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| Tuesday, 20 July 2004 |
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Role of the State in rice pricing by Dr. U P de S. Waidyanatha The price of rice has soared to unprecedented levels, the consumers are complaining, and the Government seems yet undecided what to do. Is somebody manipulating prices?.
This year, the situation has been totally different where prices have remained unusually high even soon after the Maha harvest. It would appear that the key players in the rice trade, aware of the Government's policy of no rice imports unless there are serious shortfalls in the local production, are exploiting the situation. The Maha crop The Maha crop has been about 12 percent less this year than usual because the rainfed rice production in the dry zone has been affected by dry weather. However, there should be about 1.6 million metric tons (MT) rice available for consumption for 2004 according to 2003/2004 Maha and 2004 Yala production estimates. A carry over stock of 164000 MT from 2003 due to the bumper harvests that year and imports (30,000 MT) makes the total estimate of rice available for human consumption to be 1.77 million MT being 91 percent or nearly 11 month's requirement of the annual national requirement of 1.94 million MT. Further, the 2002/2003 Maha production together with the carry over shocks totalling 1.29 million MT should be more than adequate to meet our rice requirements for 8 months, in other words, until at least the end of August by which time the Yala harvest would be available in the market. If so why have the prices escalated? Clearly illustrated The reason is clearly illustrated in Table 1. Whereas both the paddy and rice prices remained comparably high in January and February of both 2002 and 2004, with the mere importation of about 9,500 MT and 5300 MT and 36,000 MT in January and February and March 2002 respectively, just 10 days' requirement of rice, the prices had come down by nearly Rs. 6 per kg by April/May. Officials reveal that there are adequate stocks of paddy with several large millers and probably a few collectors who they claim control the rice market. There are some 1000 rice mills of which about 40% are commercial mills with a milling capacity of over 1MT per hour, the balance being custom mills. The owners of a few mills, with very large milling capacities appear to a have monopolistic control of prices. They procure and mill bulk of the local paddy production. Of course their investments in milling, storage and other operations are huge, but because of the very high turn over (milling capacities), they make reasonable profits even with a margin as little as a rupee or less per kilo of rice. A reputed wholesale dealer showed me his invoices for "Ratu Kekulu" and "Samba", being Rs. 1650/= and 1800/= per 50 kg bag, that is, Rs 33 and Rs 36 per kilo respectively. He maintains that he keeps only a margin of about a rupee and the retail dealer about Rs. 2/= per kilo. These margins, if true are not unreasonable. Wholesale dealers in Colombo also claim that millers, in not releasing adequate stocks have caused an artificial scarcity, to their advantage, and are making large profits margins because of no State intervention either through local purchases or imports of rice. Let the Government import just a few thousand tonnes of rice, and the prices will come tumbling down, a wholesale dealer remarked"! A Government official remarked that when the Ministers for Commerce and Agriculture paid an investigative visit to Polonnaruwa, some weeks back, there was a hive of rice milling and transportation activity! Fleets of lorries were being loaded with rice for the city - a facade to hoodwink the ministers? How much should the rice cost the consumer assuming that paddy is purchased by millers at the Government prescribed minimum price of Rs. 15/kg? Official calculations According to standard official calculations, the cost of production of rice to the miller is about 184 percent and 177 percent of it, respectively for parboiled rice and raw rice (about 33 to 35 percent is for husk and bran and the balance being collection, transportation, milling, bagging costs etc). Of course, the purchase price of paddy varies with the type and quality. At Rs. 15 per kilo of paddy, the cost of par boiled rice for the miller according to the above calculation should be about Rs. 27.60/kg. Assuming that he delivers to the wholesale dealer with a comfortable margin of Rs. 2.00 per kilo, the latter delivers to the retailer with a margin of Rupee. 1. and the retailer keeps a margin of Rs. 2, the price for the consumer should be Rs. 32.60 for a kilo of reasonable quality Samba. These margins are in fact higher than what millers, wholesale dealers and retail dealers claim they keep. However, only "Nadu" rice is now available at this price!. Millers, on the other hand, claim that the current price of paddy at farmgate or from the collectors is Rs. 2 or 3 above the prescribed minimum price of Rs 15 and that is the reason for high rice prices. The reality, however, is that the large millers and collectors collect bulk of the rice at harvest, often at prices below the prescribed minimum price and stock them, and farmers have only small stocks for sale at a later date. Some of these stocks are now coming into the market at Rs. 17. (Nadu) and Rs. 19/= (Samba) per kilo. The cost of production of rice to the miller at this price should be Rs. 31, (Nadu) and Rs. 35, (Samba). Is it then that the millers are pitching their rice prices for today's paddy prices, for paddy they in fact procured months ago, at much lower prices? Millers claim Contrary to the wholesalers' assertion that adequate stocks do not reach the city, the millers claim that consumer demand for rice has decreased substantially because of the high price and that some lorry loads of rice reaching the city had to be redirected or brought back. Millers also accuse wholesale dealers for keeping a margin far in excess of what they claim. A more discreet interpretation as to the cause of high rice prices, however, can be made only on an assessment of the actual rice/paddy stock position with all stakeholders in the trade, and the Government has a right to ask them to declare their stocks and monitor veracity. This will require maintenance of a comprehensive database, which we do not yet have. PMB disbanded The Paddy Marketing Board (PMB) was disbanded in 1996 in the belief that the local rice market is competitive, and there is no need for State intervention. Other state interventions such as the cooperatives and the CWE are now non-functional in regard to paddy procurement. PMB though an 'inefficient, giant,' full of corruption and so forth, however, had a price stabilizing impact although it procured only about 5% of the total national production (but a much higher percentage from the main producing areas). Its intervention also gave the farmers a higher margin. One study reveals that if the government had no intervention in paddy purchases, the farmgate price of paddy would have dropped by about 2.15% leading to a consequent drop in paddy production by 1.28 percent. Clearly, the desired free market forces do not then operate for rice. In the event of such market failure, equity concerns such as a fair price for both the farmer and consumer is justification for State intervention in the rice market. A suble intervention that does not hurt the farmer, but gives some redress to the consumer appears necessary. (The writer is Director General, National Agribusiness Council) |
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Produced by Lake House |
As evident from the Figure 1, rice prices usually come down after the
Maha harvest (March/April) and remain so until after October, and then
rise with decreasing stocks, unless there is market intervention through
imports.
