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Technical Assistance to the

Modernisation of Agricultural Programme in Sri Lanka (TAMAP)

Government of the Democratic Socialist Republic of Sri Lanka

European Union

Service Contract No 2007 / 147-446 EuropeAid/138-539/DH/SER/LK Technical Assistance to the Modernisation of Agricultural Programme in Sri Lanka (TAMAP)

DESK STUDY ON AGRICULTURE SECTOR, SUBSECTOR ASSESSMENT AND STAKEHOLDER MAPPING May 2018

Submitted to: Delegation of the European Union to Sri Lanka and the Maldives 389, Bauddhaloka Mawatha, Colombo 7, Sri Lanka Ministry of National Policies & Economic Affairs Department of National Planning, The Secretariat, 1st floor Colombo 01, Sri Lanka This project is implemented by a Consortium led by Ecorys Nederland , B.V

Technical Report: DESK STUDY ON AGRICULTURE SECTOR, SUBSECTOR

ASSESSMENT AND STAKEHOLDER MAPPING

Project title: Technical Assistance to the Modernisation of Agriculture Programme in Sri Lanka

Project number: ACA/2017/389-911

Country: Sri Lanka

Address: Ecorys Nederland B.V Watermanweg 44 3067 GG Rotterdam The Netherlands

Tel. number: T: +31 10 453 86 76

Fax number: F : +31 10 453 87 55

Contact person: Eleanor Harvie [email protected]

Date of report: 31 May 2018

Assignment period: 15 March – 31 May 2018

Author of report: Verité Research

Disclaimer. The content of this report does not reflect the official opinion of the European Union. Responsibility for the information and views expressed lies entirely with the author(s) and the consortium led by Ecorys Nederland BV for the implementation of TAMAP

PROJECT SYNOPSIS

Project Title: Technical Assistance to the Modernisation of Agriculture Programme in Sri Lanka

Project Details: Project Ref. No:

EuropeAid/138-539/DH/SER/LK Programme Manager

Dr Olaf Heidelbach

Date of project start:

8 January 2018 Contracting Authority

Delegation of the European Union to Sri Lanka and the Maldives 389 Bauddhaloka Mawatha, Colombo 7, Sri Lanka

Contract Duration:

36 months Name of contact person (Contractor):

Project Manager: Eleanor Harvie Project Director: Nick Smart

Contract No:

ACA/2017/389-911

Contractor’s name, address, telephone numbers and e-mail address:

Ecorys Nederland B.V Watermanweg 44 3067 GG Rotterdam The Netherlands T +31 (0)10 453 88 00 [email protected] [email protected]

Total contracted amount:

EUR 4, 167, 000 Team Leader

Dr. Christof Batzlen Postal Address:Ministry of National Policies and Economic Affairs, Treasury Building, Lotus Road,

Colombo 01, Sri Lanka.

mailto:[email protected]

Technical Assistance to the Modernisation of

Agriculture Programme in Sri Lanka

Agriculture sector assessment and stakeholder mapping Page i

SUMMARY 1 1 INTRODUCTION 7 2 PADDY SECTOR 8 2.1 Sector Overview 8 2.2 Government Policy 15 2.3 Challenges 18 2.4 Opportunities 22 2.5 Recommendations 23 3 OTHER FIELD CROPS SECTOR 27 3.1 Sector Overview 27 3.2 Government Policy 29 3.3 Challenges 31 3.4 Recommendations 34 4 VEGETABLE SECTOR 35 4.1 Sector Overview 35 4.2 Government Policy 41 4.3 Challenges 42 4.4 Opportunities 43 4.5 Recommendations 44 5 FRUIT SECTOR 47 5.1 Sector Overview 47 5.2 Key Subsectors 49 5.3 Government Policy 53 5.4 Challenges 55 5.5 Opportunities 60 5.6 Recommendations 62 6 TEA SECTOR 67 6.1 Sector Overview 67 6.2 Key Trends 69 6.3 Government Policy 71 6.4 Challenges 73 6.5 Opportunities 76 6.6 Recommendations 78 7 RUBBER SECTOR 81 7.1 Sector Overview 81



Agriculture sector assessment and stakeholder mapping Page ii

7.2 Key Trends 82 7.3 Government Policy 84 7.4 Challenges 85 7.5 Opportunities 87 7.6 Recommendations 88 8 COCONUT SECTOR 91 8.1 Sector Overview 91 8.2 Key Trends 92 8.3 Government Policy 93 8.4 Challenges 95 8.5 Opportunities 98 8.6 Recommendations 99 9 SUGAR SECTOR 101 9.1 Sector Overview 101 9.2 Key Trends 102 9.3 Government Policy 104 9.4 Challenges 106 9.5 Opportunities 109 9.6 Recommendations 110 10 EXPORT CROPS SECTOR 113 10.1 Sector Overview 113 10.2 Government Policy 117 10.3 Challenges 119 10.4 Recommendations 123 11 FLORICULTURE SECTOR 127 11.1 Sector Overview 127 11.2 Government Policy 129 11.3 Challenges 130 11.4 Recommendations 132 11.5 Sector Overview 132 11.6 Government Policy 135 11.7 Challenges 136 11.8 Recommendations 137 12 INLAND FISHERIES AND AQUACULTURE SECTOR 139 12.1 Sector Overview 139 12.2 Government Policy 145



Agriculture sector assessment and stakeholder mapping Page iii

12.3 Challenges 147 12.4 Opportunities 150 12.5 Recommendations 152 13 LIVESTOCK SECTOR 155 13.1 Sector Overview 155 13.2 Key Trends 161 13.3 Government Policy 163 13.4 Challenges 167 13.5 Opportunities 171 13.6 Recommendations 173 14 AGROFORESTRY SECTOR 177 14.1 Sector Overview 177 14.2 Government Policy 181 14.3 Challenges 182 14.4 Opportunities 183 14.5 Recommendations 184 15 KEY STAKEHOLDER PROFILES 187 15.1 General 187 15.2 Paddy 193 15.3 Export Crops 194 15.4 Vegetables& Fruits 194 15.5 Tea 195 15.6 Rubber 195 15.7 Coconut 196 15.8 Sugar 197 15.9 Other Field Crops 197 15.10 Floriculture 198 15.11 Inland Fisheries & Aquaculture 198 15.12 Livestock 200 REFERENCES 203 ANNEX 1 225 ANNEX 2 227 ANNEX 3 232 ANNEX 4 234



Agriculture sector assessment and stakeholder mapping Page iv

List of Tables Table 2.1: Key Players in the Paddy Sector Value Chain 10 Table 2.2: Rice availability situation - Maha 2017/18 13 Table 2.3: Marketing Costs and Margins of Paddy/Rice (Long Grain) from the Farmer

at Hambantota to Consumer at Kirulapona in 2012 19 Table 2.4: Marketing Costs and Margins of Paddy / Rice (Round Grain) from Farmers

at Anuradhapura to Consumer in Gampaha in 2012 19 Table 3.1: Extent and Production of Other Field Crops 27 Table 3.2: Product specific activities – National Food Production Programme 2016 31 Table 3.3: Productivity of other field crops, MT/Ha (2006-2015) 32 Table 3.4: Import substitution – targets and achievements 33 Table 4.1: Geographical Distribution for Vegetable Production 35 Table 4.2: Average Retail Prices of Selected Consumer Items, 2007 – 2016, LKR 37 Table 4.3: National Production Extent of Vegetables, (Hectares) - 2011 to 2015 38 Table 4.4: National Production of Vegetables, Production (MT) - 2011 to 2015 38 Table 4.5: Average Producer Prices of Selected Items, 2007 – 2016 39 Table 4.6: Top Ten Importers of Vegetables (excluding those under HS 0713) from Sri

Lanka, 2014-2016, USD thousands 40 Table 5.1: Fruit Production by Land Extent in Hectares 47 Table 5.2: Fruit Production by Number of Fruits in Metric Tonnes 48 Table 5.3: Export Performance by Fruit, 2007-2016 49 Table 5.4: Cost of cultivating pineapple 50 Table 5.5: Traditional and improved banana post-harvest operations 66 Table 6.1: Number of Holdings and Extent of Tea by Sector and by District, 2002 68 Table 6.2: Trends in Tea Production in Sri Lanka 70 Table 7.1: Trends in Rubber Production in Sri Lanka 82 Table 8.1: Trends in Coconut Production in Sri Lanka 92 Table 8.2: Domestic Consumption as a Percentage of Production 92 Table 9.1: Trends in Sugar Production in Sri Lanka 103 Table 9.2: Sugar Imports, 2012-2016 104 Table 10.1: Volume of Exports, kg ’000 114 Table 10.2: Value of exports, LKR million 114 Table 10.3: Current value addition status for Export Agriculture Crops (2016) 115 Table 10.4: Cultivation and production – the area cultivated 115 Table 10.5: Main cultivation districts for each product 116 Table 12.1: Inland fish catch by major species, MT (2012-2015) 143 Table 12.2: Fish products exported from Sri Lanka to the world 144



Agriculture sector assessment and stakeholder mapping Page v

Table 13.1: Number of Poultry Farms by District, Type of Poultry and Size, 2017 158 Table 13.2: Swine Industry - Key Statistics 2007 - 2016 160 Table 13.3: Imports of Milk and Milk Products, 2016 162 List of Figures Figure 2.1: Agro-climatic zones of Sri Lanka 9 Figure 2.2: Value Chains for Paddy/Rice in Sri Lanka 12 Figure 2.3: National Average Yield of Paddy (1996-2015) 14 Figure 2.4: Annual Average Paddy Yield by Region (2011-2015) 14 Figure 2.5: Imports of rice (2012-2016) 18 Figure 3.1: Other field crops production, MT (2016) 28 Figure 4.1: The Vegetable Value Chain 36 Figure 4.2: Average monthly household expenditure on vegetables, 1985-2016 37 Figure 4.3: Exports of Vegetables from Sri Lanka, 2007-2016 40 Figure 5.1: Export Performance, 2008-2018 (February) 49 Figure 5.2: Traditional banana supply chain from Embilipitiya to Colombo 52 Figure 5.3: Key stakeholders in the banana supply chain and losses incurred during the

traditional practices of handling 59 Figure 10.1: Composition of Export Crops (2016) 113 Figure 10.2: Cinnamon value chain 116 Figure 11.1: Floriculture Exports, USD million 127 Figure 11.2: Floriculture Exports, USD million 133 Figure 12.1: Aquaculture and inland fish production, MT (1999-2017) 140 Figure 12.2: Production cost and farm gate prices for shrimp (2008-2014) 142 Figure 13.1: Key players in the dairy industry in Sri Lanka 156 Figure 13.2: Supply chain for milk 157 Figure 13.3:Average Monthly Milk Production, 2006-2017 162



Agriculture sector assessment and stakeholder mapping Page vi

ACRONYMS AgMIS Agriculture Information Management System AI Artificial Insemination AQDCs Aquaculture Development Centres ASC Agrarian Service Centers AWD Alternate Wetting and Drying BMPs Best Manufacturing Practices CBF Culture-Based Fisheries CBOs Community-based Organizations CBPP Contagious Bovine Plural Pneumonia CCC Ceylon Chamber of Commerce CIS Commonwealth of Independent States CPD Contagious Pustular Dermatitis CRI Coconut Research Institute CRIWMP Climate Resilient Integrated Water Management Project CSA Climate Smart Agriculture CSDDLS Commercial Scale Dairy Development Loan Scheme CTA Colombo Tea Auction CTC Crush, Tear, Curl DAPH Department of Animal Production and Health DAR Department of Aquatic Resources DEA Department of Export Agriculture DM Dry Matter DoA Department of Agriculture EACs Export agricultural crops EDB Export Development Board EIA Environmental Impact Assessment ET Embryo Transfer EU European Union FAO Food and Agriculture Organisation FDI Foreign Direct Investment FGL Farmapine Ghana Limited FPNP Food Production National Programme GAP Good Agricultural Practices GDP Gross Domestic Product GI Geographical Indications



Agriculture sector assessment and stakeholder mapping Page vii

GMP Good Manufacturing Practices HACCP Hazard Analysis and Critical Control Point HCRDI Horticultural Crop Research and Development Institute IPHT Institute of Post-Harvest Technology ITC International Trade Centre K Potassium LDO Livestock Development Officer LFVPPEA Lanka Fruit and Vegetables Producers, Processors and Exporters

Association LKR Sri Lankan Rupee LO Livestock Officer MFARD Ministry of Fisheries and Aquatic Resources Development MoA Ministry of Agriculture MPCSs Multipurpose Cooperative Societies MSMEs Micro, Small and Medium Enterprises MT Metric Tonne N Nitrogen NAC National Agribusiness Council NAQDA National Aquaculture Development Authority NARA National Aquatic Resources Research and Development Agency NBGD National Botanic Gardens Department NCFRD National Committee on Floriculture Research and Development NCRC New Comprehensive Rural Credit NIFNE National Institute of Fisheries and Nautical Engineering NLDB National Livestock Development Board NPIP National Plantation Industry Policy Framework NTM Non-Tariff Measures OFCs Other Field Crops P Phosphorus PDAPH Provincial Departments of Animal Production and Health PFP Participatory Forestry Project PIP Public Investment Programme PMB Paddy Marketing Board RAS Recirculating Aquaculture Systems RO Research Officer RPCs Regional Plantation Companies



Agriculture sector assessment and stakeholder mapping Page viii

RSS Ribbed Smoked Sheets SEPC Socioeconomic and Planning Centre SLCARP Sri Lanka Council for Agricultural Research Policy SLSC Sri Lanka Sugar Corporation SLTB Sri Lanka Tea Board SMEs Small and Medium Enterprises SPF Specific Pathogen Free SPMDC Seed and Planting Material Development Center SPR Specific Pathogen Resistant SPS Sanitary and Phytosanitary Measures SRDI Sugar Research and Development Institute SRI Sugarcane Research Institute SRI Systems of Rice Intensification STDF Standards and Trade Development Facility TRI Tea Research Institute TSR Technically Specified Rubber UAE United Arab Emirates UK United Kingdom UNESCO United Nations Educational, Scientific and Cultural Organisation US United States USD United States Dollar WIPO World Intellectual Property Office UAE United Arab Emirates UK United Kingdom



Agriculture sector assessment and stakeholder mapping Page 1

S U M M A R Y

Agriculture continues to be an important sector for Sri Lanka – in 2017, it accounted for 7.5% of Sri Lanka’s GDP and 26% of total employment, and agricultural exports made up 23% of total exports. Arable land makes up 21% of the land area and permanent cropland accounts for 16%. This report provides an overview of the current status of selected key agricultural sub-sectors to inform the work anticipated under the Technical Assistance to Modernising Agriculture Programme (TAMAP). These sub-sectors include, small-scale subsistence agriculture (paddy, other field crops, vegetables and fruits); plantations (tea, rubber, coconut and sugar); export crops; inland fisheries and aquaculture; livestock farming; and agroforestry. Sectoral contribution to GDP – Paddy, Sri Lanka’s main agricultural crop which constitutes the staple diet of Sri Lankans, contributes to 0.8% of GDP while tea accounts for 2% of the country’s GDP. Growing of fruit and vegetable account for 0.6% of 0.5% of GDP. Export crops account for 0.5% of GDP. Animal production accounts for 0.7% of GDP while inland fisheries and aquaculture make up 0.1% of GDP. The national account statistics available does not provide contribution of other sectors separately. Exports: Tea, accounting for 13% of total export revenue remains the second largest contributor to exports following apparel. Spices are also an important contributor to exports accounting for 4%. Sri Lanka dominates the global market for pure cinnamon, accounting for 90% of global exports. The other sectors have potential to expand, however, at present the contribution to exports remain low. Key stakeholders: The activities of the different sectors fall under multiple Ministries and government agencies. The key Ministries are Ministry of Agriculture, Ministry of Plantation Industries, Ministry of Primary Industries, Ministry of Industry and Commerce, Ministry of Fisheries and Aquatic Resources Development and Ministry of Sustainable Development and Wildlife. The key government agencies are the Department of Agriculture, Department of Export Agriculture, Department of Agrarian Development, Department of Irrigation, Department of Animal Production and Health, Sri Lanka Export Development Board, Paddy Marketing Board, Sri Lanka Tea Board, Coconut Development Authority, Department of Notational Botanic Gardens, Forest Department, Institute of Post-Harvest Technology, National Plant Quarantine Services and National Aquaculture Development Authority among many others. The formal private sector growers and processors in general have associations that represent their interests such as the Ceylon Chamber of Commerce, National Agribusiness Council, Spices and Allied Producers and Traders Association (SAPPTA), Tea Exporters’ Association (TEA) in the tea sector, Coconut Growers Association, the Lanka Fruit and Vegetable Producers, Processors and Exporters Association, the Seafood Exporters Association in Sri Lanka and others.

K e y c h a l l e n g e s

The literature review reveals that the key challenges facing different sub-sectors in general to be common across all sectors. Low productivity of land and inputs: This is a major constraint to the expansion of the sector. In terms of paddy, for example, the realised paddy yield average 3.8 metric tonnes per hectare (mt/ha) but the potential yield stands at around 7 mt/ha. Similarly, pepper yield is estimated at 590 kg/ha but potential yield under research conditions is estimated to be 2,000 kg/ha. In general, across all sectors, low productivity was often symptomatic of systemic issues within the sector. These include factors such as adverse weather conditions and soil erosion and




resultant poor soil fertility, lack of technical knowledge of farmers, limited availability of good quality seeds, inadequate research and development. Some of these factors that contribute to low productivity is discussed in detail below: Adverse effects of changing weather patterns: Across sectors, the most common challenge to the development was its vulnerability to the adverse impact of changing weather patterns. Many sectors have not developed mechanisms and technology to adapt to the increasing prevalence of droughts and extreme rains. For example, unfavourable weather caused major problems in the tea sector in 2016, with prolonged drought leading to supply shortages. Weather related supply shortages affect domestic prices as well as international competitiveness of exported products. In the rubber sector, for example heavy rainfall restricts tapping and droughts reduce yield during critical months. Extended periods of drought in coconut growing areas have adversely affected coconut production. Lack of technical knowledge and good practices of farmers: Technical knowledge such as improved cultivation methods, selection and use of high quality seeds and planting material, crop management techniques, proper fertilisation application protocols, and in the case of fisheries and dairy production, the use of the best management practices, biosecurity measures and veterinary services were severely underused, and this absence was even more dominant among smallholder farms. Weak extension services and connectivity of knowledge sources and expertise limits the diffusion to farmers is identified as a key root of the problem. Training opportunities and awareness of even the limited training available especially for small scale farms is limited. Vulnerability to pests and disease: Vulnerability to pest and disease is a common feature of most subsectors reviewed and can have devastating effects on domestic production. For example, the coconut sector has been affected by various pests and suffered a major epidemic recently of “leaf wilt disease” which spread across the coconut plantations in Southern Sri Lanka, damaging more than three hundred thousand coconut trees. The main reason for the continued prevalence of such pests and disease is the ineffectiveness of the control measures that have been introduced to eliminate those pests. Such outbreaks are especially damaging to crops with significant export investment, as global standards become increasingly stringent. In addition to crop agriculture, disease a prevailing source of instability in production and farm failure of fish and shrimp farms. The lack of capacity to assess, diagnose, manage and prevent diseases is common across all sectors of aquaculture in Sri Lanka. Similarly, small ruminant industry, namely that of goats, is plagued by common ailments such as chill, pneumonia, diarrhoea, mainly due to the poor management and lack of skills among smallholder farmers. Lack of innovation and value addition: Production in most sectors was characterised by primary products, with little innovation or value addition taking place. This issue is a critical challenge for entrepreneurship development and tapping into the international market in the sectors. For example, the bulk of spices are exported without or with very little value addition. 90% of the cinnamon that is produced in Sri Lanka is exported in bulk, in the form of quills. Even when value-added products are exported these are largely low-tech value-added products such as ground/crushed spices that are exported in small quantities. Similarly, in the fruit sector, there is a significant potential to export value added products such as processed food and beverages, which is constrained by lack of specialised infrastructure, inadequate training and capacity building and ineffective marketing. In floriculture, there has been no introduction of new varieties for the export market, lack of locally produced novel varieties, and no market-oriented breeding programs. The currently available level of research support and advisory capacity is inadequate compared to the ever-increasing demands of the industry. Insufficient supply of high-quality inputs: Access to sufficient high-quality inputs is a significant challenge in most of the sectors reviewed in the study. The limited availability of high-quality hybrids seeds and other planting material was documented in the fruit and




vegetables, coconut, sugar and floriculture sectors. In the case of fruits, vegetables and floriculture, restrictions placed on the import of hybrid seeds are a key factor. These restrictions result in major problems with delays, inspections, quarantines and permits making the process cumbersome and costly. There is a lack of appropriate seed cane nursery programmes to provide quality seed cane to sugarcane cultivators. The inability to access sufficient quantities of high-quality inputs has serious consequences in these sectors. It significantly affects the export potential in the fruit, vegetables and coconut sectors where domestic production is often insufficient to meet export demand. Lack of improved varieties also affects the paddy sector, which has not just managed to meet domestic demand in recent year. There have also repercussions in other sectors. In the poultry industry for example, the local production of maize is not sufficient to fulfil the requirement for animal feed production and restriction of imports meant to encourage production are instead driving up prices and overall cost of poultry production. The shortage of fingerlings in inland fisheries sector is constraining the sector from reaching a maximum annual fish production of 700 kilograms per hectare(kg/ha) against current production of 150 kg/ha. Lack of quality testing services for export products: Exports are subject to increasingly stringent and complex international and local standards related to food quality and safety. To ensure export success, producers must provide evidence of compliance with these standards through the services of accredited testing facilities. A key issue facing exporters in most sectors is the lack of accredited testing services that have the capability to certify products for the required international standards. For example, Sri Lanka’s key export, tea, must adhere to stringent standards to be exported to destinations such as Japan and the EU and currently, there is an absence of testing services that can conduct the full scope of tests required. Hence, Sri Lankan tea exporters need to send samples to overseas laboratories. The high cost of testig abroad deters many of the smaller and medium producers from exporting. Similar issues are faced with both fresh and processed fruit and vegetable products, and spices. Poor post-harvest and storage infrastructure: The underdeveloped nature of rural infrastructure such as roads, irrigation and power supply contribute to the challenges of developing value-added industry in most sectors. In addition, the lack of storage facilities, cold storage and transport facilities is especially detrimental to highly perishable products such as fruit and vegetables and floriculture. In the vegetable sector, an estimated 16-40% of total production is wasted as post-harvest losses due to poor storage and transport. In addition to these common issues, there are challenges that are specific to a sector. For example, the ineffectiveness of the fertiliser subsidy programme has been identified as a key area for reform in the paddy sector. A key issue threatening the decline of production in the plantation sector is the lack of labour and the high cost of labour available. For example, labour costs account for more than 60% of the total production cost in the tea sector. The shortage is driven by an ageing workforce, outward migration of skilled workers and a reluctance of the younger generation to engage in these industries. Another issues facing the plantation sector is reduction in the availability of land, as a result of urbanisation and competition and other crops. The sugar sector’s growth has been disrupted by the lack of institutional framework and ad hoc policies. These sector-specific challenges are outlined in greater detail in the rest of the report.

R e c o m m e n d a t i o n s

Several recommendations have been made to overcome the challenges faced in the agricultural sector. Some of the key recommendations are summarised below. Increased investment in research and development: Greater research and development is one of the key changes that has been cited as having cross-cutting benefits across sectors. In




the paddy sector, research impact is in part reflected in the increase in yields, from about 1.5 mt/ha in the early 1950s to over 3.5 mt/ha in the late 1990s. Increased research by the Department of Agriculture is demanded in the vegetable sector to develop mother plants of high yielding, disease resistant varieties that the private sector can propagate to overcome the excessive application of chemicals. Innovation is also critical in the rubber sector as there is there is limited product and market diversification in the sector. Adopting climate-change mitigation strategies: The National Adaption Plan (2016-2025) makes the following recommendations to ensure food security in the face of climate change: develop heat/drought tolerant varieties and breeds; develop and promote water efficient farming methods; adjust cropping calendars according to climate forecasts; develop systems for the timely issuance and communication of climate information to farmers; and develop research institutes’ capacity for conducting research drought-tolerant varieties/breeds and climate resilient farming methods. Additional measures such as the need for a well-functioning crop insurance scheme is strongly felt in some sectors to protect farmers from adverse conditions affecting cultivation. Enhancing farmer knowledge through improved extension services and training programmes: Another important area for reform is in the dissemination of extension services to improve farmer awareness and implementation of the good agricultural practices. In the tea sector, despite numerous capacity building programmes aimed at smallholders which account for the bulk of tea production in Sri Lanka these programmes have limited outreach. Therefore, effective measures to enhance their knowledge and capabilities relating to various aspects of tea production are necessary. Increasing value addition: There is room for greater value addition in production in the agricultural sector, especially for exports. In the tea sector, less than 10% of tea is exported as tea bags. However, tea bags constitute a value addition of 84% more than packeted tea and 88% more than bulk tea. Therefore, Sri Lanka should increase the exportation of tea bags and other high value-added tea products such as premium teas, tea infusions, tea extracts, etc. There is also a high potential for value addition with crops such as cinnamon. This includes cinnamon based food products such as ground cinnamon, soft drinks and carbonated drinks, cinnamon tea, confectionaries (such as toffees or chewing gum), bakery products (biscuits, buns and cakes), honey, syrup, and other similar products. Introducing new technologies and methods: Agricultural technologies and best practices are constantly evolving, and can be adopted to increase productivity, quality and safety. For example, cost-effective post-harvest measures such as the use of standardised plastic crates, evaporative coolers and hermetically sealed plastic storage bags can be used to minimise post-harvest losses caused by poor storage facilities in the fruit and vegetable sector. Increasing access to lack technology such as poly tunnels and drip irrigation can reduce chemical use, protect crops from unfavourable weather or diseases, and allow growing in climates or geographically that are not traditionally suitable for the crop. In the floriculture sector, innovative techniques can be introduced to increase the product range such as flower preservation and bonsai. Techniques such as drying aromatic flowers and advanced preservation techniques have already been imitated and should be expanded. Strengthening artificial insemination delivery and breed-improvement programmes can increase milk production in the dairy sector. Improving quality and safety of production: Low quality and safety is identified as a key bottleneck for expanding in exports for a product. Measures have been proposed in the different sectors that address the lapses in safety and quality controls throughout the supply chain. In the highly perishable fruit and vegetable sector, these include adopting stringent food quality control measures and complying with global quality standards relating to packaging, labelling, environment and ingredients; establishing stronger controls to minimise residue from




fertilisers and pesticides; preventing contamination with heavy metals; establishing traceability and record keeping systems; and establishing collection and cold storage centres for fruits that are easily perishable. Better quality inputs: Other measures that have been proposed to increase quality of production include the use of high quality inputs. In the sugar sector, introducing superior cultivars and establishment of a proper seed cane nursery programme to provide farmers with improved varieties of seed cane has been proposed. In the livestock sector, the need for better feed ingredients has been highlighted.

O p p o r t u n i t i e s

Apart from the recommendations made, the literature also identifies unexplored opportunities in many of the sectors, some of which are highlighted below: Export potential of organic and value-added products: Organic products are consumed by a growing number of health-conscious consumers worldwide, especially in Europe Several rice-producing countries such as Thailand and Cambodia are adopting strategies to tap this new market. By contrast, here is no evidence that Sri Lanka is currently exporting significant quantities of organic rice to these markets. Producing and exporting organic rice can be an opportunity, because the availability is often not sufficient for the growing demand. There is also potential for value addition of rice products - rice flour and rice fermented beverages have got growing demand in many foreign markets. Similarly, in tea, the Tea Research Institute is currently exploring how to increase value addition beyond the conventional methods - projects include developing a high-quality instant tea mixture for vending machines, using tea leaves for various cosmetic applications and improving the process of instant black tea production. If these research projects prove to be successful, they will open up numerous opportunities for the tea industry of Sri Lanka in the future. Growth in global demand: There is high demand in the world market for most agricultural products, a key challenge Sri Lanka face in tapping this demand is quantity and quality of supply. Sectors such as rubber and coconut are experiencing growth in global demand that Sri Lanka is unable to meet due to domestic constraints. The primary competitive advantage that the Sri Lankan rubber products have over those of competing countries is that the majority of Sri Lankan rubber products are based on local availability of natural rubber. However, the rubber production has declined over the years and Sri Lanka’s global share in the value-added rubber product sector is a mere 0.25%. There are ample opportunities to move further up in the value chain to capture a higher portion of this thriving global industry. Sri Lanka has not been able to fully capitalise on the rise in popularity of coconut related products due to increased awareness of its health benefits, mainly due to insufficient production of coconuts. While Sri Lanka exports a vast array of value-added coconut products, there are still untapped market opportunities that can be explored. Exportation of coconut water, a by-product of the processing industry, is one such market opportunity. Marketing and Branding: Exploring different branding and marketing options such as providing nutritional information, organic and other certifications can be a strategy to create differentiated products in a homogenous market in sectors such as paddy and fresh fruits and vegetables, both domestically and internationally. For example, the TJC mango, developed in Sri Lanka, branded as a unique product, and priced higher than the normal mango varieties. Most fruits grown in Sri Lanka are not fully underutilised and marketed. Sri Lanka has many fruits that are rich in nutrients and vitamins and that can be processed into ayurvedic medicinal and beauty products. Sri Lanka already has a long ayurvedic tradition so there is scope to pair up the fruit sector with research support from government institutions.




Power generation and fuel potential of sugar: Currently, electricity generated at the sugar factories is capable of only partially fulfilling the power requirements of the mills. However, power generation programmes are underway to expand their capacities and if successful, will be able to contribute to the national grid as well. Sri Lanka spends a significant amount of foreign exchange to import fuel. Currently, fuel grade ethanol is not produced in Sri Lanka. With proposed plans to increase sugarcane cultivation, ethanol production could also be increased and approximately 20% of the country’s petrol consumption can be substituted with ethanol. Untapped production potential in aquaculture: Over 8,500 ha in Sri Lanka can be developed into aquaculture. At present, only 25% of these areas are used for aquaculture. Further, the opening up of the country’s Northern and Eastern Provinces after the civil conflict, generates new opportunities by enabling access to many virgin areas well suited for brackish as well as marine species aquaculture. In addition, there is potential to develop culture-based inland fish production in perennial and seasonal tanks, significant numbers of which remain underutilized at present. Agro-tourism: Some Kandyan home gardens are promoted as “spice gardens” among tourists, and tourists are introduced to various local spices and medicinal plants at these home gardens. Research on these spice gardens indicates that these “spice gardens” operate at a technical efficiency of 84% which indicated that there is potential for further expansion and improvement.




1 I N T R O D U C T I O N

The Government of the Democratic Socialist Republic of Sri Lanka and the European Union signed an agreement on "Support to the modernisation of the agriculture sector in Sri Lanka" on 6 April 2017. The programme's objective is to contribute to a more productive, diversified, climate resilient, market oriented and equitable agriculture in Sri Lanka. The specific objective is to contribute to the creation of the enabling conditions for small holder farmers in poverty-stricken districts to move towards a more sustainable, resilient and productive agriculture. This report seeks to inform one component of this programme which is the Technical Assistance to Modernising Agriculture Programme (TAMAP). The specific objective of this assignment is to conduct a stakeholder analysis of the agriculture sector in Sri Lanka with a view to gaining a robust understanding of key stakeholders across the sector, including their positions, ideas and their interests to inform future activities of the TAMAP. Sri Lanka’s agriculture sector is characterised by having many stakeholders and each with their own areas of jurisdiction and interests, and which often overlap with those of other actors. The technical assistance will operate mainly, but not exclusively, at the national level and will provide support to the main stakeholders in identifying and addressing the needs/gaps in capacities, policy, fiscal, legislative or regulatory frameworks needed to enable small holder farmers to move towards a more sustainable, resilient and productive agriculture. This working document is compiled with the objective of assisting agenda setting to inform policy formulation. the assignment provides an overview of the thirteen sub sectors. The information is expected to help TAMAP improve its understanding of the broad policy context of Sri Lanka’s agriculture and subsectors in order to assist Government develop pragmatic policy and strategies to modernize the sector. It will also serve as a document which can be used as a resource for any future initiatives in the sector. The report is divided into fourteen sections. The first thirteen sections provide an overview, including the general trends, policy direction, opportunities and challenges, and recommendations identified in the literature in the sub-sectors identified for intervention under the programme. These sectors are broadly categorised as follows: Small Scale Subsistence Agriculture Plantations Export Crops Floriculture Inland Fisheries and Aquaculture Livestock Agroforestry

The final section of the report provides profiles of the key stakeholders in the above sectors.




2 P A D D Y S E C T O R

2 . 1 S e c t o r O v e r v i e w

Rice is the major crop for most farmers and Sri Lanka’s main agricultural product. Paddy cultivation contributes around 0.8% to GDP during the period 2011-2016.1 Rice is the staple diet of the people in Sri Lanka and is the single most important crop.2 About 1.8 million farm families are engaged in paddy cultivation island-wide.3 Since rice is the staple diet and its cultivation is the main occupation of millions of small scale producers the prices of both paddy and rice significantly affects the welfare of the people in the country. 4 Rice is cultivated in 34% of total cultivated areas in Sri Lanka. 560,000 hectare (ha) are cultivated in Maha seasons and 310,000 ha are cultivated during Yala seasons. On average 560,000 ha are cultivated during the main season and 310,000 ha during the second season making the average annual extent sown with rice to about 870,000 ha.5

2 . 1 . 1 E m p l o y m e n t

The majority of the Sri Lankan paddy farmers are small scale producers who own less than two ha of land and therefore they have very small lots for sale.6 The distribution of labour use is highly uneven over the cultivation period. Rice farming requires considerable labour inputs during the period of land preparation and sowing at one end, and at harvest time at the end of the season. In between labour use is minimal. During the peak periods of activity, however, household labour may be inadequate especially as the activities have to be performed within a very short period of time.7

2 . 1 . 2 C l i m a t i c C o n d i t i o n s

Rice is grown under a wide range of environmental conditions, such as different elevations, soils and hydrological regimes. Despite its relatively small aerial extent, Sri Lanka exemplifies a variety of climatic conditions depending on the geographical settings of respective locations. The average annual rainfall of the island varies from about 900 mm (Maha Lewaya, Hambantota) to over 5,500 mm (Kenilworth Estate, Ginigathhena). The country has three agro-climatic zones: the wet zone in the southwest, the dry zone in the north and east, and the intermediate zone in between.8 (Figure 2.1).

1 Department of Census and Statistics. (2017). National Accounts Estimates of Sri Lanka – Provisional Estimates for the year 2016. 2 Senanayake, S. M. P., & Premaratne, S. P. (2016). An analysis of the paddy/rice value chains in Sri Lanka. Australia South Asia Research Centre working paper, 4. 3 Senanayake & Premaratne. 4 Ibid 5 Hilal, Mujahid, Mohamed Ismail, and Kaldeen Mohamed Mubarak. "Rice marketing: lesson and driver for Sri Lankan producers." (2013) 6 Senanayake & Premaratne. 7 Sanderatne, N. (2003). The Paddy Paradox: Challenges in the Next Decade. In Rice Congress 2000. Ed. Abeysiriwardena, DSDZ, Dissanayake, DMN and (pp. 23-36). 8 Wang, H. (Ed.). (2012). Patterns of varietal adoption and economics of rice production in Asia. Int. Rice Res. Inst.




Figure 2.1: Agro-climatic zones of Sri Lanka

Source: Wang et al (2012)9

The wet zone receives relatively high mean annual rainfall over 2,500 mm without pronounced dry periods. The dry zone receives a mean annual rainfall of less than 1,750 mm with a distinct dry season from May to September. The intermediate zone receives a mean annual rainfall between 1,750 to 2,500 mm with a short and less prominent dry season.10

2 . 1 . 3 C u l t i v a t i o n S e a s o n s

The major growing seasons of Sri Lanka are the Maha and Yala seasons. The major cultivation season Maha paddy, stretches from September to March, and normally accounts for 65% of the country’s annual paddy production. The output of this season depends on rainfall from inter-monsoon rains and northeast monsoon. The mostly irrigated secondary Yala season lasts from April to September and relies on the southwest monsoon.11

9 Wang. 10 Rice Research and Development Institute. Rice Cultivation. 11Coslet, C., Goodbody, S., & Guccione, C. (2017). FAO/WFP crop and food security assessment mission to Sri Lanka. Special report. Special Reports and Alerts (FAO).




2 . 1 . 4 I r r i g a t i o n

Water for rice culture in Sri Lanka is received through rainfall or through irrigation. In areas where rain fall distribution during the season is satisfactory to meet the crop water requirement, the crop is raised completely as a rainfed crop. In this case, the crop depends on direct rainfall to the field and seepage and run off from surrounding areas. There is no properly constructed system of channels for directing of distribution of water. Dykes are constructed to retain water in the field and they are maintained well to prevent water leakages. In areas where rainfall is not assured to supply the water requirement of the crop, supplementary irrigation is provided through distributary channel systems from tanks and anicuts. These irrigation networks, essentially designed for rice culture, are divided into two main categories:

(1) Minor irrigation system: Systems with command areas less than 80 ha. Both tank (reservoir) and anicut systems are included. These systems come within the jurisdiction of the Agrarian Services Department. The water availability in these systems depends on the catchment area rainfall tank capacity and the size of command area.

(2) Major irrigation system: Systems with command areas greater than 80 ha. They also include both tanks (reservoir) and anicut systems.12 These systems come under the authority of either the Irrigation Department or the Mahaweli Authority of Sri Lanka. The distributor channelled systems in these systems are better equipped with control structures than in the minor irrigation schemes. Hence somewhat controlled water management practices have been introduced into these systems. Water is issued mostly on a pre-scheduled rotation in major tank systems.13

2 . 1 . 5 O v e r v i e w o f P a d d y V a l u e C h a i n s

The paddy/rice marketing system in Sri Lanka consists of both public sector and private sector value chains (Table 2.1). There are five types of hand marketing outlets for paddy. They are private collectors, mobile traders, private millers, the Paddy Marketing Board (PMB) and the Multipurpose Cooperative Societies (MPCSs). Private collectors, mobile traders and private millers purchase more than 90% of the marketable surplus of paddy from farmers in a given season. They usually purchase paddy immediately after harvest when the prices are low. 14 Table 2.1: Key Players in the Paddy Sector Value Chain

Player Description Input Suppliers

Seeds, fertiliser, agrochemicals and machinery (ploughing and harvesting machines) are major inputs used in paddy farming. Seeds are obtained from a variety of sources: some farmers use their own seeds, some purchase seeds from government sources namely, Agrarian Service Centers (ASC), and some purchase seeds from other farmers and shops. In the Northern Province, ASC is the dominant supplier. In the Southern province, less famers purchased from ASC, some of the farmers used their own seeds and the rest was purchased from other farmers and shops. in the Eastern province seed purchases had been mainly from other farmers and shops.

12 There are numerous run-of-river systems known as amunas (anicuts) in the mountainous regions of Sri Lanka.

These anicuts are similar to weirs in other parts of the world, where notches are made in the riverbanks to divert water to lateral canals that feed field terraces or small alluvial plains.

13 Rice Research and Development Institute. 14 Senanayake & Premaratne.




The majority of the farmers depend on private shops, either fertiliser shops or other retail shops for purchase of agrochemicals. ASCs are not popular for the supply of agrochemicals. In the case of machinery, most farmers hire their machinery, others use their own machinery and only a few hire machines from ASCs.

Collectors The buyers who visit the farmers and purchase paddy from their threshing floors or homes are called collectors. There are two categories of collectors of paddy that farmers sell to: village collectors and town collectors.

Paddy millers

Mill owners who purchase paddy from the farmers and collectors are involved in de- husking the paddy and sell the rice to the wholesalers at the mill; Sometimes retailers also purchase rice directly from millers. Usually millers deliver the rice to the business premises of the retailers.

Supply side wholesalers

Supply side wholesalers are the wholesalers in the production areas who visit the mills and purchase rice, transport to a market and sell to wholesalers and retailers in the consumption areas.

Demand side wholesalers

Wholesalers doing business in the consumption areas that visit the mills in the production areas, purchase and transport rice to the markets in the consumption areas and sell to the retailers.

Demand side retailers

Demand side retailers do business in the consumption areas. The rice is delivered to their shops either by the mill owners or wholesalers.

Some of the collectors, mobile traders and millers provide credit facilities for the farmers to finance their cultivation operations. They also provide inputs in kind (such as chemicals) and hire their land preparing (tractors) and threshing machines on credit basis and later get back the monies due to them in the form of paddy. The farmers sell their paddy to these buyers for several reasons. They include repayment of loans, mutual trust, and long patronage. These buyers often purchase paddy with higher moisture contents (at a discounted price), and the institutional buyers (PMB and MPCS) purchase only a limited quantity. The two institutional first-hand marketing outlets are the purchasing centres (paddy stores) of the PMB and the MPCSs. They purchase paddy at these purchasing points and the farmers are required to transport their paddy to these purchasing points. Paddy is purchased at the prices fixed by the government. These two institutions are purchasing paddy subjected to the pre-specified quality criteria in respect of moisture content, extraneous matter and sand etc.




Figure 2.2: Value Chains for Paddy/Rice in Sri Lanka

Source: Senanayake & Premaratne (2012).

2 . 1 . 6 P r o d u c t i o n

Rice production in Sri Lanka has continued to increase over time because of technological improvements, increased fertiliser use, land expansion, and various policy support by the government.15 It is possible to discern three distinct trends in rice production during 1961-2009.16 Between 1961 and 1984, rice area, yield, and production were increasing, with the annual

growth rates of yield and area being 2.55% and 1.64%, respectively. This led to a 4.19% annual growth rate in rice production during this period. By the 1980s, rice area had reached 750,000 ha.

During 1985-2000, the growth rate in rice production slowed down considerably, with the annual growth rate being only 0.66%. The area of rice even decreased slightly.

After 2000, the growth in rice production picked up once again, with both rice area and yield increasing rapidly. The annual growth rate of rice area and yield was 2.6% and 1.41%, respectively, and the rice production growth rate reached 4%. Favourable weather, a better policy environment, and the rapid spread of improved technology contributed to this increase in production growth. Cropping intensity also increased from around 119% to 147%. The implementation of supportive policies coupled with special extension programs and new technologies contributed substantially to the production growth. In 2005, a price support system called “guaranteed price scheme” and a new fertiliser subsidy program were also implemented.

The estimated value of total paddy production in Sri Lanka during Yala 2017 was 909,321 metric tons. However, when compared to paddy production in the previous Yala season, the total paddy production in Yala season 2017 has declined by 40%. Drought has been cited as the main reason for lower paddy production, which also led to paddy cultivation on a limited

15 Walisinghe BR, Gunaratne LHP, Prasada DVP, Sarthaj IZ. 2010. Analysis of the consumer preferences for rice-based noodles and biscuits, Ann. Sri Lanka Dept. Agric. 12:201-211. 16 Wang.




extent, lower average paddy yield than expected, and harvest losses in some districts.17 The Department of Agriculture’s production forecast for the 2017/18 Maha season is 2.316 million mt, which is a 16% drop compared with a normal season's production (Table 2.2).

Table 2.2: Rice availability situation - Maha 2017/18

Domestic rice production: 2017/18 Maha Maha 2017/18 paddy production (forecasted production)

mt (in millions) 2.32

Wastage of paddy (6%) mt (in millions) 0.14 Paddy availability for consumption mt (in millions) 2.14 Rice availability for consumption (68% milling ratio) mt (in millions) 1.45 Rice consumption/ Requirement /Usage: 2018 Rice per capita consumption kg/year/person 110.2 Population 2018 mt (in millions) 21,672,032 Total rice requirement year 2018 mt (in millions) 2.39 Rice requirement/ month mt 199,021 Months can be fed from Maha 2017/18 production

7.31

Source: Socio Economics & Planning Centre, Department of Agriculture (2018).

2 . 1 . 7 Y i e l d

As Figure 2.3 shows, average paddy yields have increased in the past two decades from 1995 to 2015 from 3,514 kg/ha to 4,428 kg/ha. However, in the last decade, yield rates demonstrate a cyclical trend with a significant dip in yield in 2011 offsetting an all-time high achieved in 2010. In 2011, extreme weather conditions experienced in the first quarter of the year negatively affected the agricultural production particularly the Maha harvest of paddy. The decline in Maha production was due to direct and indirect effects of the flood experienced in January and February 2011, which is the highest ever crop damage reported in any season at the time. Direct crop damage was estimated to be 25% (185,861 ha) of the cultivated extent in the Maha season while the indirect damage was reflected in the significant decline of the yield. Districts of Batticaloa, Trincomalee, Ampara, Polonnaruwa and Anuradhapura, which are usually considered as surplus areas of paddy, were largely affected by the flood. However, total extent cultivated during 2010/11 Maha season was higher by 84,013 ha to 730,050 ha compared to the 2009/10 Maha season. This increase was largely due to new lands cultivated in the Northern and Eastern provinces (50,948 ha).18

17 Liyanage, M. “Paddy production in Yala 2017 down 40 percent”. Daily News. 5 March 2018. 18 Central Bank of Sri Lanka. Annual Report 2011.




Figure 2.3: National Average Yield of Paddy (1996-2015)

Source: Department of Census and Statistics

The average national yield for the period 2011-2015 was 4,269 kg/ha. However, there are significant regional variations in yield. Udawalawe recorded the highest yield during this period with an annual average of 6,193 kg/ha while Jaffna recorded the lowest yields at 2,474 kg/ha. Figure 2.4 shows the average yield for each region during the period 2011-2015. Figure 2.4: Annual Average Paddy Yield by Region (2011-2015)

Source: Department of Census and Statistics

The average paddy yield reported for Yala season 2017 is 4,291 kg per ha and the highest average yield is reported from Udawalawe agricultural zone (5,770 kg per ha). The drought accounted for relatively high amount of harvest loss.19

2 . 1 . 8 C o n s u m p t i o n

Sri Lanka currently produces 2.45 million metric tonnes (mt) of rough rice annually and is virtually self-sufficient in rice. Rice provides 45% total calorie and 40% total protein requirement of an average Sri Lankan. The per capita consumption of rice fluctuates around 114 kg per 19 Liyanage.

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year (including rice and rice-based products) depending on the price of rice, bread and wheat flour.20 Rice is the preferred staple food in Sri Lanka and production includes significant varietal differences. Generally, about 60% per cent of consumption is made up of long grain white rice, 30 percent short grain white rice, and the remaining 10 percent parboiled “red” rice and other local varieties. A small portion of Sri Lanka’s rice consumption consists of imported basmati rice varieties.21

2 . 1 . 9 P r i c e B e h a v i o u r

The terms of trade for the paddy farming sector have decline substantially in terms of prices paid for consumer items and farm inputs during the period 1984-2013. Similarly, the cost of farm machinery has also increased relative to output prices received by farmers. Government policy interventions in the past such as guaranteed price mechanisms and fertiliser subsidies have all been aimed at addressing the deteriorating terms of trade that farmers face.22

2 . 2 G o v e r n m e n t P o l i c y

2 . 2 . 1 A g r i c u l t u r e P o l i c y F r a m e w o r k a n d N a t i o n a l A g r i c u l t u r e P o l i c y

The Agriculture Policy Framework and National Agriculture Policy framework and National Food Production Programme (2016-18) published by the Ministry of Agriculture (MoA) identifies the following priority objectives for the agriculture sector: Achieving self-sufficiency in food crops, which may grow locally and save foreign exchange

on imports of those food items; Increasing availability of safe food by promoting eco-friendly practices and minimizing

agrochemicals and pesticides in food crop production; Ensuring food security through appropriate management of buffer stocks; Introducing and implementing agroecological region-based food crop cultivation programs; Increasing the productivity of crop production through appropriate technologies; Establish proper coordination among all agricultural stakeholders in the local food

production process and connect all schools, civil organizations and general public to the program;

Providing quality inputs for production and establish proper marketing mechanism for their products;

Ensuring building a healthy nation.23

In addition, a number of policies have been designed to encourage rice production in Sri Lanka. Some of these policy measures are introduced through legislation while others are introduced on an ad-hoc basis such as through the annual budget speeches of the government. However, the available literature is insufficient to determine the extent to which these policies and programmes have been implemented in certain instances.

20 Senanayake & Premaratne. 21 Wright, T. (2013) Global Agricultural Information Network Report No. CE3001. USDA Foreign Agricultural Service. 22 Henegedara, G. Variation of Terms of Trade in Small farming Sector: with Special Reference to Paddy And Vegetables Cultivation in Sri Lanka. (undated) 23 Ministry of Agriculture. (2016). Sri Lanka E-Agriculture Strategy.




2 . 2 . 2 F e r t i l i s e r S u b s i d y P r o g r a m m e

Among the policies and programs to increase food production, the fertiliser subsidy program is the longest lasting, most expensive, and most politically sensitive. It was initiated in 1962 at the onset of the Green Revolution, with the main objective of encouraging farmers to switch from traditional to high-yielding rice varieties that are highly responsive to chemical fertilisers. Since then, the provision of the subsidy has become customary, and successive governments have been under tremendous pressure to continue the subsidy despite budgetary constraints. The subsidy policy has evolved over time. During the period 1962–89 the subsidy was provided for all three main types of fertilisers—nitrogen (N), phosphorus (P), and potassium (K)—targeted primarily at paddy. Subsidies were not provided during 1990–94 but were reintroduced in 1995 for all three types of fertilisers. The subsidy was limited to urea during 1997–2004. Since 2005, the subsidy has again been expanded to cover all three types. The price of a 50-kg bag of fertiliser has been set at USD 3.07 regardless of the world market price. 24 Paddy farmers are eligible to apply for the fertiliser subsidy provided that they have legal title to their paddy lands. The subsidy payment constitutes 2.24% of total government expenditures and has become a massive burden on the Treasury.25 This policy lasted until late 2015. In the inaugural Budget of November 2015, the government proposed to grant LKR 25,000/ha per year, for up to 2 ha, for procuring fertiliser. The selling price of fertiliser was initially supposed to be market determined but was later regulated at LKR 2,500/50-kg bag. 26 The subsidy accounted for nearly 95% of the market price.27 The 2009 Budget speech introduced a system that provides fertiliser for paddy on an advance basis to reduce difficulties that farmers face when having to purchase fertiliser on a cash basis. However, from the 2016 Yala Season onwards, a direct cost grant was provided, replacing the existing fertiliser subsidy scheme. The planned fiscal cost of the fertiliser scheme for 2018 is Rs 32 billion which is equivalent to 32% of the total allocation for agriculture in 2018.28 However, for the 2018 Yala season, the fertiliser subsidy program was reintroduced. Farmers are able purchase a bag of fertiliser for LKR 500 at agrarian service centers and for LKR 1,500 in the open market.29

2 . 2 . 3 P r i c e s

Section 5 of the Agricultural Products (Guaranteed Prices and Control of Hulling and Milling) Act, together with section 5 of the Paddy Marketing Board Act, No. 14 of 1971, establish the power of the Paddy Marketing Board to fix a guaranteed price in respect of any variety of paddy or any grade of any variety of paddy. However, it does not specify the mechanism by which these prices are determined.

24 Weerahewa, J. 2017. Modernising Agriculture in Sri Lanka – Status and Challenges. Available at: https://www.adb.org/sites/default/files/publication/373316/sri-lankan-economy.pdf 25 Weerahewa, J., Kodithuwakku, S. S., & Ariyawardana, A. (2010). The fertiliser subsidy program in Sri Lanka. Food policy for developing countries: Case studies. 26 Weerahewa, J. 2017. Modernising Agriculture in Sri Lanka – Status and Challenges. Available at: https://www.adb.org/sites/default/files/publication/373316/sri-lankan-economy.pdf 27 Wang. 28 Ministry of Finance. (2017). Approved Budget Estimates 2018. 29 Stern action against selling fertiliser above maximum price. ColomboPage. 12 May 2018. Available at:

http://www.colombopage.com/archive_18A/May12_1526109602CH.php




2 . 2 . 4 I r r i g a t i o n

Irrigation is subsidised, with farmers receiving irrigation free of cost. In the 2011 Budget Speech, the government promised to rehabilitate all minor irrigation schemes in the country by allocating Rs 900 million for a 3-year partnership initiative between the Provincial Councils and the Department of Agrarian Services. The Ministry of Mahaweli Development and Environment, in collaboration with the United Nations Development Programme and the Green Climate Fund, is also implementing Climate Resilient Integrated Water Management Project (CRIWMP), seven-year project from 2017-2024. The project targets poor and vulnerable households in three river basins – the Malwathu, Mi, and Yan rivers – which flow through the northern part of the Dry Zone. The project aims to achieve enhanced levels of food, livelihood and water security of approximately 770,500 climate vulnerable communities living in three river basins. It is also expected that another 1,179,800 people will be indirectly benefited from the Project through improved water management, resilient agriculture practices, and provision of climate and weather information.30

2 . 2 . 5 S e e d

At the beginning of 2011, Sri Lanka commenced a 3-year, Rs 700 million project (approximately USD6.4 million) to develop the seed sector funded by the government and implemented by Seed and Planting Material Development Center (SPMDC).

2 . 2 . 6 L a n d

The Agrarian Development Act No. 46 of 2000 restricts the use of paddy lands for purposes other than paddy cultivation. However, it allows cultivation of paddy land with other crops subject to approval of the Commissioner of Agrarian Services. The government also implemented a land policy that restricts any shift of rice land to other crops without government permission to maintain the rice cultivation extent.31 There have been two land development programs in Sri Lanka: Northern Spring and Eastern Revival There have also been regional initiatives to improve land use. The Sabaragamuwa Provincial Council has taken initiatives to cultivate 8,850 acres of barren paddy lands in line with the national agriculture revolution programme of the Government. Farmers are paid a grant of Rs.10,000 each for every barren paddy acre to be prepared for paddy cultivation.32

2 . 2 . 7 I m p o r t s

Policies on imports vary each year depending on the fluctuations in local production. The decision to import rice is based on the crop forecasting by the Socioeconomic and Planning Centre (SEPC) of the Department of Agriculture. However, there are instances where such decisions are not coordinated. In February 2018, rice was imported by the Ministry of Industry and Commerce without coordination with the SEPC.33 Figure 2.5 provides the import quantities of rice during the period 2005-2016.

30 United Nations Development Programme. Climate Resilient Integrated Water Management Project. 31 Wang. 32 Abeyratne, D. Barren paddy lands to be cultivated. Daily New, 12 October 2017. 33 Warakapitiya, K. “Rice imports continue despite bumper harvest”, The Sunday Times, 25 February 2018.




Figure 2.5: Imports of rice (2012-2016)

Source: Department of Census and Statistics, Statistical Abstract 2017

2 . 3 C h a l l e n g e s

While Sri Lanka’s rice yields are relatively high compared to other rice growing countries with similar agronomic conditions, there is a large gap between potential yields and realised yields. Realised yield is about 3.8 mt/ha.34 Sri Lanka just manages to fulfil the domestic rice demand in good crop years and hardly produces a consistently maintained surplus over the years. Despite these concerns, Sri Lanka’s allocation of GDP towards agriculture research and extension during the last three decades has remained marginal.35

2 . 3 . 1 C o s t - P r i c e S q u e e z e

Rice farmers face a severe cost-price squeeze. The costs of farming have increased while the sale price of paddy has been depressed in recent years. Sri Lanka is a high cost producer. At prevailing milling, transport and storage costs, the cost of milled rice in Colombo is nearly three times the cost of production of paddy.36 In addition, living costs have risen to make rice farm incomes on smallholdings unsustainable. Costs of cultivation and living costs have gone up while yields and paddy prices have not. 37 The high cost of inputs excepting fertiliser is a major problem reported by farmers.38 For example, in the 2015 Yala season the cost of cultivation of irrigated paddy was equivalent to 58% of the farmgate price with 17% accounted for by the cost of farm-owned labour. Input costs are even higher for rain-fed paddy, accounting for up to 91% of farmgate prices in Yala 2015.39 Table 2.3 and Table 2.4 present the marketing costs and margins for two varieties of rice grain in two different locations. As the figures show, the farmer’s share of the consumer price is somewhat lower in the round grain variety when compared with the long grain variety. This is because the price of rice in the consumer market is higher by Rs.14 in the case of round grain 34 Sanderatne. 35 Samaratunga, P., Sri Lanka as a Rice Exporting Country: Possibilities and Problems, Talking Economics, 7 December 2011. 36 Samaratunga. 37 Sanderatne. 38 Senanayake & Premaratne. 39 Central Bank of Sri Lanka. Economic and Social Statistics 2017. Available at: http://www.cbsl.gov.lk/pics_n_docs/10_pub/_docs/statistics/other/econ_&_ss_2017_e.pdf

0

100

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600

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variety, and also a lesser quantity of paddy (the raw material) is required to produce I kg of rice. The involvement of an additional player called collector between the producer and miller in the case of the round grain variety is also a contributory factor. However, the figures presented in Table 2.3 and Table 2.4 must be treated with caution given the limited sample that they were based on. Table 2.3: Marketing Costs and Margins of Paddy/Rice (Long Grain) from the Farmer at Hambantota to Consumer at Kirulapona in 2012

Item Rs. /kg % Price paid by the consumer 56 100.0 Retailer's cost and margins 3.26 1.8 Price paid by the retailer to the wholesaler 52.74 94.2

Transport 1 1.8 Labour 0.4 0.7 Wholesaler's margin 2.34 1.2

Price paid to the miller by the wholesaler/commission agent 49.84 89.0 Cost of rice to the miller 48.4 86.4 Miller costs and margins 7.6 13.6

Cost of paddy equivalent 46.41 82.9 Cost of processing 4 7.1 Transport 0.75 1.3 Labour 0.1 0.2 Packing 0.58 1.0 Miller margin 2 3.6

Price received by farmer (LKR 30/kg) 46.41 82.9 Transport 0.5 0.9 Labour 0.44 0.8

* Conversion Rate 1.61 kg of Paddy is required to produce 1 kg of Rice

Table 2.4: Marketing Costs and Margins of Paddy / Rice (Round Grain) from Farmers at Anuradhapura to Consumer in Gampaha in 2012

Item Rs./kg % Consumer/Retail Price 70.00 100.00 Retailer's cost and margins 2.00 1.40 Retailer's buying price 68.00 97.14 Wholesaler's buying price 65.00 92.86

Transport 1.50 2.14 Labour 0.15 0.21

Wholesaler's margin 1.35 1.93 Miller's selling price 65.00 92.86

Cost of paddy equivalent 59.45 86.95 Cost of processing 3.31 4.73 Labour 0.15 0.21 Packing 0.46 0.66 Miller margin 1.63 2.33

Collector's selling price of paddy equivalent (LKR 35.46/kg) 59.45 84.93





Collector's buying price of paddy/ Farmer's price (LKR 34/kg) 35.46/kg) 56.10 80.14


Collector's margin 0.50 0.71 Source: Premaratne et al (2016) *1.5 kg of Paddy is required to produce 1 kg of Rice

In addition to cost-price concerns, there is also a labour short-fall with youth averse to taking up agriculture. The aversion is such that even unemployed youth are willing to remain unemployed till than work as labourers or cultivate rice themselves. Other employment opportunities, including working in garment factories, retail trade, self-employment opportunities such as driving a three-wheeler, are more economically viable.40

2 . 3 . 2 I s s u e s i n P a d d y M a r k e t i n g

The main objective of the PMB is to stabilize prices both in the paddy (producers) and rice (consumers) markets. PMB offers guaranteed prices for producers. However, in the recent past the PMB has been grappling with problems of purchasing paddy. The PMB was able to purchase only a small proportion of paddy offered for sale due mainly to the problems of storage and shortages of working capital, forcing paddy farmers to sell stocks to private millers at below the guaranteed price. In July 2015 the farmers were compelled to sell paddy in the open market where prices ranged between Rs 39 per kg for the short grain variety and Rs. 28.47 for long grain variety, both well below the guaranteed prices of Rs.50 a kg for short grain and Rs.45 for long grain. 41 Farmers face the same situation in March 2018, with private millers moving in and purchasing the paddy harvest at prices between Rs 24 and Rs 25 per kg while the PMB and District Secretaries are still waiting for the Treasury to release funds to purchase paddy. The government is offering Rs 38 per kilo of Nadu, a short or long grain variety and Rs 41 for a kilo of Samba, a short grain variety.42 The very low prices prevailing in the market over the harvest period is the biggest problem faced by paddy farmers. Prices fall well below the minimum floor price due mainly to the excess supply of paddy. The PMB and MPCSs are unable to purchase the entire stock of paddy offered at harvest time, due to insufficiency of working capital and lack of other resources such as storage facilities and packaging materials. The PMB owned 180 stores in 2012, most old and in disrepair. Many stores were damaged by the JVP insurrection in the south of the country in 1988/1989 and during the thirty year civil ethnic conflict in the North and East.43 Special programs have been launched by the PMB in these areas, but such measures are inadequate to solve the problems. 44

40 Sanderatne. 41 Senanayake & Premaratne. 42 Warakapitiya, K. No money for District Secretariats, private millers grab bargains. The Sunday Times, 4 March 2018. Warakapitiya, K. “Farmers versus millers: Rice price fight brewing again”, The Sunday Times, 25 February 2018. 43 44 Senanayake & Premaratne.




2 . 3 . 3 P r i v a t e P r o f i t a t S o c i a l C o s t s

The deficiencies in the paddy marketing system currently implemented by the government results in a case of private profit at social expense. This “private profit” accrues to various parties involved in the rice value chain because the state bears the costs of free irrigation, subsidized fertiliser and the artificially high guaranteed prices. Systematically conducted research has shown that rice is only marginally profitable at social levels even when its private profitability is substantial as in the case of high potential irrigation areas. 45 The fertiliser subsidy has been a heavy financial burden on the government budget with escalation of fertiliser prices at the world market causing a series of unsolicited macroeconomic implications.46 Although paddy prices are fixed by the government their effectiveness is limited. It is contended that both the producers and consumers are exploited by the players, particularly by rice millers and wholesalers, involved in the value chain due to the oligopolistic/oligopsonic structure in the market.47

2 . 3 . 4 H i g h U s e o f W a t e r

Demand for agricultural water is higher than industrial and municipal water demands. Approximately, 87.34% of freshwater withdrawals are used for agricultural purposes. The share of agricultural water demand is higher in Sri Lanka when compared to many other countries in the world. The reasons for the increase in demand for water could be the low efficiency of water use in farms; poor adoption of water saving techniques; high losses associated with storage, distribution and on-farm utilization of water; and the lack of incentives for conservation due to free state supply of irrigation. In most developed countries, the adoption of technological advances and market-based strategies has reduced the water demand for farming.48

2 . 3 . 5 A d v e r s e I m p a c t s o f C l i m a t e C h a n g e

Adaptation to extreme weather events, especially flooding and droughts, is of utmost importance in Sri Lanka. According to climate predictions, Sri Lanka’s wet areas are becoming wetter, while the dry areas are becoming drier, directly affecting the agriculture activities in the wet zone and dry zone. Irrigated paddy rice requires 1,500 mm of water annually. Sri Lankan agriculture has already felt the effect of extreme weather events and climate changes, including: a slow but steady rise of ambient temperature (0.01–0.03 °C per year); high-intensity rainfall resulting in landslides and soil and coastal erosion; salinity intrusion into soils and aquifers; tornado-type winds; and increasingly extreme droughts and floods. Future climate change will continue to impact the agricultural sector in general, but will be especially acute for Sri Lanka’s smallholder farmers, due to several factors: Lack of access to irrigation systems increases susceptibility to drought (e.g., in the

Kurunegala district, drought has reduced rice yields by 44%).

45 Samaratunga. 46 Prasanna, R. P. I. R., Bulankulama, S. W. G. K., & Kuruppuge, R. H. (2012). Factors Affecting Farmers Higher Gain from Paddy Marketing: A Case Study on Paddy Farmers in North Central Province, Sri Lanka. 47 Senanayake & Premaratne. 48 Better Water, Sustainable Agriculture and Better Lives for Sri Lanka. Talking Economics. 22 March 2016. Available at: http://www.ips.lk/talkingeconomics/2016/03/22/better-water-sustainable-agriculture-and-better-lives-for-sri-lanka/




Reliance on rainfed systems threatens crop productivity. Rice dependency and undiversified production, which, given anticipated higher

temperatures, may make agricultural production riskier. For instance, exposure to temperatures of over 33 °C during the flowering stage significantly reduces productivity.

Irrigation systems and drought-resistant varieties are widely used in Sri Lanka; however, accessibility and affordability are limiting factors for smallholder farmers. Insufficient resources and limited marketing options are important barriers to climate-smart agriculture adoption. For example, smallholder farmers have largely adopted government-subsidized improved varieties for staple crops. However, few of them have changed planting cycles and strategies, possibly due to the costs associated with more input or labour-intensive cultivation techniques. 49

2 . 3 . 6 L o w Q u a l i t y o f R i c e

Another concern is the low quality of rice produced by the traditional rice mills. About 60% of the paddy in the country is processed by these traditional mills.50 Under the prevailing free trade policies, with increased purchases of rice in the open market at competitive prices, there has been a growing awareness and an increased demand for better market quality among consumers. A recent survey conducted by the Institute of Post-Harvest Technology (IPHT) on quality of locally produced rice available in the open market has revealed that the rice quality is below the requirements of international standards Further, at present the price of locally produced rice is approximately 25% higher than imported rice.51 The main factors contributing to reduction in rice quality are presence of high amounts of broken grains, paddy seeds, type admixture, impurities, damaged and discoloured grains and non-uniformity in bran removal. Although there is a demand for high quality premium rice in Sri Lanka, the country is not in a position to produce such rice due to the poor quality of the rice mills.

2 . 4 O p p o r t u n i t i e s

2 . 4 . 1 E x p o r t P o t e n t i a l o f O r g a n i c R i c e

European imports of milled rice increased by almost 70% in the past five years. Increased attention to health, environment and social responsibility is also leading to a rapid growth of the organic sector. Many rice varieties are available as organic products. Producing and exporting organic rice can be an opportunity, because the availability is often not sufficient for the growing demand. A growing number of consumers in Europe are increasingly aware of the need for a healthy diet. Online media and food specialists promote the benefits of health foods – foods claimed to have outstanding health characteristics. Brown rice is consumed throughout Europe as a healthier alternative to milled rice, since the rice bran contains important minerals, vitamins

49 Marambe, B. et al (2015). Climate-Smart Agriculture in Sri Lanka. International Center for Tropical Agriculture and the World Bank. 50 Palipane, K. B. (2000). Milling and quality improvement in rice. Institute of Post-Harvest Technology, Anuradhapura. 51 Senanayake & Premaratne.




and fibre. Parboiled rice is also widely offered for its improved preservation of vitamins.52 Several rice-producing countries such as Thailand and Cambodia are adopting strategies to tap this new market. By contrast, here is no evidence that Sri Lanka is currently exporting significant quantities of organic rice to these markets. However, rice has been identified as an emerging crop for organic agriculture in the National Research Priorities in Organic Agriculture 2017-2021.53

2 . 4 . 2 E x p o r t P o t e n t i a l o f R i c e F l o u r a n d F e r m e n t e d R i c e B e v e r a g e s

Rice flour has good demand in the international market. Germany, Poland, Canada, France, Belgium, United Kingdom, Netherlands, Italy and Spain have got major country markets for rice flour. This also implies that there is substantial demand for rice flour in the international market. Rice fermented beverages are also manufactured and exported. Rice flour and rice fermented beverages have got growing demand in many foreign markets. This opportunity can be capitalized.54

2 . 4 . 3 R i c e B r a n d i n g

Rice branding is not prevalent in Sri Lanka and regardless of scale, rice millers adopt a common method of packaging their output, which is simply the name of the miller along with the rice type on the front of the bag. Millers do not perceive the need to include any additional information as they view the rice market as an uncompetitive one. However, one study finds that consumers in Sri Lanka do exhibit preference in their rice they consume.55 Therefore, exploring different branding and marketing options such as providing nutritional information, organic and other certifications can be a strategy to create differentiated products in a largely homogenous market.

2 . 5 R e c o m m e n d a t i o n s

The following recommendations have been suggested in the literature with regard to the paddy sector in Sri Lanka.

2 . 5 . 1 R e f o r m i n g t h e F e r t i l i s e r S u b s i d y S c h e m e

Subsidy schemes in developing countries are criticised for not reaching the intended target group, being subject to misuse and corruption in the process of distribution, for imposing government budget burdens, and for creating a dependency syndrome. Sri Lanka is not an exception to these criticisms. Some of the policy alternatives include:56

52 Centre for the Promotion of Imports, Netherlands Ministry of Foreign Affairs. Exporting specialty rice varieties to Europe. Available at: https://www.cbi.eu/market-information/grains-pulses/specialty-rice-varieties/ 53 Sri Lanka Council for Agricultural Research Policy, National Committee on Organic Agriculture. National Research Priorities in Organic Agriculture 2017-2021. 2017. 54 Hilal, M. and Mubrarak, M. Rice Marketing: Lesson and Driver for Sri Lankan Producers. Proceedings of the Third International Symposium, SEUSL: 6-7 July 2013, Oluvil, Sri Lan 55 Ranaweera, R. et al. Purchasing Behavior of Rice Consumers and Potential for Rice Branding in Sri Lanka, 2008. 56 Weerahewa et al.

https://www.cbi.eu/market-information/grains-pulses/specialty-rice-varieties/




(1) Remove the subsidy on fertiliser to improve the economic efficiency of the market. This option might lead to socio-political imbalances.

(2) Reform the current system to provide some support to intended target groups at a minimum cost. Combinations of the following options could be considered as elements of alternative policy packages:

- Target the most deserving farmers to receive support. - Make it optional for those who receive fertiliser at a subsidized price to sell their

harvest to the Department of Agrarian Services. - Establish a voucher system that restricts farmers’ access to a lifeline amount (such

as two bags) and requires them to purchase the balance co

europeaid/138-539/dh/ser/lk technical assistance to the ...€¦ · 10/11/2019 · project title:...

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