Food price policy in Sri Lanka

Pergamon

PII: S0306-9192(96)00037-I

Food Policy, Vol. 22, No. 1, pp. 81-96, 1997 © 1997 Elsevier Science Ltd

All rights reserved. Printed in Great Britain 0306-9192/97 $17.00 + 0.00

Food price policy in Sri Lanka

F r a n k Ell is School of Development Studies, University of East Anglia, Norwich NR4 7TJ, UK

P i y a d a s a S e n a n a y a k e Department of Economics, University of Colombo, PO Box 1490, Colombo 3, Sri Lanka

a n d M a r i s o l S m i t h School of Development Studies, University of East Anglia, Norwich NR4 7TJ, UK

This paper examines selected aspects of staple food markets in Sri Lanka in order to draw conclusions about the role of the state in promoting price stability and equity for producers and consumers. The paper describes the food security system in Sri Lanka, and carries out a time-series analysis of price seasonality and margins in rice marketing 1980-95. Interactions between rice and wheat markets in the context of national food availability are also examined. Private rice marketing channels are found to be competitive and efficient, but in recent years conflicting signals have been created by policy decisions taken separately in the rice and wheat markets. It is concluded that a large proportion of state organizational involvement in staple food markets is redundant, because trade policy instruments are capable on their own of achieving government food security objectives, without recourse to so much state involvement in marketing channels. © 1997 Elsevier Science Ltd. All rights reserved

Keywords: food security, food prices, seasonality, marketing, liberalisation

Introduction

Sri Lanka has a well documented historical record of placing priority on the attainment of adequate staple food consumption for all its citizens (Gavan and Chandrasekera, 1979). In three decades after independence in 1948, this priority was manifested particularly by rice ration schemes based on the principle of universal coverage. Subsequently, rice rations were replaced by targeted food subsidies, but successive governments continued to pay close attention to national food availability and consumption levels of rice and wheat. An elaborate structure of food policy agencies and price interventions arose in earlier decades and this continues to exist in active or modified form to this day.

The purpose of this paper is to examine selected key aspects of staple food markets in Sri Lanka with a view to drawing conclusions about the relevance and coherence of some major components of the food security apparatus, particularly with respect to the achievement of price

81

82 Food price policy in Sri Lanka: F. Ellis et al.

policy goals of intra-year price stability and farm-level price support. ~ Attention is focused on the price behaviour of the private rice marketing sector, and on the market interactions between rice and wheat that have occurred as a consequence of government interventions. The period studied is 1980-95 with focus on later years in this period.

Sri Lanka is an island economy with an estimated population in 1995 of 18.1 million people. The country has a fully functioning democracy, with elections every 5 years, and periodic switches between the two main parties that compete for power, the United National Party (UNP) and the Sri Lanka Freedom Party (SLFP). A coalition called the People's Alliance, in which the SLFP is the dominant partner, has been in power since 1994, and represents a reversion to a more interventionist stance after roughly 15 years of relative moves towards market liberalisation. Economic growth in Sri Lanka has been unexceptional by comparison to the more successful market-oriented states of South and South East Asia (World Bank, 1995). Between 1980 and 1993, GDP growth averaged 4% per year, as compared to a range of 5-8% in India, Indonesia, Malaysia and Thailand. Correspondingly, growth in GNP per capita averaged 2.7% as compared to a range of 3-6.5% in the countries cited. The Human Development Index places Sri Lanka in a rank position of 97 out of 174 countries (United Nations Development Programme, 1995). This is better than is suggested by its GNP per capita of US$640 in 1994 and reflects high life expectancy at birth (72 years) and a high adult literacy rate (90%).

Although the economy of Sri Lanka has diversified considerably over the past three decades, rice nevertheless remains a key economic sector. Rice production involves over 800 000 farm families and corresponds to 5% of GDP. Rice consumption provides about 40% of per capita calories and 30% of per capita protein in the average Sri Lankan diet, and accounts for nearly 15% of average per capita consumption expenditure (Borsdorf, 1993, p. 12).

The trend of paddy production over the past two decades provides an important backdrop to the concerns of this paper. Like other rice producing countries, Sri Lanka experienced rising yields per hectare and therefore increasing total paddy production associated with the adoption by farmers of high yielding varieties in the 1970s. From the 1970s to the 1980s the average paddy yield for the country as a whole rose by roughly 1 ton per hectare from 2.0 to 3.0 tons. Since then average yields have stabilized in the range of 3.0 to 3.2 tons per hectare. Total paddy output rose from 1.5 million tons in the 1970s to 2.3 million tons in the 1980s, and averaged 2.6 million tons between 1990 and 1995. In the period 1993-95, rice output was more than required to meet domestic consumption, and the country was technically rice self- sufficient in this period (Borsdorf, 1993, pp. 71-101; Sri Lanka, Department of Census & Statistics, 1995a).

The paper is structured as follows. The next section describes briefly the historical evolution of food price policy in Sri Lanka, bringing the picture up to date with the current array of institutions and methods utilized to affect the producer price of paddy and consumer prices of rice and wheat. The third section reports the results of time-series analysis of rice prices aimed to elucidate the efficiency and competitiveness of the private rice marketing system. The fourth section examines interactions in consumption between the rice and wheat market, including policy conflicts which are manifested in the relationship between the two staple foods. The

tThis paper results from the authors' participation in an ODA-funded research project entitled Role of Govemment in Adjusting Economies currently being undertaken by the Development Administration Group, University of Birmingham. Views expressed are those of the authors and do not represent the ODA nor the conclusions of the larger project.

Food price policy in Sri Lanka: F. Ellis et al. 83

fifth section summarizes the implications for producers and consumers of trends in the real prices of rice and wheat. The sixth section gives a brief overview of world price aspects of the preceding discussion. The paper concludes with an interpretation of the validity and effectiveness of the major policy instruments utilized in Sri Lanka to influence staple food markets, bearing in mind the wider debate about the role of the state in food crop marketing in developing countries.

Past and present food price policy in Sri Lanka

The contemporary structure and working of the food security system in Sri Lanka can only be properly understood by reference to past priorities that were responsible for creating the system in the first place. From the 1940s until 1978, the state operated a rice ration scheme with universal coverage. While this scheme underwent various modifications in different phases of its implementation, its main components were a high degree of state involvement in mar- keted domestic production and imported rice, the distribution of rice through government channels, and its delivery to consumers as a rice quota per person, either at a heavily subsidised price, or free, or as a combination of free and priced components, in different periods.

In this same historical period, the government also maintained monopoly control over wheat flour imports, distribution and prices to bakers and to consumers. In some phases, wheat flour was sold at or near its import cost, in other phases it was heavily subsidized. The degree of control required to exercise a comprehensive rationing scheme is clearly of a different order of magnitude to that required merely to stabilize producer prices, or consumer prices, or both. In Sri Lanka, domestic rice procurement and milling was undertaken by a large-scale government body called the Agrarian Services Department, replaced in 1971 by the Paddy Marketing Board (PMB). The distribution of rice was undertaken by another large-scale body, the Food Commissioner's Department (FCD), through a vast array of cooperative agencies known as the Multipurpose Cooperative Societies (MPCS). The distribution of imported wheat flour also took place through the FCD and the MPCS.

At the peak of its market participation in the mid-1970s, the PMB annually procured 40% of the domestic rice harvest, equivalent to 500 thousand tons of paddy. The Board owned 300 storage complexes, with a total warehousing capacity of 350 000 tons, and 28 rice mills, and also had a peak number of 485 private mills under contract (World Bank, 1986, p. 160). In the same period, the FCD annually imported around 450 000 tons of wheat flour and 400 000 tons of milled rice. Rice and wheat flour were delivered to consumers via approximately 8000 distribution and retail cooperatives comprising the MPCS.

Important modifications occurred to this apparatus after an election in 1977 which returned the pro-liberalisation UNP to power. The rice ration scheme was abolished in 1979 and replaced by a food stamp scheme targeted at the poorer members of society. At the same time PMB lost its monopoly powers over paddy procurement, and rice marketing was soon conducted predominantly by the private sector. In 1980 a 25-year contract was signed with a private company, Prima Ceylon Ltd, to mill all wheat grain imported by Sri Lanka, with FCD/MPCS continuing to undertake flour distribution ex-mill) In 1990, legal ownership of imported wheat

2Prima Ceylon Ltd owns and operates a single large capacity wheat mill at Trincomalee in Sri Lanka under a BOT (build, operate, transfer) contract. In the year 2005, ownership of the mill passes to the government. The agreement is that Prima gets supplied with a minimum 435 000 tons wheat per year, of which it returns 74% by weight in wheat flour, and is permitted to keep all by-products for own sale in domestic or export markets. In practice, Prima has the capacity to mill double the minimum specified quantity, and has milled all wheat grain imported by Sri Lanka since 1980.


and wheat flour ex-mill was switched from the FCD to yet another state institution, the Cooperative Wholesale Establishment (CWE), an agency previously concerned mainly with managing imports and price guarantees for non-staple crops. However, FCD remained the distributing agency for CWE wheat flour, so the public wheat distribution system became more intricate without reducing the extent of government institutional involvement.

While the UNP period (1977-93) was in many respects an era of market liberalisation in Sri Lanka, successive administrations in this period displayed great reluctance to dismantle or privatize outmoded parastatal institutions in the staple food marketing system. The history of the PMB illustrates this paradox of public and private roles which pervades food security policy in Sri Lanka.

PMB was never defined as a price stabilization or farm price support agency, rather it was the state procurement agent in the rice ration scheme. PMB procures paddy at a price called the Guaranteed Price Scheme (GPS), a government fixed price that has existed in Sri Lanka since 1948. However, the GPS is not set like a typical floor price. It is not announced annually, but intermittently, and the timing of changes in its level bears no relation to the planting decisions of farmers. For example, from 1980 to 1996, the GPS was changed 10 times, and the timing of the announcement of new levels occurred in seven different calendar months varying from January to November. 3

With the advent of more liberal economic policies in 1977, the GPS was allowed to drift down in real terms until it was well below the seasonally lowest farm-gate prices offered by private traders and millers (Fig. 2). The consequence of this was that the proportion of domestic harvest procured by PMB declined unevenly during the 1980s, culminating in a low point between 1989 and 1992 when less than 2% of the annual rice harvest was purchased in each year. Also during the period from the mid-1980s, PMB underwent a considerable contraction in the size of its permanent assets, both physical and human. It was divested of 24 rice mills and 150 storage complexes, and in 1989-90 its permanent staff levels were reduced from 1500 to 870 persons, subsequently falling to 500 persons in 1995.

Yet PMB was not abolished, and this left its future open-ended. In 1994, the incoming People's Alliance government quickly set about increasing the GPS paddy price, and in 1995 PMB was back in the rice market in a big way, procuring 10% of domestic output. 4 A view held by many senior government personnel in Sri Lanka is that PMB does indeed provide an effective floor to the paddy market, and that its dissolution would be economically unacceptable and politically difficult. This is contrary to the evidence of the period 1980-92, elaborated in detail below, that the rice market functioned well in the context of declining and eventually negligible intervention by the PMB.

The current food security apparatus in Sri Lanka is composed of all those major bodies discussed so far in this paper--PMB, FCD, CWE, MPCS--plus plenty of minor ones, too. The system is centred on the office of the Food Commissioner as head of the FCD, and short run policy is determined in weekly meetings of the high-level Food Security Committee con- sisting of the heads of all these agencies plus senior representation from the Ministries of Agriculture and Trade. The Food Security Committee undertakes well-informed and detailed monitoring of the evolving food balance in Sri Lanka, including stocks, imports, harvest projec-

~A complete list of all GPS changes since 1948 is contained in Sri Lanka, Paddy Marketing Board (1993, p. 13). 4It is unlikely that this PMB revival is sustainable. It was predicated on the government temporarily allowing loans for crop purchase from the Peoples Bank which the PMB was quite unable to repay in 1995/96, let alone borrow from the banking system to continue high profile operations in subsequent years.


tions and price trends for paddy, rice, wheat and wheat flour. FCD monitoring and control over import volumes, tariffs and wheat flour prices means that indications of emerging food deficits or surpluses can quickly invoke a compensating policy response.

The contention of this paper is that the trade policy and market intelligence features of the food security system in Sri Lanka are quite sufficient in themselves to correct emerging imbal- ances in the domestic market, without the need for the large-scale parastatal bodies, throwbacks to the 1950s, that continue to bestride the landscape of the system.

Analysis of rice price formation

The necessity for large-scale state interventions in food markets, as manifested in Sri Lanka by the continued existence of the parastatal PMB and the GPS, is usually predicated on the existence of defects in the operation of private markets of a type and severity that can only be overcome by invoking comprehensive controls (Ellis, 1992, Chs. 4-5). In all countries the most frequently cited market inadequacies which provide the reasons for this type of intervention are seasonal and inter-year price instability, and uncompetitive marketing margins.

This section tests the hypothesis that seasonal price fluctuations in the rice market constitute an economic problem that requires state intervention in the Sri Lankan case. Also examined here is the behaviour of the producer-consumer marketing margin over time, and the relationship of actual farm-gate producer prices to those set by the GPS in the period from 1980 to 1995. The analysis that follows focuses on the performance of the marketing system rather than its structure or conduct, and therefore emphasizes overall efficiency rather than local variations in economic power between buyers and sellers.

The seasonal pattern of price formation in a staple food market is a key indicator of the relative efficiency and effectiveness of the temporal dimension of crop marketing. A well functioning marketing system would be expected to exhibit reasonable stability from year to year in the price spread between the lowest and highest price season, this spread to reflect competitive margins for crop storage given prevailing levels of interest rates, and these margins not to be widening over time without good explanation of why this should be occurring. Conversely, a poorly functioning marketing system would display the opposite of these features: erratic and high price differences between low and high months, and perhaps a trend for these price differences to widen if the competitiveness of marketing is deteriorating over time.

Statistical analysis of seasonality in the rice market in Sri Lanka was undertaken utilizing an established methodology (Goetz and Weber, 1986; Trotter, 1992) and the results are summarized in Table 1 and Fig. 1. The methodology consists of the following steps:

(a) A 12-month moving average was applied to monthly retail rice price data, running from July 1984 to June 1995. The effect of this procedure is to isolate the seasonal component of prices (contained in the original price series) from the long-run trend and cyclical components of prices (which are the components embodied in the moving average prices series). 5

(b) Individual monthly prices from the original price series were then converted into an index number by dividing each monthly price by the annual average price centred on that month in the moving average series, and multiplying by 100.

~This analysis was undertaken for the rice quality denominated as 'raw white' in Sri Lanka. This is a low quality rice consumed especially by the urban poor. A comparison with price trends for other quality specifications demonstrated that the findings given here had general applicability for the rice market as a whole.


Table 1 Analysis of seasonal trends in retail rice prices 1985-95

Seasonal Indices (SI) Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

1985 116 .5 123.4 97.0 92.3 90.1 94.6 96.2 95.8 95.6 1 0 0 . 9 1 0 5 . 0 104.0 1986 106 .2 102.6 97.9 95.5 97.2 99.7 99.4 100.1 98.8 99.5 1 0 1 . 7 102.6 1987 103.1 103.2 99.6 99.0 98.6 99.0 97.2 97.7 98.0 1 0 0 . 6 1 0 3 . 0 102.2 1988 101 .6 100.7 96.9 97.9 96.0 94.8 95.2 96.0 97.7 97.6 1 0 8 . 0 109.2 1989 102.2 97.6 96.2 95.0 95.0 98.4 99.8 98.4 95.4 95.3 99.2 105.4 1990 113.3 1 1 1 . 4 1 0 2 . 7 101.0 99.9 98.0 98.5 96.5 95.2 95.5 1 0 3 . 6 106.1 1991 106 .7 1 0 5 . 7 101.8 93.0 93.3 92.7 97.0 96.5 94.6 1 0 4 . 7 1 0 8 . 9 106.2 1992 106 .6 101.9 91.8 95.4 1 0 1 . 6 98.9 96.5 96.4 1 0 4 . 4 1 0 0 . 9 1 0 2 . 9 107.7 1993 106 .5 103.4 96.0 92.4 94.6 98.0 96.9 96.9 98.4 1 0 0 . 4 1 0 5 . 5 108.3 1994 108.7 103.5 98.2 95.5 96.4 96.1 96.0 98.7 96.5 96.4 1 0 1 . 9 107.1 1995 106 .2 106.1 98.7 94.9 97.4 98.7 . . . . . .

Grand Seasonal Indices (GSI) 107.05 105.41 97.88 95.64 96.36 97.19 97.29 97.29 97.45 99.17 103.97 105.91

Standard Errors (SE) 1.35 2.08 0.89 0.82 0.96 0.68 0.48 0.44 0.90 0.93 0.93 0.74

t-test values 5.22 2.60 -2.39 -5.30 -3.79 --4.11 -5.65 -6.11 -2.83 -0.89 4.26 7.93

Note: Null hypothesis H0: Mean = 100; alternative hypothesis HI: Mean does not equal 100; if t has a value outside the range +/-2.23, then H1 is accepted (there is statistically significant price seasonality for that month).

Source: Indices calculated from monthly retail price data for rice quality raw white, 1984-95, Sri Lanka, Department of Census & Statistics, mimeo tables.

Index

110

105

100

95

90

~ . , 0n averse, pri¢~ I . . . . . ~ by 12% bel',,,~en Io~m[ and highest Month

I I I I I I ~ [ r I

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Month

Figure 1 Seasonality of rice prices in Sri Lanka, 1984-95

Source: Table 1. The graph displays the mean seasonal price index for raw white rice (the GSI). The average annual

GSI = 100. The broken lines indicate a band of 1 standard deviation either side of the mean seasonal index.

Food price policy in Sri Lanka: F. Ellis et al.

(c)

87

The effect of this is to express the price in an individual month as an index number relative to a calendar year average annual price set equal to 100.00. Thus if the January price in a particular calendar year was 7% above the average price in that year, then that price would have an index number of 107.0, and so on. This is called the Seasonal Index (SI) for that month.

(d) Then for the 11 years as a whole, the index numbers (Sis) for say, January each year (or for any other month) can be analyzed with respect to their variability and whether they exhibit a rising or declining trend. This is done by calculating the mean index number for an individual month across the 11 years and examining its statistical properties. The mean index number is called the Grand Seasonal Index (GSI).

The results of applying this procedure to Sri Lanka rice price data are summarized in Table 1. The index numbers shown in the body of the table are Sis. Any individual SI, for example January 1993 given as 106.5, indicates the relative level of the actual rice price above or below a calendar year average of 100.0, reading along the row. In this instance, the price in January 1993 is 6.5% above the average price for calendar year 1993. The GSI is calculated as the mean SI for each month, reading down the column. For example, the GSI for January is 107.1, showing that on average, during 11 years, the January rice price was 7.1% above the overall average rice price in these years. The GSI row also averages to 100.0. Then the GSI for each individual month can be tested to see if it is different from 100.0, and therefore whether seasonality is statistically significant, or indeed, whether it is present at all.

In the case of Sri Lanka, rice price seasonality certainly exists. All but one calendar month display a GSI level which is significantly different from 100.0. With few exceptions, the pattern and predictability of this seasonality is remarkable stable. Standard errors associated with the monthly GSIs are small, and there is no discernible long run trend in the level of the Sis for individual months.

These results are demonstrated graphically in Fig. 1. This shows a marketing system which is functioning both effectively and efficiently with respect to interseasonal crop storage. As demonstrated by the band of one standard deviation either side of the average, there has been little annual variation in seasonal prices over the period from the mid-1980s to the mid-1990s. The highest variation, as might be expected, occurs in the period just before the main harvest, when the level of rice prices is dependent partly on stock levels remaining from the previous season and partly on uncertain expectations about the size of the forthcoming harvest. However, even this variability, for the month of February, is less than 2% either side of the average index level for that month.

Figure 1 displays a maximum seasonal price spread between the lowest and highest price month of 12%. This is not a high seasonal margin. The lowest price month is immediately after the main Maha harvest season in April. 6 The highest price month is January just before the new harvest starts. The pattern of prices suggests that fairly rapid turnover of rice stocks occurs between the first harvest and the end of the second harvest, from April to September. Prices then start to rise to cover storage costs over the period from September to January, but the price spread is only 10% over 4 months, or 2.4% per month compound. This percentage describes a gross return to storage. When account is taken of the interest rate costs of funds

6There are two main rice harvests in Sri Lanka called the Maha and Yala seasons. About two-thirds of rice output occurs in the Maha season, with harvesting mainly in January-April, and one-third occurs in the Yala season, with harvesting mainly in July-September. See Sri Lanka, Department of Census & Statistics (1995b).


tied up in stocks, plus the handling and deterioration costs of storage, it becomes improbable that uncompetitive profits are made from seasonal storage in the Sri Lankan rice market.

The conclusion of the seasonal price analysis is that the private rice marketing system in Sri Lanka is competitive and works well. There is no evidence in the behaviour of long term retail price series to suggest the contrary. The pattern of harvests means that the maximum storage period in the private sector is around 4 months, and this storage is undertaken both in paddy and rice, by farmers, traders and millers, mainly in relatively small quantities by numer- ous participants (Borsdorf, 1993, pp. xii, 29). Under such conditions it would be difficult for a single operator to "comer the market," and risky for any individual actor in the system to attempt to make unusual gains by keeping stocks off the market. The evidence for Sri Lanka compares favourably with that for Java which has a considerably more developed infrastructure, and where a similar analysis to the one presented here found a gross seasonal margin of 11% (Trotter, 1992; Ellis, 1993).

The foregoing conclusion might be modified were it discovered that the producer-consumer margin exhibited unusual characteristics in the Sri Lankan case. The producer-consumer margin captures most of the efficiency factors in crop marketing which are not described by seasonal price movements. In the rice market it covers the costs and margins of purchase from farmers, paddy transport to mills, milling, rice transport, wholesaling and retailing. Again, as with the seaonal analysis, a well functioning marketing system should exhibit stability in this margin, and the absence of large fluctuations or trends in the size of the margin, and a share of the margin in the retail price which compares favourably with evidence on competitive rice markets elsewhere.

The producer-consumer margin for the rice market in Sri Lanka was examined utilizing monthly data for farm-gate and retail prices, for the period 1990-95. 7 The data is summarized in Fig. 2, which also contains, for reference purposes, the GPS price for paddy delivery to the PMB.

The data utilized in Fig. 2 is in current money terms, unadjusted for inflation. 8 It is unusual, given seasonal price changes, for the proportionate share of the producer price in the retail price to remain the same month-by-month for a commodity like rice. Yet in the Sri Lanka case, the producer price is on average 76.5% of the retail price, and the coefficient of variation around this average is only 3.5% for the monthly price series over a 6-year period. Thus the producer-consumer margin has remained stable at an average proportion of 23.5% of the retail price during the 1990s. 9

The analysis of producer-consumer margins reinforces the conclusion already reached that private rice marketing in Sri Lanka is competitive and efficient. While outcomes at the level of individual farmers, traders and millers are no doubt quite variable in practice on the ground, the combined effect of a diverse and heterogeneous private marketing system is to produce extraordinarily homogeneous average price ratios and seasonal price relationships for the country as a whole.

VData on farm-gate paddy prices were supplied by the Agrarian Research and Training Institute (ARTI), which carries out a price data collection and monitoring role for the Food Security Committee. ~The proportion of the producer price in the retail price is unaffected if both price series are deflated by the same deflator. Since real retail and real producer prices are often computed by economists for different reasons using different deflators, it is less confusing in the present context to keep them both in nominal terms. "Some typical figures for this margin in the 1980s can be found in Ahmed and Rustagi (1985, p. 23). Margins for slaple foods varied from around 20% in Asian countries to as high as 40-50% in a number of African countries.


20.0

17.5

E • 15.0 .> 3 O"

o e 12.5 ' E

10.0 g~

7.5

5.0

retail price , i

. . . . . ~. ; .......... " ~ . . . . . . . . . . ..-'.~ ..... , ..... / : ; , : ..... ~ ..................... i ................... , . . . . . . . .

: ,,'-t...., ,,. i ' , . . ' " / \ '. /",",. i i '",. ...;. / , i '...L.s . ..,< ....... "... i ',, ...... i / ~L .," "... , \ . - '... ...... i ........... + '"--- ." ', ' . ..... ' - , "

. . . . . . . . ;::;::: ..... / " ....... ~ : : : : l " t V " . . . . . . . f . . . . . ~ ' . . . . . . . ! . . . . . . . i . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ! . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

i ......... / - / '~ i p ~ c e r price (~rice equivalent)

GPS price (r ice equivalent) . . . . . , . . ! • . . . . . . . . . . . . . . . . .

i

1990 1991 1992 1993 1994 1995

Year

Figure 2 Producer-consumer margins in the rice market 1990-95

Source: retail prices: Sri Lanka, Department of Census & Statistics, monthly retail prices by main types; producer

prices: Sri Lanka, Agrarian Research & Training Institute (ARTI).

Rice and wheat market interactions

Rice is the chief staple food in Sri Lanka, but wheat plays a significant secondary role, especially for the poorest fifth of the population in the urban and estate sectors of the economy. The interactions between rice and wheat markets are strongly influenced by policy, since the government can determine import volumes and domestic price levels for both commodities by varying tariff levels and regulating import quantities.

According to the Food Balance Sheet for Sri Lanka a given weight of rice or wheat flour makes a virtually identical contribution to dietary energy (Sri Lanka, Department of Census & Statistics, 1994). The figures are 349 kcal per 100 g rice and 348 kcal per 100 g wheat flour. Table 2 shows the trend in total dietary energy intake per capita in Sri Lanka, together with the contributions of rice and wheat flour consumption to the total. On average, over the 15- year period from 1980 to 1994, per capita energy consumption in Sri Lanka was just over 2300 kcal. Rice made a 40% contribution to this total and wheat made a 12% contribution. Thus rice is by far the dominant contributor to nutritional energy intake. However, as the table demonstrates, the picture is not static. While total energy consumption per person has been rising gradually according to these figures, the share of rice has fallen from 44 to 37%, while that of wheat has risen from 9 to 15%. In fact the percentage contribution of wheat to dietary energy in Sri Lanka has been growing at just over 2% per year in this period, j°

Before turning to an explanation of these trends by reference to policy and prices, it is useful

"~This growth rate, as others cited in this part of the paper, was calculated on simple linear trends applied to actual time-series data.


Table 2 Contribution of rice and wheat to per capita energy intake 1980-94

Total Rice Wheat Flour energy

Year keaVday kca~day % kcaVday %

1980 2169 966 44.5 204 9.4 1981 2200 983 44.7 240 10.9 1982 2189 944 43.1 265 12.1 1983 2361 1003 42.5 254 10.7 1984 2385 1032 43.2 283 11.9 1985 2517 1050 41.7 304 12.1 1986 2377 989 41.6 271 11.4 1987 2267 903 39.8 279 12.3 1988 2326 963 41.4 282 12.1 1989 2248 878 39.1 324 14.4 1990 2292 970 42.3 263 11.5 1991 2339 957 40.9 330 14.1 1992 2283 938 41.1 307 13.5 1993 2305 932 40.4 304 13.2 1994 2491 929 37.3 368 14.8 1995 (P) N/A 928 N/A 414 N/A

Average 1980-94 2317 962 41.5 285 12.3

Sources: Borsdorf (1993, p. 141); Sri Lanka, Department of Census & Statistics (1992-94).

to explore them further at the level of the national availability of rice and wheat respectively. Table 3 provides data on trends in rice supply, per capita availability, and the degree of self- sufficiency in rice production from 1980 to 1995. Total rice availability (production plus imports) has remained more or less static over this period at 1.7 million tons, giving an average availability of 102 kg per person per year. The key trends behind these averages are, first, that per capita availability is on a declining trend, and, second, that the degree of rice self- sufficiency is on a rising trend, attaining 100% self-sufficiency by the end of the period.

In summary, then, the rice market in Sri Lanka has been characterized by the following features over the period from 1980 to 1995:

(a) domestic production has grown, but not as fast as population growth, causing a potentially widening gap between output and consumption;

(b) the use of rice imports to close this gap has tailed off, eventually leading to negligible imports and the observed rise in the self-sufficiency ratio;

(c) the gap has in fact been closed by a declining trend in per capita rice consumption, thus also resulting in a declining relative contribution of rice to dietary energy for the country as a whole.

The parallel trends in the wheat market are also shown in Table 3. Wheat is a wholly imported commodity in Sri Lanka. In general, the supply of wheat flour is determined by the volume of wheat grain that is imported annually and milled by the single flour mill owned by Prima Ceylon Ltd. Occasionally, there have been notable imports of wheat flour, reflecting unforeseen shortfalls in imported wheat grain, significant proportions of which are obtained under various food aid programmes like the US PL480 programme. The key wheat trends revealed in Table 3 are the strong upward trend in total flour availability, and the consequent rising trend in per capita wheat flour consumption. In fact, total flour distributed through the

Food price policy in Sri Lanka: F. Ellis et al.

Table 3 Food Balance Sheet data for rice and wheat 1980-95

91

Rice market Wheat market

Domestic Rice Wheat Flour Flour rice imports Total rice Per capita Rice self- imports imports distributed Per capita production '000 availabiltiy availability sufficiency '000 '000 '000 m. distributed

Year '000 m. tons m. tons '000 m. tons kg % m. tons m. tons tons kg

1980 1363.5 189.5 1553.0 105.4 87.8 227.0 360.9 378.9 26.8 1981 1425.0 157.0 1582.0 105.4 90.1 439.2 0.0 440.4 30.4 1982 1377.3 160.9 1538.2 101.2 89.5 494.7 0.0 431.6 29.4 1983 1587.4 119.5 1706.9 110.7 93.0 571.8 21.9 424.4 28.5 1984 1542.8 26.5 1569.3 100.6 98.3 571.3 11.0 414.5 27.6 1985 1701.0 182.4 1883.4 118.9 90.3 655.1 0.0 478.6 31.6 1986 1658.8 220.2 1879.0 116.6 88.3 680.9 10.4 482.8 31.6 1987 1360.1 102.4 1462.5 89.4 93.0 578.6 10.0 486.7 30.5 1988 1583.0 188.7 1771.7 106.8 89.3 612.0 35.9 522.7 32.7 1989 1319.2 130.7 1449.9 86.3 91.0 637.2 38.0 569.1 33.9 1990 1622.3 172.0 1794.3 105.6 90.4 638.7 137 .0 494.2 30.3 1991 1527.0 133.0 1660.0 96.3 92.0 719.7 0.0 536.5 31.8 1992 1591.0 237.2 1706.5 98.1 93.2 706.1 0.0 561.1 32.8 1993 1706.9 206.9 1696.8 97.5 100.6 771.0 0.0 554.3 31.9 1994 1824.9 23.1 1690.6 97.1 107.9 885.3 0.0 671.5 38.6 1995(P) 1910.7 9.4 1688.7 97.0 113.1 1057.4 0.0 755.3 43.4

Average 1980- 95 1568.8 141.2 1664.6 101.4 94.2 640.4 39.1 512.7 31.2

Sources: Borsdorf (1993); Sri Lanka, Department of Census & Statistics (1992-94); unpublished data provided by Sri Lanka, Food Commissioners Department, 1996.

public system grew by over 3% per year in this period, and the per capita level of this distribution grew by just under 2% per year, these percentages being derived from linear trends estimated from the data given in the table.

In summary, the wheat flour market in Sri Lanka has been characterized by the following strong trends in the period 1980-95:

(a) a sustained rise in wheat imports, surpassing one million tons for the first time in 1995; (b) consequently, a sustained rise in the total and per capita availability of wheat flour over

this period, with the latter reaching nearly 40 kg per person per year by 1995; (c) consequently, a rising trend in both the absolute and relative contribution of wheat flour

to dietary energy, with the relative contribution increasing by 2% per year in this period.

These trends and interactions between the rice and wheat markets in Sri Lanka are clearly not the result of accidental market forces such as world price trends or switches in consumer preferences. The behaviour of both the rice and the wheat market is circumscribed by the interlocking components of the government food security system, the institutional features of which are described earlier in the paper.

Both rice and wheat imports are subject to tariffs. For rice, the ad valorem tariff has varied between 20 and 35% during the 1990s. In 1995, it stood at 35%. For wheat, an import duty of 25% in the early 1990s was reduced to 20% in 1992 and 1993, and was abolished in 1994. Both rice and wheat import volumes are also constrained by government importation decisions made through the FCD. Rice imports are permitted only by a few licensed private importers


(the bondsmen). There is no constraint on the quantity of such imports, although the bondsmen must comply with minimum stock requirements held duty-free in bonded warehouses as a food security reserve. However, release of these bonded supplies into the domestic market cannot take place below a minimum duty-paid price set by the FCD. In the event that this duty-paid minimum domestic price is below the world market price the food security stock is turned over by re-exporting rather than by selling at a loss in the domestic market. Wheat import volumes are planned and monitored by the FCD on an ongoing basis as part of its national food security role.

In addition to these instruments, the price of wheat flour to consumers has often been subsidized, by different amounts in different periods. The cost burden of such subsidies on the government budget is ambiguous since a large proportion of wheat imports are on concessional rather than commercial terms. After a period in which domestic wheat prices had been moving towards import parity, the incoming People's Alliance government sharply reversed this trend by reducing official wholesale and retail prices of wheat flour by 40% from Rs 12 to Rs 7 per kg, in September 1994.

The outcome of policy is observed in price trends and fluctuations for rice and wheat, and in the relationship between them. Table 4 provides data on the average retail prices of rice and wheat, and the price relationship between the two commodities. Prices are in money terms. The rice:wheat price ratio displays a strong upward trend. Indeed, it more than doubles between the early 1980s and 1995. An examination of the last column in Table 4 shows well-defined periodization in this upward movement. A first phase spanned 1980-88, when the rice:wheat price ratio averaged 0.94; the second phase spanned 1989-94, when this ratio had moved up to an average of 1.25; then a big leap occurred in 1995, when the ratio moved to nearly 2.00. Thus, in uneven jumps, rice has become significantly more expensive relative to wheat in Sri Lanka in the period under study.

While policy decisions have evidently resulted in growth of wheat demand at the expense

Table 4 Retail prices for rice and wheat 1980-95

Year

Rice all-island Wheat flour all- Rice/Wheat (parboiled) island Rs/kg price ratio Rs/kg

1980 4.43 4.86 0.91 1981 5.87 5.77 1.02 | 982 6.02 6.53 0.92 1983 6.20 6.68 0.93 1984 6.50 7.67 0.85 1985 7.18 7.77 0.92 1986 7.25 7.88 0.92 1987 7.56 7.88 0.96 1988 7.97 7.88 1.01 1989 11.22 8.72 1.29 1990 14.40 13.63 1.06 1991 15.25 12.46 1.22 1992 15.82 12.32 1.28 1993 16.48 12.66 1.30 1994 15.85 11.33 1.40 1995 16.11 8.41 1.92

Sources: 1980-89: Borsdorf (1993, pp. 151, 182); 1990-95: Sri Lanka, Department of Census & Statistics.


of rice, the relative importance of control over volumes versus manipulation of prices remains open to interpretation. Studies of rice and wheat demand in Sri Lanka conclude that both commodities are price inelastic at an aggregate level. For example, rice consumers are observed to adjust to price changes by varying between higher and lower rice qualities, rather than by changing the total amount they purchase (Borsdorf, 1993, p. xiv). Therefore some observers would argue that recent consumption trends are driven by availability rather than by changing price ratios. On the other hand, a powerful price incentive to switch consumption from rice to wheat is demonstrated in Table 4, and this certainly reinforces, even if it does not alone drive, the substitution in consumption which has occurred in recent years.

Events in the most recent period, post-1994, contain conflicts between domestic and trade branches of price policy, with large potential costs in terms of mixed signals to rice producers and financial resources wasted on fruitless interventions. The attempted revitalization of the near moribund PMB, by raising the GPS, conflicted directly with the downward pressure on rice prices induced by lowering retail wheat prices and encouraging consumers to switch from rice consumption. It would appear that the incoming government tried to support simul- taneously the two separate constituencies of rice farmers and poorer urban consumers, without heed to the interlocking nature of food markets between these two groups.

Real prices and impact on producers and consumers

Table 5 examines the long run trend in the real levels of rice and wheat prices. The interesting first result of this exercise is that the prices of both rice and wheat appear to have declined in real terms over the period 1980-94. This real price decline is both more sharply defined and steeper for wheat than for rice. Whereas for rice real prices move unevenly and provide only an ambiguous indication of a slightly declining trend, for wheat there is a strongly defined decline in which real prices have been falling at roughly 4% per year on trend.

Declining real food prices are favourable for consumers, especially if sustained as a secular

Table 5 Current and deflated prices for rice and wheat 1980-95

Rice all-island Wheat flour all- Colombo CPI Deflated prices (parboiled) island Rs/kg 1980 = 100

Year Rs/kg Rice Wheat

1980 4.43 4.86 100.0 4.43 4.86 1081 5.87 5.77 118.4 4.96 4.87 1982 6.02 6.53 131.6 4.58 4.96 1983 6.20 6.68 150.0 4.13 4.45 1984 6.50 7.67 175.0 3.71 4.38 1985 7.18 7.77 177.6 4.04 4.37 1986 7.25 7.88 192.1 3.77 4.10 1987 7.56 7.88 206.6 3.66 3.81 1988 7.97 7.88 235.5 3.38 3.35 1989 11.22 8.72 263.2 4.26 3.31 1990 14.40 13.63 318.4 4.52 4.28 1991 15.25 12.46 357.9 4.26 3.48 1992 15.82 12.32 398.7 3.97 3.09 1992 16.48 12.66 444.7 3.70 2.85 1994 15.85 11.33 482.9 3.28 2.35 1995 16.11 8.41 519.9 3.10 1.62

Sources: 1980-89: Borsdorf (1993, pp. 151, 182); 1990-95: Sri Lanka, Department of Census & Statistics.


trend. It means that they can either buy more staple foods for the same income, or diversify their consumption basket while keeping up the same level of staple food purchases. In the Sri Lankan case, declining real food prices have meant especially the substitution of wheat for rice which could have long run implications on consumption patterns and preferences going long beyond the immediate policy imperatives of the 1990s.

Declining real food prices are not so favourable for staple food producers, in this case paddy farmers. While the trend in real rice prices may be ambiguous and even nonexistent, the incomes of paddy farmers are nevertheless potentially affected adversely by the market growth of ever cheaper wheat flour. This is because the market share of rice falls, possibly permanently, demand for rice decreases, and the direction of price pressure is for the real price of rice to fall too. When relative prices move as strongly as they did in 1994, when the wheat flour price dropped from Rs 12 to Rs 7 per kg, it is clear that rice producers and traders will have faced powerful downward price pressures at all levels of the marketing system.

Domestic policy and international prices

The discussion of this paper has focused on domestic price formation rather than the relationship between domestic and world prices for rice and wheat. The reason for this is the stated aim of drawing conclusions about the coherence, effectiveness and necessity of the major components of the domestic food security apparatus, rather than concern with issues of international competitiveness. Nevertheless, it is appropriate to make some observations about trends and comparative levels between domestic and international prices of the staple foods.

Clearly the rice and wheat flour markets differ in regard to the economic factors of most interest in making comparisons between domestic and international prices. For rice, the key issue is whether domestic output has been protected from international competition in the long run, and whether rice production represents an efficient use of domestic resources compared to the alternative of importing rice supplies. For wheat, the key issue is whether wheat consumers in Sri Lanka have been subsidized by comparison to the international price of wheat, and therefore if wheat consumption has been artificially stimulated by reference to international opportunity cost criteria.

Not surprisingly, the position with respect to both these parity price issues is not entirely clear cut (Edwards, 1993, pp. 42-66). World prices of both rice and wheat are prone to short and medium term instability around long run trends, and in the case of rice there are always difficulties in bringing world prices of particular qualities of traded rice into comparison with the entirely different quality specifications of domestic rice.

For rice there appears to be some consensus that domestic producers have been protected relative to world prices in the long run, although the extent of such protection varies widely in different periods (Bhalla, 1991, p. 203; Edwards, 1993). The broad picture is that a high degree of nominal protection was enjoyed until the late 1970s, followed by a period when domestic producer prices were at or below import parity in the early 1980s, and the reemerg- ence of protection from the late 1980s onwards. World rice prices have declined in real terms in the long run, and so too have domestic prices in Sri Lanka, as shown in Table 5, but not to the same degree. In the 1990s nominal protection appears to have been on a slightly rising trend, from t0% in the early 1990s to 20% or more in the mid-1990s.

For wheat flour, several studies concur that on average wheat consumers paid about 10% above import parity prices in the period 1985-93, although there was considerable annual variation around this average. From 1994 to 1996, this position was sharply reversed, with


consumers enjoying a 40% subsidy compared to world prices. These trends in nominal protection help to explain the changing relative domestic prices between rice and wheat discussed in the previous section. In the 1990s more protection was afforded to rice than to wheat, and this contributed to the rise in the rice:wheat retail price ratio displayed in Table 4, with its ambiguous eventual impact on the real incomes of paddy producers due to the substitution provoked in consumption between wheat and rice.

Conclusions

Food price policy in Sri Lanka seems to illustrate some of the oldest cautionary axioms in the agricultural price policy literature (Krishna, 1967). It is a mistake to have more policy instruments than are required to achieve a stated goal, and the more complex the instruments operating on different parts of the system, the more likely that inadvertent and wasteful conflicts and side-effects will occur as a result of pulling different policy levers in uncoordinated ways.

This paper describes the food market intervention system in Sri Lanka, and poses the ques- tion whether the parastatal organizations that trade in rice and wheat play any useful role in contributing to food security and food price stability. Analysis of time-series price data for the rice market suggests that the private rice marketing system is competitive and efficient and comparable in its performance with well functioning marketing systems elsewhere in developing countries. There is no reason to deduce that the domestic distribution of wheat flour could not similarly be performed efficiently by private sector agencies.

It is also shown that trade policy instruments have a powerful and dominating effect on the evolution of domestic markets in staple foods in Sri Lanka. A combination of tariffs and import controls, coupled with food security reserves held in imported stocks, means that adjustments to domestic supplies and prices can be readily implemented. Piecemeal privatization of parts of the intervention apparatus, e.g. private bondsmen utilized to import rice and Prima Ceylon Ltd utilized to mill wheat, has not lessened the ability of the government to exercise food security objectives; however, nor has it lessened the need to get rid of redundant large-scale parastatal bodies that appear to serve no useful purpose to those ends.

It is interesting to compare the Sri Lankan case to that of Indonesia which one of the authors described in a previous article in this journal (Ellis, 1993). In the case of Indonesia, the annual setting of a floor price in advance of planting decisions; its effective defence at peak harvest by an active purchasing agency, Bulog; the stability of annual procurement levels by Bulog at around 4--6% of the harvest; and the historical reluctance by the government to import rice, meant that the floor price approach appeared the most effective and low cost means of achieving domestic price stability. In Sri Lanka, by contrast, the erratic and intermittent setting of the GPS; the widely varying procurement levels of PMB; the deteriorating infrastructure of PMB; and the flexible use of rice or wheat imports to keep staple food markets in balance, means that the GPS paddy price is a redundant policy instrument.

The two countries illustrate different solutions to the same policy challenges, however, the critical point is that the methods need to be clear and predictable, they should minimize the bureaucratic costs of implementation, and they should avoid duplication of function arising from a multiplicity of policy instruments. Similar issues to those surrounding the scope and function of food policy instruments in Sri Lanka are also arising in Bangladesh as its degree of rice self-sufficiency increases (Goletti, 1994).

The Sri Lankan case also illustrates how very much more difficult in practice is the task of dismantling outmoded mechanisms of state intervention than is recognized in a great proportion


of writing on structural adjustment and market liberalization. Institutions are woven into the structure and history of a society, and beliefs about their role and efficacy persist for years or even decades beyond the particular circumstances that made them seem essential at the time they were created.

A c k n o w l e d g e m e n t s

Thanks are due to many senior government personnel in Sri Lanka who gave generously of their time to discuss food policy issues. Special thanks are due to Professor Lakshman, Vice- Chancellor of the University of Colombo, for providing the institutional support without which the research could not have been conducted. The paper has benefitted from comments by an anonymous reviewer.

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Food price policy in Sri Lanka