The paddy problem is more than a price problem

By Dhananath Fernando

Originally appeared on The Morning

I recently joined a television programme to discuss the economics of paddy and rice. Three farmers representing farmer associations joined the discussion, together with former Governor of the Sabaragamuwa Province Prof. Dhamma Dissanayake.

It was difficult to listen to the reality faced by the farmers. Their main request was for a paddy price of around Rs. 120–140 per kilo.

The Government has announced a guaranteed price of Rs. 120, but the Paddy Marketing Board (PMB) does not have the capacity to purchase even a meaningful share of the total harvest. The private sector, meanwhile, purchases paddy at around Rs. 95 per kilo.

One farmer presented his numbers. After nearly three months of work, his profit from one acre was about Rs. 20,000. When you hear numbers like this, it is easy to understand why farmers are protesting.

There is also another complaint. Farmers argue that keeri samba has been imported when there are already adequate stocks in the country, putting further pressure on local prices.

We know there is a problem. It is also very easy to politicise it. But the solutions are more complicated than announcing another controlled price.

Suppose the Government forces private millers to purchase paddy at Rs. 120 per kilo. Either the price of rice will have to increase further, which will be politically difficult, or millers will simply reduce their purchases. Similarly, the Government itself cannot purchase the entire harvest at the guaranteed price.

There are around 346 storage facilities under the PMB, but their total capacity covers only a small fraction of the annual harvest. Therefore, the Government cannot become the buyer of last resort for the entire paddy market.

The problem of storage

When we look at the problem through an economic lens, one of the most important issues is storage.

My colleague Sudaraka Ariyaratne and researchers at Advocata have conducted an in-depth study on the paddy market, which is yet to be published. One important insight from their research is that market power in the paddy sector is closely connected to the ability to store the harvest.

Farmers and farmer organisations generally do not have sufficient storage capacity. Most of the storage capacity is with millers.

Paddy is also different from many other products because a large quantity of the harvest enters the market within a short period. Farmers cannot keep the harvest for long without proper storage. They therefore have little choice but to sell soon after harvesting.

When thousands of farmers bring paddy to the market at the same time, prices naturally fall.

Storage changes that equation. It gives the owner the ability to decide when to sell and allows the harvest to be released gradually into the market.

Therefore, if we genuinely want to empower farmers, part of the solution lies in storage.

One option is to create more storage opportunities for farmers and farmer organisations. Another is to improve access to storage for smaller millers, creating more competition in the market.

But how can farmers build storage facilities? That is where access to credit becomes important. Farmers, farmer associations, or farming communities should be able to borrow and invest in storage and other productivity improvements.

But banks require collateral. Many farmers have very little collateral. Some cultivate land under permits. Others farm rented land and pay part of the harvest as rent. This is where land rights become directly connected to the paddy problem.

We often discuss land rights as a separate economic reform. But without clear and bankable property rights, farmers cannot unlock the value of the assets they already use. The land remains dead capital. Without collateral there is no credit, and without credit there is no investment in storage, technology, or productivity.

The structure of the market

The second major issue is the basic demand and supply structure of the market.

Suppose our farmers suddenly achieve an extremely good harvest because productivity improves. Under the present system, even that success can become a problem. A larger harvest can create an oversupply and push prices down further.

Normally, when a country produces a surplus, exports can become a safety valve. But Sri Lanka has limited opportunities in this area because many of the rice varieties we cultivate do not have strong international demand.

Much of global demand is for long-grain varieties such as basmati. Sri Lanka largely cultivates different varieties suited to our own consumption patterns and agricultural conditions. We cannot simply switch to basmati overnight. Soil conditions, weather, seed varieties, and farming practices all matter.

Therefore, even if we produce a significant surplus, exporting it is not necessarily easy. At the same time, our cost of production remains very high.

During the television programme, one farmer explained how many parts of the process are still highly labour intensive. Paddy is dried on roads and open grounds using manual labour. Workers have to be paid at every stage. Paddy is stored in bags, which then have to be physically carried, stacked, and moved again.

From applying fertiliser to drying, storing, transporting, and finally processing the harvest, there are inefficiencies throughout the value chain.

Every inefficiency adds another cost. Eventually that cost has to be absorbed either by the farmer, the miller, the consumer, or the taxpayer. Most of the time, all four end up paying in different ways.

There is another structural weakness in the market. Farmers mainly depend on one broad category of buyer: the rice miller.

Ideally, paddy and rice should have many different types of buyers. Rice can be used for a range of industrial products and value-added applications. These can include processed foods, beverages, rice-based ingredients, and other industrial uses.

The more diverse the buyers are, the less dependent farmers become on a single market.

But such a market cannot develop through Government instructions alone. Farmers and smaller businesses need access to capital, storage, technology, and markets. New investors need space to enter. Competition needs to increase.

The real solution

The paddy problem cannot be solved simply by imposing a controlled price on rice or announcing a guaranteed price for paddy.

A guaranteed price without the capacity to purchase is only an announcement. A controlled rice price without addressing production costs creates shortages and distortions. Forcing millers to buy at a particular price without considering the final selling price will not create a sustainable market either.

The farmer who earns only Rs. 20,000 after three months of work certainly deserves a better outcome. But the answer is not another temporary intervention every harvesting season.

The real solution is to give farmers more options: the option to store, the option to borrow, the option to invest, the option to improve productivity, and, most importantly, the option to sell to more than one type of buyer.

For that, economics has to come into the paddy market.