in mid December producing 1kg of Nadu rice costs Rs. 235, while the wholesale cap is Rs. 225, resulting in a loss of Rs. 10 per kg. This had compelled millers to halt production, worsening shortages. Wholesalers and retailers face similar challenges. Even at present as we speak “Red Raw Rice” is still in shortage as the CAA slapped a price cap at Rs 220 and created black markets where it was sold at around Rs 310 as recently as the 3rd week of last month. Sri Lanka's deputy minister of agriculture just a few days back said that -“Sri Lanka has red rice stocks but they are only sold after 5.00 pm when the Consumer Affairs Authority officials go home after their days work”  

According to Araliya Rice Sri Lanka's largest rice grain miller the cost breakdown of producing 1 kg of White Nadu Rice was as follows back in December of last year. This will help us understand why there was a shortage in most types of rice as sellers could not cover their costs at the price cap set by the government. However one must remember that these costs have slightly come down as Sri Lanka has experienced deflation in the last few months.

Cost Breakdown for 1kg of White Nadu Rice:

  • Paddy purchase (farm gate price): Rs. 122

  • Storage: Rs. 38

  • Conversion: Rs. 37

  • Other costs: Rs. 38
    Total: Rs. 235

Back in December large-scale millers were paying above the government’s current minimum guaranteed price for paddy. Which is set at Rs 120 for Nadu, however most paddy farmers are saying that the cost to produce 1 kg of rice is around Rs 117 making the Rs 120 purchase price not sufficient to meet their costs. However, fast forward to January, most farmers in areas like Anuradhapura and Polonnaruwa complain that the price they receive is between Rs 95 - 100. Farmers say this is the price seen just prior to the government announcing the minimum price of Rs 120. This drop in farm gate prices could probably be due to collusive practices large scale millers engage just before paddy is harvested in the Maha season. 

Meanwhile, a Rs. 65/kg import tax pushes imported rice prices far above global levels. For example, imported Nadu rice retails at the price range of Rs. 220 - 225 (with a Rs. 215 landing cost), compared to Rs. 140-150 without the tax, the price at which it retails in India for example. Retaining this tax during shortages exacerbates malnutrition as it makes rice increasingly unaffordable. The following table shows the difference in prices between different rice varieties and also shows the difference in prices of  imported or locally produced varieties as of the 3rd week of January 2025 taken from the Department of Census and statistics.  

As you can see even with a Rs 65/kg import tariff imported rice varieties are quite significantly cheaper, hence retaining taxes and exacerbating malnutrition among children is a cardinal sin being committed by the government. 

IS IT THE "GREED" OF RICE MILLERS THAT IS CAUSING ALL THIS?

Sri Lanka's rice milling market operates as an oligopoly, with a few large players like Araliya and New Rathna controlling around 35% of the market however there are reports that this has increased to around 60% today, alongside many small-scale millers concentrated in Marandagahamula. Historically, large millers have exploited their dominance through anti-competitive practices; using their storage capacity and purchasing power, they manipulate prices by flooding the market during harvests to lower paddy prices and then create artificial scarcities to keep rice prices high.

Farmers, constrained by limited storage and credit, are forced to sell during harvests, enabling this cycle. Cartels and exclusive agreements further restrict competition. However, the current level of prices are a result of multiple factors, including protectionist import tariffs, a dry Yala season, flooding-induced supply disruptions, and price control uncertainties. These uncertainties encourage millers to sell rice at higher prices now, fearing future losses.

By late 2024, rice stocks began depleting, and millers limited daily releases to stretch supplies until the Maha harvest. Small-scale millers, lacking proper climate-controlled storage, often run out of stock, leaving larger millers with market dominance and full control over supply. Despite public concerns, the Consumer Affairs Authority (CAA) back in December said that millers aren’t really hoarding excessively and that they are maintaining the bare minimum required to keep mills running  until the next harvest season(present Maha Season). 

Protectionist policies, including a Rs. 65 per kilo import levy prevented imports from filling supply gaps. Basic economics suggests rising prices should increase supply, but restrictive policies enable large millers to curtail supply further, benefiting at the consumer's expense. Allowing low-tariff imports could help stabilize the market, ensure sufficient supply, and protect consumers from inflated prices.

ARE LARGE SCALE MILLER’S HOARDERS? 

Large-scale rice millers in Sri Lanka are often criticized for hoarding, while this may arise in certain instances this is not the case at present and it is wrong to generalize it as a recurrent phenomenon. At present too, even the CAA has acknowledged the fact that the current shortages are not due to millers hoarding. Furthermore, large scale millers also bring significant benefits to consumers. These millers have improved rice quality using advanced technologies. They have built huge processing plants to convert the paddy into rice, built huge temperature-controlled silos to preserve its moisture content and keep it fresh, there is also a huge cost for all of this. Thanks to these innovations and investments we are able to consume uniform, impurity-free grains with minimal breakage, meeting our demands for high-quality, safe, and consistent rice.

Despite their contributions, large-scale millers face challenges, including rising input costs and inflation. The price of a 5 kg rice bag increased significantly from Rs. 20 in 2019 to Rs. 50 in 2024. Millers also deal with cash flow pressures as they must pay farmers upfront while selling on credit, a unique practice in the industry.

If rice millers are engaging in anti-competitive behavior, it is the result of policy mishaps like protectionist tariffs and import controls which have enabled such rent-seeking behavior, distorting the market and fostering a "rice millers mafia." Removing protectionist tariffs and allowing imports would force competitive pricing, enhancing both quality and quantity. 

 IMPACT ON CONSUMERS

Price controls and tariffs harm consumers by creating shortages that leave many unable to purchase rice, leading to hunger and reduced access to essential goods. Price controls prevent the market from adjusting to natural supply reductions, while import tariffs compound the problem by making alternatives unaffordable. Consumers unable to afford rice cannot switch to substitutes like wheat if those are also taxed, worsening food insecurity. Additionally, importers struggle to provide quality rice due to high tariffs and price controls, leading to low-quality imports. In Sri Lanka, the Rs 65/kg tariff makes rice significantly more expensive, with taxes accounting for 50% of the cost. Removing this tax could improve rice affordability and quality while allowing market forces to stabilize supply and prices naturally, ensuring better outcomes for consumers and farmers alike.

DOES SRI LANKA NEED TO BECOME SELF-SUFFICIENT IN RICE TO ENSURE FOOD SECURITY.

Self-sufficiency or Autarky is a very narrow-minded view point only fitting for a utopian world. Self-sufficiency does not guarantee food security nor will it end malnutrition among the population. Rather a country's goal has to be in pursuing to become export competitive in rice or for that matter anything else. To achieve this, it must be able to produce high quality varieties of rice at far higher yields than seen presently in Sri Lanka. It must also produce it at the lowest possible opportunity cost of production, if unable to, then “Trade economics” tells us that you are far better off importing it from another country. Countries like Vietnam and Thailand are export competitive in rice, self -sufficiency is not their goal. But in-order to achieve this all forms of protectionist policies like import tariffs have to be dismantled. Firstly, because it would be impossible to produce high quality rice without being able to import high quality fertilizer or advanced machinery needed for growing and harvesting paddy. Secondly, by protecting inefficient farmers export competitiveness can never be achieved as foreign competition is needed to learn and grow better quality rice. To give a comparison of how efficient farmers are in countries like Thailand, the “Farmgate” price for rough rice is around 60 to 70 percent cheaper than in Sri Lanka. For example, farmgate prices of paddy with 15 percent moisture (dried paddy) was 8,900 to 10,200 baht per ton, which works out to around 75 to 86 rupees a kilogram, In Vietnam the farmgate prices are around 8,000 dong or about Rs. 94 per kilogram.  While in Sri Lanka it is at Rs 120 (Gov. announced price) making it probably the highest farmgate price for rice in Asia and perhaps even the world, showing the scale of export competitiveness achieved in countries like Thailand and Vietnam.  

On the other hand a major reason for farmers being so poor and the industry being so inefficient in Sri Lanka is due to the fact that we have too many farmers growing rice thanks to decades of protectionist policies. According to data from the Department of Agrarian Development, Sri Lanka has over 1 million paddy farmers which is around 12% of the total labour force. Whilst a staggering 25% of our labour force is engaged in agriculture, generating only around $ 2.6 billion in export revenue, countries like the Netherlands exported around  $ 132 billion in 2024 with just 185 000 farmers engaged in agriculture, which was just 1.91% of Netherlands total labour force. Hence the problem very clearly is an over supply of labour in the industry, which is keeping millions trapped in eternal poverty and hence in order to reduce this number the country must liberalize the sector and allow inefficient farmers to switch to more productive sectors of the economy. A second reason for the high levels of poverty seen among farmers is due to the fact that farmers in Sri Lanka don’t own the land they grow the crop on, rather it is either owned by the state or most are tenant farmers that pay a rent to farm on those lands. As a result farmers are unable to obtain credit as they have no collateral to show to banks. Furthermore average farm sizes of around 1 hectare are too small in Sri Lanka and as a result it provides very little incentive for farmers to invest in high end technologies to improve farm productivity as they are unable to recover the cost. Comparatively on average a farmer in the Netherlands holds and owns around 41 hectares of land if one equates the output to a traditional farm since the Netherlands has vertical farm technology.  

CONCLUSION

Price controls, aimed at easing consumer burdens, often result in shortages, black markets, and harm  farmers and producers. Coupled with import tariffs, these contradictory policies deepened the crisis. The crisis seen in Sri Lanka's rice markets is an example of such government overreach and shows the negative effects of price controls and import tariffs that seem to be a recurrent phenomenon. 

To solve this crisis markets and prices must be allowed to function naturally. The following simple steps must be followed to come out of this man-made crisis. 

  1. Remove price controls

  2. Remove import tariffs and licensing and allow rice to

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