Confused by the coconut oil conundrum?

Originally appeared on The Morning

By Dhananath Fernando

As usual, Sri Lanka is cruising through another eventful week; this time with discussions on the topic of imported coconut oil that is said to contain carcinogenic compounds called aflatoxins. On social media, I saw people sharing posts saying that, to date, they were under the impression that the coconut oil they have been consuming was produced in Sri Lanka.

The government authorities, public health officers, Sri Lanka Customs, Sri Lanka Standards Institute (SLSI), and many other government agencies are running around scrambling to check whether the carcinogenic coconut consignments have been released to the market. As we get closer to the Sinhala New Year, it is the norm that the prices of coconuts increase, and also that coconut oil consumption increases. So, people were already confused as to whether to buy coconut oil or not and as to what substitutes are available.

This is yet again another example of closing the stable door after the horse has bolted. It’s quite unfortunate that no one thinks about the economics behind the coconut oil issue. Instead of trying to take political advantage of the situation, we need to explore the root cause of the issue.  

Let’s understand the numbers first. According to Coconut Development Authority (CDA) Director General Dasitha Niroshana, Sri Lanka’s total demand for coconut oil is about 180,000 MT (metric tonnes) per year. Out of that, about 90,000 MT are for domestic usage and the balance is for industrial usage. Over the last few years, our local coconut oil production was about 40,000 MT. Due to climate challenges, higher prices, and thin margins, coconut oil production has been negatively affected. For the last few years, local coconut oil production has come down to about 25,000 MT. According to these statistics, about 140,000-155,000 MT of coconut oil are being imported for industrial and domestic use. Refined as well as non-refined coconut oil is imported. Given the nature of the product, microbial activity can take place when it’s stored for a long period of time and also based on the handling process.

It takes about eight coconuts to produce 1 kg of coconut oil. For the domestic usage of coconut oil, estimating that the production levels are at 25,000 MT, about 200 million nuts will be required for domestic consumption alone. The total nuts we can produce per annum is about 2,600-3,000 million by utilising 20.6% of our arable land. As Sri Lankans consume quite a lot of coconut for personal use and for their cuisine, we are still short of about 600 million nuts per annum to meet the total national demand for coconuts.

As the coconut yield is somewhat sensitive to water levels, changes in weather affect the harvest and supply. Additionally, the coconut trees in Sri Lanka are very old, and only about 62 nuts can be produced per tree. Meanwhile, the best Sri Lankan yield amounts to about 6,000 nuts per hectare. If we look at competitive markets like Kerala, Malaysia, and the Philippines, it’s as high as 11,000-14,000 coconuts per hectare, while Indonesia has the highest productivity with 15,000 coconuts per hectare. However, the Sri Lankan coconut is specifically preferred for some industrial uses, as the aroma and taste of the Sri Lankan coconut is quite unique. However, we can’t match the demand. 

On the other hand, the edible oil market is changing drastically. With consumption patterns of customers who want a healthy heart and less cholesterol content, markets in Europe and America shifted to edible plant fats of soybeans, corn, peanut, sunflower oil, and other oil sources. 

The price of coconut is one key determinant for the import of coconut oil. Given that the margins are thin in the coconut oil industry, when the coconut prices go up, there is more incentive to import coconut oil instead of manufacture it locally at a higher cost.

Most of the coconut-based export businesses are also affected when coconut prices go up, as they have signed agreements with their buyers overseas. 

On the demand side, locally, the demand is increasing with the increase in population and usage in Sri Lanka. On the supply side, it’s stagnant or decreasing due to extremely low productivity. As a result, coconut prices go up, which affects the entire value chain of the business cycle. 

So the big question is, what have we done to increase productivity and take a count on the policy prescription we have been following?

When the coconut prices went up during the tenure of the last Government, they imposed a price control. Following in the same footsteps, the current Government too imposed a price control last November. Needless to say, none of the price controls really worked. Instead, it further distorted the market. When you have price controls, inferior-quality products are entering the market or the available products are disappearing and black markets are created. In the case of coconut oil, the market distortion by price controls on coconut has incentivised people to bring low-quality products and manipulate the market.

Additionally, one substitute product, which is palm oil, has been discontinued, due to environmental reasons. Palm oil is a substitute for coconut oil and produces a higher yield than coconuts. Rather than finding a solution for proper water management, complete interference in the market has now distorted the entire market with the introduction of products that allegedly contain carcinogens to the market. As a remedial action, the CDA has issued a five-star label to seven selected coconut suppliers where the production method is evaluated from end to end and monitored by government authorities so that consumers can be assured that the coconut oil is pure and good to use. Yet again, however, the prices are about Rs. 100-200 higher, according to the CDA Director General. Obviously when you only allow only seven players to supply authorised coconut oil, the suppliers are going to increase the prices, as they lobby to keep higher profit margins. In economic terms, we can call this a “rent” , due to the advantage of the restriction of access by new players.

In summary, we have distorted the concept of markets by introducing price controls and providing licences. As a result, our productivity is very low in the coconut sector and our solution for all problems has been market intervention again and again by consecutive governments. At the same time, as a result of focusing on unnecessary state-owned enterprises, the State has forgotten the role of necessary market regulations to ensure consumer protection. As a result, from time to time, we hear news stories of the importation of rotten tin fish and carcinogenic coconut oil, and we kill time till another similar story explodes. The problems remain the same or become worse; our attention diverts; life goes on… 

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.