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Technology transfer, capital investments, production efficiency and involvement of ICT have limited our capacities to harness benefits from export-oriented agricultural value chains – Pic by Shehan Gunasekara
Sri Lanka’s economy is built on agriculture. Sri Lanka is rich with biodiversity, climatic variations, water sources and soils that can accommodate large number of agricultural crops. Regardless of whether these crops are native or introduced our farmers are pioneers in growing anything on this land.
We were once a proud self-sufficient nation. Economic liberalisation exposed us to imports and exports, giving our agricultural producers the opportunity to earn export income. However, our opportunities have been constrained by many factors. Technology transfer, capital investments, production efficiency and involvement of ICT have limited our capacities to harness benefits from export-oriented agricultural value chains. 
Therefore, to this date, most of our agricultural value chains are primitive. Information asymmetry on prices and markets have limited our farmers to be price takers leaving no power to bargain. Inefficient agricultural advisory services have convinced our farmers that there is no help, giving more room for private entities to promote their own products, not for the benefit of farmers but for their own private gains.
Quality standards are hardly practiced and there is no traceability at all since the market does not adjust the prices to provide enough signals. Limited capital investments and technology transfers have pushed our farmers to produce raw materials only, leaving no room to attract higher prices. At the end of the day blood and sweat of our farmers are being bargained and sold for pennies at regional economic centres such as Dambulla resulting almost 40% post-harvest losses. All this has resulted in tying our framers into a vicious cycle of poverty, with no hope of achieving SGDs. This is not the agriculture development we dream for, this does not justify our proud history.
Therefore, we need to think outside the box. We need to provide enough incentives for farmers and major stakeholders in agricultural value chains to think in terms of export-oriented value chains, use of ICT technology and more and more value addition. On average close to 40% of the rents in agricultural value chains are being extracted by middlemen. This is highly inefficient and that money should in fact go to the agricultural producers.
The Grama Shakthi program provides a unique opportunity for farmers (producers) and well as buyers (in this case exporters) to work together to harness the benefits of an efficiently managed export-oriented agricultural value chains. In order to understand this, I will first explain the incentive structure around farmers and exporters. Grama Shakthi program could become the vehicle that provides the necessary incentives for both these parties leaving no room for the middlemen to exploit the rents of the value chain.
What are the incentives for the exporters?
What exporters are interested in is a quality and a continuous supply. This can be raw materials or value-added products. Ideally to have both these conditions an exporter has to invest in a field officer network, a collection centre arrangement, cold storage facility, a value adding processing centre and a logistic network (probably with a cold supply chain). This is a larger transaction cost for the exporter therefore his incentive to invest in these is very less.
Today only a limited number of exporters have field officers on ground, but that is mainly to manage their loyal producers which they have also invested in. Only a handful of exporters are running logistic networks with cold storage and supply. Therefore, at the moment collectors have evolved in agricultural value chains to cater logistic demand where they extract the most rents out of the value chains.
For example, during the regular season OKRA is demanded at Rs. 35 per Kg at Dambulla market. At the same time exporters pay Rs. 130 per Kg if farmers can bring this to their factory to the required quality. However, there are collectors/middlemen who work with farmers on cost recovery programs (they provide seeds and fertilisers and recover the cost when the harvest is bought from the field) who will pay just Rs. 50 per Kg to the farmer. Therefore, at the end, middlemen attract most rents from the value chain.
Since exporters do not directly deal with farmers, middlemen have the ability to control the flow of demand side information to the farmer, such as, what crops to grow, quality parameters and prices and opportunity for value addition. Now, the question is ‘Can the Gram Shakthi program replace the middleman and make sure the agricultural producers have most of the rents from value chains?’
What are the incentives for the farmer?
It is clear that, getting in to an export-oriented value chain requires money. Inputs are costly. On average, for a crop like OKRA, one acre of land will need around Rs. 20,000 for seeds only. While the return is high most of our farmers are not capable of mobilising these input costs. Labour is not a serious issue since most rural farmers have their own labour invested in to agricultural activities. Therefore, farmers look for a cost recovery program (we call this a buyback program as well) with a forward contract. A forward contract is an agreement with the farmer or a farmer organisation where it specifies the cultivation process, buyback process, quality parameters, supply frequency and prices. Therefore, the incentive here is a “forward contact”.
Since quality is the most important aspect of an export oriented agricultural value chain, crop cultivation information, pest and disease management, harvesting, packaging and transportation with traceability is very important. For this farmer need advisory support. For the moment, farmer can get this knowledge from an agricultural extension officer or from 1920 agriculture advisory services. However, these services are also constrained with necessary knowledge to work with new improved (hybrid) seed varieties. Up to date knowledge on these management practices are with seed importers and agricultural exporters. This knowledge needs to be transferred to the farmer and then to the agriculture extension services and well. Therefore, the incentive here is an “efficient agriculture advisory service”.
Value addition should be a primary objective of an export-oriented value chain. For example, Moringa leaves have a high demand in the local as well as international market. However, the price paid to the product can be easily doubled if leaves are exported as dried leaves. A simple drying process can help farmers to attract a higher price.
Others examples are products like ginger, turmeric and vanilla. All these are attracting higher prices in the international markets, however with value addition agricultural producers can earn a very high price. For an example, 1 Kg of mature vanilla pods are bought from farmers at Rs. 6,500. Cured vanilla (a drying process) is bought at Rs. 32,000 per Kg. Vanillin extractions attract an even higher price in the export market. Therefore, value added products have the capacity for farmers to earn more, but they need investments. Hence the incentive here is the “investments for value addition”.
How can the Grama Shakthi program link farmers and exporter incentives?
Being a Government-headed program, Grama Shakthi has its own perks. The program is structured at divisional, provincial and national level linking the existing Government management system together. It has the blessings of the President himself, therefore any private initiative such as exporter associations have enough incentives to trust and depend on its sustainability.
The program is based on transparency and accountability, therefore involvement of different stakeholders in the value chain is visible leaving no room for rent seeking. At last, it aims to eradicate poverty from Sri Lanka, which is the primary objective of any government.
To date, we do not have a fully functioning common platform where exporters can inform about the orders that they have. However, I am optimistic since there are several private as well as donor initiatives working on this. For example, agriculture modernisation project under the funding of the EU is planning to build a web portal that publishes all the export related information including demands, prices and quality requirements. This web portal will be managed by a government entity, such as the EDB, or government’s e-gov program.
At the same time there are several private initiatives that have produced mobile application where exporters can publish their demands. Therefore, Grama Shakthi program does not have to re-invent the wheel. Rather, it only needs to make sure that farmers have access to ICT where they can either visit these web portals or download these mobile applications. Tools are there, we just need to make sure there is enough access.
However, we do not have to wait till these digital platforms are fully developed. Grama Shakthi program can start working with the exporter associations, for example National Chamber of Exporters, Lanka Fruit and Vegetable Producers, Processors and Exporters Association, International Federation of Organic Agriculture Movements, Good Market, Spices & Allied Products Producers’ & Traders’ Association, etc.. With these organisations, demand can be identified and transferred back to the farmer/farmer organisations through the exiting provincial and divisional structure of the Grama Shakthi program.
It is important to note that our existing agriculture advisory services do not have enough information on the new crop varieties. This is understandable since the department of agriculture (DOA), unless the crop variety is developed by them, will have no information on the new crop varieties. For example.
‘Thinnaveli’ is a bitter gourd variety developed by the department of agriculture and is in high demand by the export-oriented value chains. However, ‘Maya’ is a bitter gourd variety which is more demand but the DOA does not hold research information on that since it is being imported to Sri Lanka by a private seed importer. Therefore, we need to link these information sources together.
The Grama Shakthi program can effectively do this linking process and transfer the knowledge to the agriculture extension officers at the village level who work closely with the farmers. Once this is done, they can transfer this knowledge to the farmers and they do not have to run around looking for advice whenever there is a pest and disease attack.
We can go one step further and make this information available on a digital/mobile based platform. For example, the 1920 agriculture advisory service (of the DOA) can be equipped with this knowledge so farmers can call and receive information free. ‘Govi Mithuro’ is another private owned initiative (headed by Dialog in partner with DOA) that we can use to communicate crop related information. ‘Crop Advisor’ is a mobile application (hosted by DOA, Developed by LIRNEasia) that can be downloaded freely which carry information on Good Agriculture Practices (GAP) information. Grams Shakthi program can depend and use all these resources for advisory services on export crops.
This is a crucial element of the export-oriented agriculture value chains. When exporters are linked with the farmers, some might agree to implement a forward contract backed by a buyback program, but some might not. The buyback component of the forward contract is important since the input costs are high.
We can do several things here. One is to form community level organisations or farmer associations and then link them to exporters. An organisation then can pool the necessary money together and labour can be shared.
If this is not possible, Grama Shakthi program can offer them micro-finance or recommend the farmer organisation to a private micro finance organisation. Micro finance organisations have less risk since the farmer organisation is backed by a forward contract, this is similar to a ‘Letter of Intent’ (LOI) where organisation usually submit for private investments.
Or, if the Grama Shakthi program is giving money directly to the household as an income support initiative, we can suggest them to use that to buy necessary agricultural inputs. We can easily link up with seed importing companies to provide a good discount on seeds for the farmers. Since a particular seed variety is imported by a single company they are in a better position to do this as a business promotion.
The same can be done for fertiliser and other inputs. In addition, we can explore local knowledge in managing pest and diseases and making organic fertilisers as a substitute for chemical input usage. Knowledge on these are with farmers and research entities such as universities, DOA and SLINTEC.
Crops such as Gliricidia are good source of N, and can be grown as a fence crop in any agricultural land. On average one acre can accommodate 1,000 trees and close to 15 Kg per tree can be harvested every six months (in the wet zone). Leaves and the bark of the Gliricidia tree is rich with many nutrients. On average 30% of the annual requirement can be substituted by Gliricidia leaves only. Mixing this with other ingredients will result in an efficient organic fertiliser that can be manufactured at household level. This way farmers in the value chain can reduce the input cost, preserve the environment and support the government’s initiative on sustainable agriculture. Biomass supplies private limited is a company that engages with more than 100,000 smallholders planting Gliricidia in many parts of the country.
Logistics is also an important element in a forward contract model. Exporter sometimes will come to the farmer to collect, and that is the ideal situation. However, sometimes producers will have to take care of the transport either to a collection centre or to the factory. If this is the situation, rather than depending on an outside transport network, farmers can get-together and share the cost by suing a transport medium they already have. This can be a simple three-wheeler or a small lorry.
I have seen these transport networks evolve very easily, where farmers (these can be farmers who cultivate or just interested in transport only) buy small vehicles on a lease base to transport what the farmer organisation produce. They have little risk in doing this since the value chain is backed by a forward contact with a clear idea on how much to transport and what they can earn.
One threat to the forward contract model is the limited availability of crop insurance schemes. This has been a challenge for most insurance companies since it is not clear how to assess the damage and there is a question on the farmer willingness for crop insurance. However, in these high value chains, crop insurance is an important aspect.
There are several entities in Sri Lanka, both government and privately owned who provide crop insurance. They have identified that index-based insurance is better than indemnity-based insurance and now practicing that. However, farmer willingness buy insurance is still low, but that is predominantly in local oriented agricultural value chains. This is understandable since farmers are not clear on their earning capacities. But under a forward contract model, farmers will have a clear idea of their earning capacity, they will know the importance of their crop, and that will give them enough incentives to buy insurance.
Traceability is also an important element of a forward contract agreement. In order to establish traceability, value chain must have ICT facilities (QR codes) and crates. While exporters are very familiar with QR codes and use of crates most farmers are not, unless they are already in an export-oriented value chain. DOA is already establishing QR codes and promoting use of crates under the GAP program. Therefore, frameworks are already there on the best practices. With little investments it is possible to introduce QR codes and crates to Grama Shakthi companies.
Value addition ventures will require larger investments. Therefore, this perfectly aligns with the concept of “Grama Shakthi Companies”. When the exporter is interested in a value-added product such as dried moringa leaves or dried/powdered ginger, the processing facility can be established by the Grama Shakthi Company, and an investment can be done under a loan program.
Since these companies are working for a dedicated order reducing the exporters’ transaction cost, grace period can be increased and it might also be possible to get in to a public private partnership (PPP) with the exporter/exporter association. PPP initiative will be ideal for a larger Grama Shakthi company who works on a high value product, such as essential oil extractions.
In addition, there are plenty of donor organisations that will fund such entrepreneurial activities, especially with a female farmer focus. Organisations such as FAO, ADB, WB and IFC are already investing on export-oriented value chains with a focus on value addition and women.
Summary
Grama Shakthi program is in a great situation where it can easily link the agricultural producers in to high value chains and achieve its objective of eradicating poverty among rural agricultural households. Ideas that I have discussed here are already being practiced in the field, they only need to be scaled up. Little by little our agricultural efforts can be expanded in to GAP and organic value chains as well where farmer will earn even more.
Models I have discussed here will not cost much to the farmer or to the Grama Shakthi program. These models are interdependent and they use existing resources effusively and collaboratively. Once we identify the transaction costs and incentives, we only have to make sure one stakeholder is complementing to reduce the others transaction cost. With this majority of the rents will go to the agriculture producer helping to eradicate poverty.
(Dr. Chatura Rodrigo is an agriculture economist. He can be reached at [email protected], 076 35 99 243)
