COMPARATIVE ANALYSIS OF RICE MARKETING

SYSTEM IN SRI LANKA – PRE AND POST

LIBERALIZATION PERIOD

Thesis submitted to the

University of Agricultural Sciences, Dharwad
in partial fulfillment of the requirements for the
Degree of

DOCTOR OF PHILOSOPHY

in

AGRIBUSINESS MANAGEMENT

By

RUPASENA LIYANAPATHIRANA

DEPARTMENT OF AGRICULTURAL MARKETING

CO-OPERATION AND AGRIBUSINESS MANAGEMENT
COLLEGE OF AGRICULTURE
UNIVERSITY OF AGRICULTURAL SCIENCES,
DHARWAD – 580005

JULY, 2006
 ADVISORY COMMITTEE

Dharwad (H.S. VIJAYAKUMAR)

JULY, 2006 MAJOR ADVISOR

Approved by:

Chairman : ______________________

(H.S. VIJ AYAKUM AR)

Members : 1.____________________

(L.B. KUNNAL)

2.____________________

(H.S.S. KHAN)

3.____________________

(S.B. MAHAJANSHETTI)

4.____________________

(K.V. ASHALATHA)
 CONTENTS
Chapter Title Page
No.
I Introduction

II Review of literature

III Methodology

IV Results

V Discussion

VI Summary and Policy Implications

VII References

Annexure
 LIST OF TABLES
Table Title Page
No.
3.1 District wise selected competitive crops
3.2 Details of secondary data collection
3.3 Methods of analysis and analytical techniques
3.4 Nominal protection coefficient of Sri Lankan rice under importable
hypothesis
4.1 Guaranteed price and import price of rice
4.2 Change in Guaranteed Price of Rice
4.3 Changes in Rice Rationing Scheme
4.4 Importance of rationed rice in per capita consumption
4.5 Coefficient of Variation of rice prices
4.6 Duty changes in Rice Imports to Sri Lanka
4.7 Credit Provided by Formal Sector to Purchase Paddy
4.8 Loans Granted to Millers by Banks for Purchasing Paddy (Rs.
Million)
4.9 Funds provided by Treasury to government agencies and recovery
rate to purchase rice (rough)
4.10 Credit Subsidy for rice Purchase by government agencies
4.11 Progress of the forward sales contracts programme on Rice
4.12 Standards for rice (rough)
4.13 Annual growth rate of area, yield, production, and price of rice,
1960-2004
4.14 Growth rate analysis of cost and return in Polonnaruwa district (1979
– 2004)
4.15 Estimates of linear trends in prices and marketing margins of rice
4.16 Seasonal price index of producer price of rice
4.17 Seasonal price index of retail price of rice
4.18 Zero-order Correlation matrix between average monthly wholesale
prices in selected markets of Sri Lanka (1996-2004)
4.19 Results of the Ravallion market integration model for selected Rice
wholesale markets
 LIST OF TABLES (Contd.)

Table Title Page

No.
4.20 Distributed lag results of integration of rice wholesale markets
4.21 Coefficient of variation of prices and marketing margins of rice
4.22 Coefficient of Variation of rice prices, 1991-2004
4.23 Relationship of paddy prices with rice prices and guaranteed prices of
paddy
4.24 Parity ratios of rice (rough)
4.25 Farmer’s share of the consumer price of Nadu rice
4.26 Nominal protection coefficient of Sri Lankan rice, 2005
4.27 Production function estimates in rice in selected districts of Sri Lanka
4.28 Technical efficiency rating of rice farming
4.29 Ratio of MVP to MFC under different inputs in rice farming
4.30 Cost and return of rice farming during Yala season in 2005
4.31 Cost and return of cultivation of competing crops with rice in 2005
4.32 Income from rice and competing crops during Yala season in 2005
4.33 Per acre net income from rice and competing crops grown in
Mahaweli H area during yala season in 2003
4.34 Labour use in cultivation of rice and competing crops during Yala
season, 2005
4.35 Labour use in rice and competing crops grown in Mahaweli H area
during Yala seaon 2003
4.36 Monthly per capita consumption (Grams)
4.37 Production and imports of selected food crops, (average of 2000-
2004), Mt.
4.38 Composition of Agricultural GDP in 2004
 LIST OF MAPS AND FIGURES
Figure Title Page
No.
3.1 Map showing the major Agro-ecological Zones in Sri Lanka
3.2 Map showing the study area in Sri Lanka
4.1 Guaranteed price and import price of rice
4.2 Government purchase as a percentage of production of rice
4.3 Government paddy purchase and rice distribution system 1971 –
1996
4.4 Marketing channel for rice 1997 – 2005
4.5 Food supply monitoring system
4.6 Seasonal price index for produce price of rice
4.7 Seasonal price index for retail price of rice
4.8 B-C ratio of rice and competitive crops

ANNEXURE
Annexure Title page
No.
I Trend in analysis of rice, 1960-1977
II Trend analysis of rice, 1978-2004
III Trend in analysis of rice, 1960-2004
IV Estimates of compound growth rate in costs and returns of rice in
Maha season, 1979 – 2004
V Allocative efficiency of irrigated rice farming in Polonnaruwa
district, 2005 Yala season
VI Allocative efficiency of irrigated rice farming Kurunegala district,
2005 Yala seaon
VII Allocative efficiency of irrigated rice farming in Kalutara district,
2005 Yala season
VIII Allocative efficiency of irrigated rice farming in Polonaruwa &
Kurunegala district, 2005 Yala seaon
IX Cost and return of banana cultivation, in 2005
 I. INTRODUCTION
Rice (oryza sativa) crop was originated in the northern region of India. There are three
main types of rice cultivars, Indica, Japonica, and Javanica. Japonica type spread into Japan
and the Javanica into Indonesia, while the Indica type spread into the Indian subcontinent.
Rice is grown in tropical, subtropical and warm temperature zones. It is a semi-aquatic plant
requiring abundant water for its growth. According to the documentary evidence, Sri Lanka
had rice cultivation as early as during 800 B.C (Gunawardena, 1987). This is further reflected
by construction of massive irrigation structures since 390 B.C.

The world rice production is around 628 million metric tonnes and developing
countries produce over 90 per cent of production. The area under rice cultivation is around
152 million hectares and the world average is 3.87 metric tonnes per hectare. China and India
are the biggest rice producers in the world with a share of 32.11 per cent and 22.77 per cent
of the world production in 2004, respectively.

Global market for rice is thin. The international commodity market is considered thin
when it represents a relatively small proportion of global production (World Rice Research
Conference, 2004). The international rice market represented only 3-5 per cent of global
production in the 1980s, but it has come to 7 per cent of global production in recent years.
Nevertheless, the international rice market remains thin compared with wheat (18%) and
maize (13%).

Thailand, India Vietnam and the United State are the top four exporting countries of
rice supplying 66 per cent of trade (World Rice Research Conference, 2004). The most
important change in the world rice market during the past fifty years has been the dramatic
decline in the level of prices adjusted for inflation (David & Slayton, 2004). It was found that
world rice prices were 77 per cent lower than the average from 1950-1981. The main factor
behind this decline in prices was the Green Revolution, which led to an in crease in yield and
a lowering of unit production cost. World rice prices are also much more stable. The average
absolute value of annual price changes was 24 percent between 1965-1981 and it was 11 per
cent between 1985 and 1998 (David & Slayton, 2004). Increased production stability and
pronounced deepening of the world market are contributing factors for price stability.

Rice is a staple food for half of the world’s population and most of them are living in
Asia. It is largely consumed as a wholegrain. Rice is also consumed in the form of noodles,
puffed rice, fermented sweet rice and snack foods made by extrusion cooking. It is used in
making beer, rice wine and vinegar. Rice bran mixed in adequate quantities with other
ingredients is used as a feed for domestic animals. The oil extracted from the rice bran, which
is rich in vitamin E, is used for cooking purpose.

The chemical composition of rice grain varies considerably depending on the genetic
factor of the rice varieties and on environmental conditions such as location, season, fertilizer
application and post-harvest operations. On average, however, milled rice grain contains
about 80 per cent starch, 7.5 per cent protein, 0.5 ash and 12 per cent water.

Rice is the largest single crop grown in Sri Lanka and accounts for nine lakh hectares
or 45 per cent of the total agricultural land area in the country. It accounts for nearly three per
cent of the country’s GDP and 15 per cent of the agricultural GDP. About half of the
agricultural labour force (37 percent of the total employed population are in agriculture) are
employed in the rice sector. Rice is the staple food for the nation and the dominant source of
energy registering 44 per cent of the daily total calorie intake. It constitutes 8.4 per cent of the
Colombo Consumer Price Index (CCPI) and 15.7 per cent of the All Island Consumer Index,
which are used to measure cost of living in the country.

Rice cultivation takes place largely on small- holdings. Over 70 per cent of the rice
holdings are less than one hectare. Further, twenty five per cent of rice cultivation units are
between 1-2 hectares. Only about five per cent of holdings are above two hectares. It is
therefore required to give attention on viability of rice farming in units below one hectare. Over
50 per cent of the rice lands are cultivated by owner-himself. The irrigated rice fields occupy
nearly 75 per cent of the rice lands and 90 per cent of the total irrigated area in the country.
Rice (rough rice) production has increased to 2.7 million metric tonnes in 2004 from 1.7
million metric tonnes in 1970, representing nearly 60 per cent increase in three decades. This
is mainly due to cultivation on new lands under new large irrigation schemes and
improvement of yield. Sri Lanka has now achieved self-sufficiency in rice. Rice import is
limited to the occasion where domestic production falls due to bad weather.

Rice is cultivated during two seasons of the year namely, Maha (October–March)
Yala (April-September). Approximately 65 per cent of the production is derived from the
Maha crop. In Maha season, rice is cultivated under irrigation and rain-fed conditions on a
fairly large scale due to favourable north east monsoon rains whereas in Yala season the
cultivated extent is less due to rain being confined to the south west of the country. In 2005,
the total extent (both Maha and Yala seasons) of rice lands cultivated was 852,529 hectares.
Out of this, 75 per cent fell under irrigation and the rest of the land has been cultivated under
rain-fed conditions. Almost all farmers in Sri Lanka use high yielding rice varieties (HYVs).

Rice is grown in almost all the districts in Sri Lanka but 5 districts contribute more
than 60 per cent of the total rice production. Almost all major rice-producing areas are located
in the dry zone. Ampara, Polonnaruwa, Kurunegala, Anuradahpura and Hambnatota are the
main granary area and they are in the dry zone. In the dry zone, under major irrigation, the
yield per hectare has been in the region of 5 .0 metric tonnes while in the wet zone it is as low
as 2.5 metric tonnes per hectare under rain-fed condition. Rice yield, which had stagnated at
around 3.5 Mt/Ha at national level from 1985 to 1995 has since then increased to 4.00 Mt/Ha.
One of the reasons for yield stagnation is loss of soil fertility and increasing salinity in many
paddy-growing areas due to continue cultivation of mono cropping of rice.

One of the major issues affecting the profitability and sustainability of the rice sector
is the steady increase in the cost of production. This is due to increasing cost of labour, farm
power (machinery), fertilizer and agrochemicals. Expenditure shares with respect to major
categories of inputs indicate that labour constitutes the largest share in cost of production.
Farmers are compelled to incur nearly half of their expenditure on labour. Shortage of labour
for rice growing is becoming critical in high intensity areas during peak periods. Next to
labour, farm power costs account for the second largest share in the total cost of production.
This is followed by the share of fertilizer and agro-chemicals, which accounts for around 16
per cent of the total cost. Due to increasing cost of production at a higher rate than rice
(rough) prices, net returns from rice farming continues to decline. Farmers are faced with a
very serious cost-price squeeze. The majority of farmers are finding rice cultivation
uneconomic in the sense that incomes derived are inadequate for their basic living.
Abeysiriwardena (2003) reported that rice cultivation is the least profitable of all farming
activities in Sri Lanka.

The average per capita consumption of rice is in the region of 100 kg per annum. An
average consumer spends 24 per cent of total food expenditure on rice. The Household
Income and Expenditure Survey, Department of Census and Statistics recorded a per capita
consumption of 102.8 kg in 2002. The Consumer Finances and Socio Economic Survey of the
Central Bank of Sri Lanka reported 105 kg per capita consumption in 2003/04. A marginal
increase of rice consumption on per capita basis could be expected because income elasticity
of rice is positive. Rural consumers consume more rice than the urban consumers. According
to the survey of Central Bank, per capita rice consumption in rural sector was 110.28 kg per
year as against to 79.16 kg in the urban sector. This indicates rice consumption will decrease
considerably with the increase in urbanization.

Sri Lanka’s economy was liberalized in 1977. Before 1977 government played a key
role in rice purchasing, storing, processing, distribution and imports. In 1972 the government
set up a separate agency called Paddy Marketing Board (PMB) for rice purchasing and
processing. Milled rice was distributed to the consumers through Food Commissioner’s
Department (FCD). It also had monopoly power to import rice till 1990 and maintained buffer
stocks to meet emergency requirements till 1993. In 1990, function of rice imports was
handed over to the Cooperative Wholesale Establishment (CWE), which is also a state run
organization until 1993. The government purchased rice under Guaranteed Price Scheme
(GPS), which was introduced in 1948.

The government intervention in rice marketing has been reduced significantly after
implementation of new economic reforms. Soon after the introduction of open economic
policies in 1977 monopoly power of PMB in rice purchasing was abolished and allowed to
private trade to purchase, process and distribute rice. In 1997 giving the private sector to
handle the rice purchasing entirely, PMB was closed down. As a result operation of GPS was
stopped. Since 1997 the government intervention in rice purchasing was done on ad hoc
basis at harvest time through CWE and Cooperatives until 2005 and since then only
Cooperatives are involved. The government decided to close down the CWE in 2005 due to
huge loss in business. Activities of FCD were also liberalized since 1990s. Consequently, the
government rice distribution programme through the FCD stopped in 1992 and buffer stock
programme maintained by the government through (FCD) was abandoned in 1993. Similarly,
monopoly power of rice imports enjoyed by CWE was liberalized in 1994 and tariff rate
reduced to 35 per cent from 50 per cent.

With these policy changes, rice marketing is today entirely in the hands of private
sector. The government intervention is now on ad hoc basis. The buying and collection of
paddy from farmers is mainly handled by the millers and assembly traders called as
collectors. There is not a single established market for rough rice (paddy) in the country like
regulated markets in India. Farmers sell paddy at the filed, in the house or transporting to the
collecting centers or to the rice mills. The selling procedure varies by location. For instance,
farmers in Polonnaruwa district largely sell to the collectors at the farm-gate while farmers in
Hambantota district largely sell to the millers at the mill. Collectors in turn sell the stocks to the
millers. Some collectors hold stocks for future sale. However, millers are the major
stockholders. A very few farmers keep stocks for sale later.

There are about 7000 rice mills in the country. These rice mills are classified as
custom and commercial rice mills in the country. The custom mills are those at the village
level, which mill small quantities of rice on a fee basis for household consumption. Others are
large mills doing commercial scale milling. The total milling capacity in the country is
approximately 2700 metric tonnes per hour, of which 60 lie in custom mills and the rest in
commercial mills. A survey conducted by the Institute of Post harvest Technology in 2002
revealed that all the custom mills and 95 per cent of the commercial mills are owned by the
private sector. The rest (5%) of the commercial rice mills belong to the Cooperatives.

The custom rice mills are of the traditional huller type, where the rough rice (paddy) is
milled using a single steel huller. The commercial rice mills can be categorized into three
main types depending on the machinery used for milling, namely traditional, semi-modern and
modern types. In the traditional type of mill, both de-husking and polishing operations are
done through one or more steel hullers whereas in the semi-modern type de-husking of rough
rice is done using a rubber roll sheller and polishing of rice is performed with one or more
steel hullers. The modern type of mill has separate specialized machines for each milling step
such as pre-cleaners, destoners, rubber roll shellers, rice separators, rice polishers and
graders. Among the commercial rice mills, 25 per cent are of the traditional type, 35 per cent
are of the semi-modern type and 40 per cent are of the modern type.

The rice produced in traditional and semi modern rice mills, which constitute 60 per
cent of the commercial mills and 100 per cent of the custom mills, is of poor quality with a
high degree of grain breakage, discoloration and impurities. Further, the rice recovery in these
mills is as low as 50-60 per cent as compared to modern type of mills where the rice outturn is
between 60 and 70 per cent. Nearly 70 per cent of the rice milling in Sri Lanka is subjected to
the process of parboiling.

Millers deliver rice to the established wholesale markets such as Colombo and
Kandy, and to the individual wholesalers. Distribution of rice by millers directly to the
individual wholesalers in towns by passing wholesale markets is on the increase because of
advantage of reduction of marketing costs which benefits both buyers and sellers, finally
consumers too. In addition, big millers distribute packed rice to the retailers and some have
their own retail outlets in cities. This is also growing because consumers prefer to pay a
premium price to better quality rice because of increased income. Most of the established
retail outlets offer over 10 brands and grades of rice for sale. Different modes of processing,
grain types and varieties make the multiplicity of brands and grades.

The above discussion shows that rice industry has undergone significant structural
changes during last four decades with merits and demerits. The great achievement was self-
sufficiency in the beginning of 21st century. Although the country is proud of this, rice farming
is in crisis situation now. Farmers started committing suicide due to unable to settle their
cultivation loans. In 2005 during Yala season five farmers committed suicide in Polonnaruwad
district and the subsequent season two farmers committed suicide in the same district
(Editorial, Lankadeepa Newspaper, 6 March, 2006). It was also found that the youth do not
wish to be employed in rice faming though unemployment in rural sector is high (Sanderatne,
2003). Kendaragama et al. (2003) also reported that abandoned rice lands are on the
increasing due to family labour shortage as a result of younger generation’s reluctance to get
involved in rice farming. The number of rice farmers below poverty line is increasing. Jeevika
(2004) argued that rice farming alone does not allow a farm family to overcome poverty. This
is the bad side of the rice farming.

Despite this situation in the ground there is considerable talk about the country
exporting rice. This has been an emotional issue (Sanderatne, 2003). The export of rice is
considered the pinnacle of achievements, the realization of the country’s ancient glory, the
hallmark of the robust economy. The country may produce exportable surplus of rice in the
future but it is important to realize that the country reached the point of self-sufficiency in rice
at very high cost. Irrigated water is provided to farmers at free. Fertilizer was heavily
subsidized. Cultivation loans were written off several times.
As regard to marketing, many have criticized the role of the private sector in rice
marketing and put all ill effects to it and suggested government intervention once again.
Paddy farmers complain about low prices at harvest time, which go below the cost of
production in many instances. On the other hand, consumers complain about high prices
especially during the off-season. The private sector complains to the government on ad hoc
policy on imports, which allow importing and dumping rice to the market. This destroyed the
market leaving many traders and millers out of the business. The private sector says that rice
industry has collapsed and it is now characterized by high risk and low return (Ubaidullah,
1999).

Rice has now become a serous issue addressing the election campaign in recent
past and also created political instability in the country. During last five years country had
three parliamentary elections i.e., 2000, 2002, 2004 and each time government has changed.
During the last presidential election held in November 2005 one of major issues was rice. Two
major parties gave lot of promises to the rice farmers, which include reestablishment of Paddy
Marketing Board, re-implementation of guaranteed price scheme and increasing fertilizer
subsidy. Newly elected President already implemented some of his promises. One is
implementation of new fertilizer subsidy scheme, which provides fertilizer at Rs.300/50kg bag
of fertilizer without discriminating the type of fertilizer, which is subsidized over 75 per cent of
the market price. At the time of election, the current ruling party made and public
announcement that fertilizer subsidy is not the cost but investment. This program has already
started problems such as financing and implementation. Discussion is going on to target the
subsidy. The second is implementation of guaranteed price scheme by offering Rs.17/kg. This
also created problems. Many farmers complained that they were unable to sell at that price
while Co-operatives that is a purchasing agency complained that there are no adequate funds
to purchase the entire quantity offered by farmers. In the meantime, the private traders
purchase paddy at low price due to uncertain market environment.

Another issue is efficiency of rice farming. Resource use efficiency on farms in

developing countries becomes an important issue in determining the existing opportunities in
agriculture for economic development and welfare of the farm families (Sikander & Sandeep,
2004). Efficiency is an important factor country like Sri Lanka where, resources are meager
and opportunities for developing better technologies are few. Such economies can benefit
greatly from the efficiency studies that illustrate the possibility of raising productivity by
improving efficiency with the existing resource base and technology. The efficiency studies
can also help policy makers to decide whether to improve efficiency or develop new
technologies to raise agricultural productivity. If resources use inefficient in rice farming
profitability could be increased by making adjustment in present use of factor inputs in optimal
direction.

The situation appearing today is more severe than ever since and problems have
become so complicated. The end result would be lack of farmers to continue rice farming. The
government so far attempted to solve the problems by looking at the syndromes of the
problems. All these happened due to lack of proper understanding of the root causes of the
problems.

The present study directed to this end and attempted to carry out a comprehensive
analysis of performance of the rice marketing system during pre and post- liberalization
period. In addition to marketing, some production aspects such as efficiency in rice farming
and profitability of rice and its competing crops were also examined because marketing
issues cannot be discussed without looking at the production side. Marketing and production
are two sides of the same coin. Overall, the present study discussed the past performance,
present situation and future direction in rice marketing in particular and rice sector in general
in Sri Lanka. Findings of the study would be valuable inputs in policy formulation towards
sustainability of rice industry because today, there is some confusion about the country’s rice
situation and the directions how rice farming should take in the future.

1.1 SPECIFIC OBJECTIVES OF THE STUDY

1. To document the policy changes in rice marketing/distribution in Sri Lanka,
2. To study growth performance of rice production and marketing in the country,
3. To analyze the price behaviour of rice during pre and post liberalized period,
4. To analyze the competitive profitability of rice production with competitive crops,
5. To ascertain the technical and allocative efficiency in rice farming,
6. To study competitiveness of rice export from Sri Lanka in the context of free trade,
7. To ascertain the impact of crop diversification on Sri Lanka’s agrarian economy, and
8. To suggest appropriate policy measures for management of rice marketing in Sri
Lanka

1.2 HYPOTHESES
1. Growth in area, production and productivity of rice is more pronounced in pre-
liberalization period than post liberalization period.
2. Private sector rice marketing system is more efficient than that of public sector.
3. Competitive crops have higher returns than rice.
4. Rice production in the country is not efficient.
5. Sri Lanka does not have comparative advantage in rice export.
6. Diversification of rice fields with alternative crops has positive impact on agrarian
economy.
7. The existing policies of marketing in rice need revision.

1.3 LIMITATIONS OF THE STUDY

Following limitations were identified while conducting the present study.
1 District wise performance analysis in relation to area, production and productivity was
unable to carry out due to time and manpower limitations
1. Production function analysis was limited to three districts because the Department of
Agriculture was not completed in processing of data at the time of requesting.
2. Primary data collection was not undertaken to ascertain impacts of crop
diversification on rural agrarian economy due to financial constraint.
3. Literature review was limited to few studies in Sri Lanka due to nonexistence.
4. Comparison of market integration between pre and post liberalization period was not
made due to absence of market wise price data during pre-liberalization period.
5.
 1.4 ORGANIZATION OF THE THESIS
Chapter I: deals with the importance and scope of the research problem, objectives of
the study and hypotheses along with the background information on the study
aspects.
Chapter II provides precise review of the empirical studies covering methodology,
findings and policy recommendations.
Chapter III presents the description of the study area, database, and the various
analytical techniques employed in the study.
Chapter IV offers the salient results obtained from the analysis of data using analytical
techniques.
Chapter V brings out the logical reasoning for results of the study.
Chapter VI summarizes the findings and indicates policy implications.
Chapter VII acknowledges the references made from reports, journals, books and other
sources.
 II. REVIEW OF LITERATURE
Review of literature provides information to the researchers regarding the previous
work done in the their area of research and thereby helps them in identifying the theoretical
framework and methodological issues related to the study and in comparison of research
findings with the empirical evidence that already exists. It provides the researchers a proper
direction to carryout their research work and enables them to arrive at meaningful results.
Keeping these facts in view, the available literatures relevant to the objectives of the present
study are reviewed and are presented herein under the following headings.

2.1 Agricultural policies with special reference to marketing

2.2 Growth performance
2.3 Price behaviour
2.4 Export competitiveness
2.5 Resource use efficiency
2.6 Costs and returns

2.1 AGRICULTURAL POLICIES WITH SPECIAL REFERENCE TO

MARKETING

Gopalappa (1996) analyzed the effect of agricultural diversification on the income and
standard of living of the farmers over time in a village Gopalpur in Elakathurthi Mandal of
Karimnagar district of Andhra Predesh. The data were collected for 1984-85, 1991-92 and
1993-94. The study found that the annual growth rate of paddy area declined at the rate of
3.01 per cent on the marginal farms and 5.44 per cent on the small farms. Paddy yielded an
annual real income of RS.696 per acre as compared to RS.5391 for sericulture in 1993-94. It
was further found that net return from paddy cultivation was declining over time whereas it
was increasing for sericulture. Analysis of impact on consumption expenditure indicated that
people had consumed more nutritious food such as fish, meat, vegetables etc., as well as
spent more on entertainment. The study concluded a significant change in the income levels
and standard of living of the marginal and small farmers due to diversification of the farm
activities.

Vyas (1999) reviewed Indian trade policy by grouping the study period into three
periods, viz., 1) till 1960S 2) mid 1960s till 1991 and 3) after 1991. The agricultural trade till
mid 1960s was subject to a regime of quantitative controls and other state interventions to
conserve foreign exchange. The trade policy in agriculture was designed to pursue twin
objectives of food self-sufficiency and promotion of exports of commercial crops. In the
second phase, inward looking imports substituting policy frame was implemented more
rigorously and food self-sufficiency became the corner stone of the development strategy in
agriculture. In the third stage, continuation of strategy of food self-sufficiency was challenged
with the economic liberalization policies. Those who were against self-sufficiency argued that
distortion in agricultural trade would be removed with WTO agreement, cheep imports could
be made if a country could earn foreign exchange and wide-spread distribution of food would
result instead of being controlled by a few countries as in the past. However, this study
stressed the need of continuation of self-sufficiency in principal cereals, i.e., wheat and rice
because expenditure on food grains accounts for 40 per cent of the expenditure of the bottom
one-third of India’s population. International prices are more volatile than the domestic prices
and bulk of the poor living in rural areas depends on the growth on agriculture. The study
concluded that food self-sufficiency is not a matter of faith and it could be reviewed when
expenditure on food becomes a minor part of the consumer’s budget, when food production
does not remain the main source of livelihood for the small and marginal farmers, when non-
food export becomes sufficiently buoyant to generate enough foreign exchange, when country
has enough buffer stocks to ward off any significant price fluctuations of imports and when
there are numerous and assured sources of supply to cope with any sizeable shortfall in
domestic production.
 Acharya (2000) reviewed the subsidies in Indian agriculture and presented an
assessment of as to who benefited from the subsidy. In the study various types of subsidy
programmes such as input, output and food subsidy are discussed. It was reported that
benefit of the subsidies had been shared by all the sections of the society including farmers,
landless labourers, urban consumers and the industry. The study concluded that price
support policy would need to be in place even in a liberalized environment in all the areas of
the country, an agency would be needed to undertake price support purchases, maintain food
grain buffer stock and undertake public distribution of food grains at least for the families
below the poverty line.

Jain and Karam (2000) made an attempt to study the effect of price policy on farm
income of the paddy farmers over time in Punjab. Data on area, yield, production and cost per
quintal (cost C or C2) for 200 holdings scattered over twenty clusters of villages in three
zones of Punjab were obtained. Operational holdings having higher cost of production than
the Minimum Support Price (MSP) were treated as affected holdings. The study found that
traditional paddy producing area of zone I was the most sufferer where about 64 per cent of
farmers incurred higher cost of production than the MSP announced by the government in
1981-82. Between size classes of the holdings in the state, small farmers (1-2 hectare) were
the most sufferers where 62 per cent of farmers had produced paddy at a higher cost of
production than MSP. In 1990-91 among the size classes, except a majority of large farmers
(above 6 hectares), each size category of farmers had higher cost of production than the
MSP. On the whole, at the state level, it was observed that 58 per cent of the paddy farmers
in 1980-81 had covered their cost of production by the MSP but it declined to 45 per cent in
1990-91 thereby showing that Punjab had become a high cost producer of paddy in India.
Similarly, price policy proved less beneficial over time as the area benefited declined from 65
to 63 per cent during the period concerned.

Jairath (2000) made an attempt to look at marketing infrastructure at the micro level
in Arid Western region of India (Rajasthan). In this study, agricultural marketing infrastructure
includes agricultural produce market, storage, transport, processing, grading and
standardization, market information system, communication, banking and finance, research
and training. There was uneven spread of 395 regulated markets in the districts. The average
area served by each regulated market was about 900 sq. km in Rajasthan as against only 75
sq. km area in Punjab and 175 sq. km area in Haryana. The cold storage capacity available in
the state was about 68 thousand tonnes and it was inadequate as compared to the available
quantity of perishable products. Over 50 per cent of the storage capacity of State
Warehousing Corporation was located in three districts. The road density per 100 sq km of
area in the state (19 km) was much below the recommendations of Shillong Plan (1981) of
32.5 km road per 100 sq km of area. When grading is considered, only 38 per cent districts of
the state had Agmark laboratories. There was only one cotton-grading center to serve an
area of 16,297 sq. km. and handled about 7,207 tonnes of produce in the state. On the basis
of average area served and average quantity handled, the study concluded that available
infrastructure facilities were poor.

Hazar (2001) documented a series of programmes on rice implemented by both

Central and State governments in India. State level training programme on rice production
technology started in 1975/76 aimed at dissemination the latest rice production technologies
to the extension officers of the state governments. In 1985-86, special rice production
programme partially funded by the union government, focused on increase in the productivity
of low productivity areas. With a view of achieve the minimum food production of 166 million
tonnes during 1988-89 and 175 million tonnes, in 1989-90, a special food production
programme was implemented during the 7th Five Year Plan period. Under this programme,
106 potential districts in 13 states were identified for the development of rice production. This
programme was fully funded by Government of India. Integrated programme for rice
development was initiated in 1990-91 to develop rice production on district basis. The
government of India financed 75 per cent of the total cost. In order to introduce hybrid
technology developed in China, promotion of hybrid rice programme was commenced in early
1990s. For the first time in India four rice hybrids had been released for commercial cultivation
during 1994 by the state government of Andhra Predesh, Tamil Nadu and Karnataka. As
regards the price policy, the government of India announced the Minimum Support Price for
rice at the start of the season. The prices were fixed on the basis of the recommendations of
the Commission for Agricultural Costs and Prices (CACP). Promotion of a cropping system
approach rather than a single crop development approach and promotion of hybrid rice
production technology were among the recommendations given in the study.

Epaarachchi et al. (2002) reviewed agricultural and trade policies and their
implications for the domestic agricultural sector in Sri Lanka during the period 1995-2000.
Tariff changes made from 1995 to 2000 were listed in order to show the ad hoc nature of tariff
policies on rice. According to the study, this happened due to the conflicting objectives of
ensuring low food prices for consumers and high prices for producers but ad hoc tariff policies
resulted in serious implications for the welfare of consumers and producers. The study
concluded that ad hoc changes in tariff rates are not conducive to the long-term growth of the
domestic agricultural sector and created uncertainty in the market and scare the producers,
traders and potentials. The authors recommended to maintain a uniform ad-valorem tariff rate
for rice making the total tax incidence 50 per cent or less.

Acharya (2003) argued that efforts to fully explore the potential and prospects of crop
diversification could forge congruence of enhanced productivity, profitability and sustainability.
The ability of the country to diversify the cropping pattern depends on the opportunities
available for diversification, the need for diversification and responsiveness of farmers to
these needs and opportunities. The opportunities for crop diversification emerge from
technological break-through, changes in demand pattern, development of irrigation,
availability of marketing infrastructure and new trade arrangements. Similarly, the necessity
for crop diversification arises on account of need for a) reducing the risks associated with
yield, market, prices, b) arresting the degradation of natural resources and the environment
and c) attaining national goals like employment generation, self-reliance in critical products
and for earning foreign exchange. In this study, crop diversification was analyzed for three
time periods, viz., before 1964-65 (pre-green revolution), between 1964-65 and 1980-81
(green revolution period) and after 1980-81 (post-green revolution period). Crop diversification
was analyzed by examining the change in gross cropped area among the food grains and
non-foodgrains. In the analysis, percentage area of the total crop and incremental area was
worked out. It had shown that the substantive diversification from food grains to non-
foodgrains took place during the post-green revolution period. The proportion of gross
cropped area under foodgrains declined from 73.7 per cent in 1980-81 to 65.1 per cent in
1988-99 and that under non-foodgrains increased from 26.3 per cent to 34.9 per cent .The
study concluded that the policy objective of crop diversification was achieved to a great
extent.

Deshpande and Gopalappa (2003) made an attempt to study agricultural marketing

policies in India. In this analysis, policies were reviewed under policy intervention, market
regulations, institutions in agricultural marketing sector, market infrastructure, agricultural
marketing under the WTO regime and suggestions for new policy regime. Market regulations
were grouped into two, viz., regulations governing functioning of primary agricultural produce
markets and a series of legal instruments. Institutions involved in marketing were documented
under public, cooperative and farm sector. As regard to market infrastructure, study pointed
out that some states like Punjab, Haryana, Tamil Nadu, Kerala and Gujarat have better
infrastructure facilities whereas in the states like Madhya Pradesh, Rajasthan, Bihar, Assam
and West Bengal a lot needs to be done. It was pointed out that private sector investment in
this area was totally lacking. To face the WTO regime there are three challenges i.e., clearing
the existing inefficiencies, connecting the domestic market with international trade and
creating proper safety nets in the system.

Hegde et al. (2003) reported in their study that double or triple cropping with rice,
though possible, but needs not be encouraged very much because with the same irrigation
water, one could produce other crops more efficiently. Rice is treated as very inefficient user
of water. The study found that though in Asia the rice-wheat system has been practiced for
over 1000 years, its sustainability has declined due to a number of causes such as labour
shortage and delayed and excessive tillage operation resulting in the late plating of wheat
crop. According to the study, in India approximately 15 million hectares of area is under
fallows ecosystems, which can be favourably exploited for the successful cultivation of pulses
and oilseeds. Three major challenges in Indian agriculture found in this study are increase in
productivity, move the green revolution to ecological systems and couple food production
efforts with sustainable environment quality. The study stated that crop diversification is one
of the ways towards meeting theses challenges and achieving sustainable agricultural
development.

Mruthyunjaya and Chauhan (2003) argued that crop diversification means enterprise
diversification at farm/village level as a process of shift at three levels, viz., from foodgrains to
non-foodgrains, from crop to non-crop sectors and outside farm converting petty trade, arts,
rural crafts service etc. According to the study, available evidence showed that small and
marginal farms could be diversified and have substantial income enhancing and employment
generating opportunities.

Raj Singh (2003) made an attempt to examine interrelationship among globalization,

agrarian situation and sustainability in Haryana State of India. This study reported that area
under wheat and rice had increased considerably during the post-liberalized period and area
under other crops such as gram, sugarcane, groundnut, fruits and vegetables had decreased.
This is against the manifest objectives of economic liberalization because the wheat-rice
monoculture pattern leads to biological problems besides reduced soil fertility. The study
highlighted that wheat-rice mono cultivation system required the application of considerable
amount of chemical fertilizers, pesticides and excessive application of both surface and
ground water. Consequently, consumption of chemical fertilizers pesticides and use of
tractors have increased considerably since 1990-91, which almost destroyed bio-diversity,
ecosystem and soil health. Since fertilizer use of rice and wheat is now close to optimal level
and application of additional doses of fertilizers is often unprofitable, the study stressed the
necessity of diversifying some areas from wheat and rice to other crops and it is a serious
challenge for the researchers to develop some cropping alternatives, which the farmers would
accept.

Rajeswar Rao (2003) pointed out that monoculture and continues cropping of rice-
wheat system have resulted in various disadvantage in India besides deteriorating soil fertility.
It was further reported that the physical condition of soil like aeration has deteriorated. Pulses,
when included in the cropping system, offer a unique opportunity in sustaining soil fertility by
virtue of converting atmospheric nitrogen into assimilable form of ammonia, i.e., Biological
Nitrogen Fixation (BNF). The study reported that the inclusion of pulses in cereal-cereal
system economizes the nitrogen to the tune of 30-40 kg/ha for succeeding cereal crops. The
study concluded that diversification of pulses into cereal based cropping system will not only
replenish the soil health but also economize input use lowering the cost of production.
Velayutham and Palaniappan (2003) studied the crop diversification in India and
found that more than 250 cropping systems are being followed in the country of which 30
cropping systems are predominant. These 30 systems include rice-wheat, rice-rice, rice-grain,
rice-mustard, rice-groundnut, rice-sorghum, groundnut-rice and sorghum-rice. Crop
diversification had been studied by analyzing change in area under major crops during the
period 1970-71 to 1998-99. It was found that the area under total cereals remained static at
about 102 million hectares while there had been a significant increase in non-grain crops such
as cotton, sugarcane, fruit and vegetables during that period. The economic return was one of
the major considerations for adoption of major cropping systems at farm as well as regional
level.

Anonymous (2004a) made documentation and analysis of past and present policies
of the government as a part of the study of Agricultural policy in India. More specially, the
study examined the various policy initiatives taken in the Andhra Predesh during the last 50
years for improving the performance of agriculture, identified the constraints for agricultural
development and designed the policy for development based on the local needs and resource
base. This study was completely based on the secondary data. The information relating to the
various policy initiatives, schemes, programmes, targets and achievements were drawn from
the Five-Year Plan documents. During the First Plan the Community Development
Programme was launched. Later in 1960 Intensive Agriculture Development Programme and
in 1965 High Yielding Variety Programmes were launched. Since these programmes failed to
cover marginal and resource poor areas, in the Fourth and Fifth Plan periods, a number of
special programmes such as Drought Prone Area Programme, Small Farmers Development
Agency, Integrated Tribal Development Agency, Command Area Development Agency etc.
focusing on specific groups and areas were introduced. In addition to these, there were
specific schemes for agricultural development implemented in Andhra Predesh during the
eighties and nineties. Integrated Credit Development Programme, Oilseeds Production
Programme, Accelerated Maize Development Programme, National Watershed Development
Programmes and Intensive Cotton Development Programme were among them. Impact of the
policies on agricultural development in the state was discussed under four periods such as
pre green revolution (before 1969) the first phase of green revolution (the seventies), the
second phase of green revolution (the eighties) and the economic liberalization period (the
nineties) by analyzing the output growth. It was found that there was a deceleration in the
growth of aggregate output in the nineties mainly due to deceleration of the growth of yields of
several crops.

Anonymous (2004b) studied the role of state in agricultural marketing, the extent to
which it has been successful and beneficial to the producers and what cost. The study related
to the state of Maharashtra and three crops viz., cotton, sugarcane and onion. Marketing of
cotton has been under government monopoly since 1972-73 and the Maharashtra State
Cooperative Cotton Growers Marketing Federation (MSCCGMF) is the responsible agency for
fixing price of cotton to be paid to the producers. In case of sugar the Maharashtra
government policy is that all mills should be cooperatively owned. The Cooperative Sugar
factories are involved in scheduling of planting, harvesting, transporting and financing of the
sugarcane crop. Since sugar come under Essential Commodity Act (1955), 10 per cent of the
total production of each factory is procured as levy sugar at notified price for distribution
through public distribution system (PDS). Marketing situation for onion is different and it is
marketed through regulated markets. The state intervention in onion is mainly in external
markets as exports are not free and government issues quotas. In case of local market
government intervenes through market intervention scheme (MIS) when prices fall to very low
levels. Performance analysis indicated that marketing of cotton and sugar is carried out with a
loss. However, farmers prefer to sell to government agencies due to assured market and high
prices. The study also found that onion farmers received less than half of the retail price due
to poor post harvest activities such as lack of scientifically constructed onion storage facilities.

Anonymous (2004c) reviewed the policy interventions made by the State Government
of Haryana. It was pointed out that diversification of agriculture away from rice-wheat to less
water using crops had little success due to non-availability of equally remunerative cropping
pattern. The study also stressed the need of development of post harvest activities such as
transport, storage, processing and other infrastructure to enable the farmers take advantage
of the new WTO environment.

Dorosh (2004) studied trade, food aid and food security in Bangladesh using
secondary data. One of the objectives was to examine the positive contribution of trade
liberalization and private sector imports to short-run food security. Rice imports increased
considerably from India after the liberalization of international rice trade in 1994. In 1998 the
Bangladesh government removed a 2.5 per cent tariff on rice to encourage private sector
imports of rice to stabilize domestic market as a result of scarcity of domestic production
resulting from floods. The study pointed out that price stabilization through private imports
was successful in 1998 as compared with public sector imports made to stabilize market
during 1974 and 1988-89 food crisis situation. Similarly, in 2001 the government raised the
tariff on rice from 5 per cent to 37.5 per cent to protect the producers whereby imports ceased
and producer prices increased. Finally, it is possible for a small country with access to
international markets to avoid a major food crisis and stabilize prices even without large
government stocks. The study stresses the need of intra-regional trade to increase food
security and finally all countries in the region get benefits.

Gulati and Landes (2004) examined the performance of agricultural policy since the
1991-92 reforms and identified key areas where achievement of consensus on reform could
have positive impacts. During 1995-96 –2001-02 period the government set Minimum Support
Price (MSP) above the recommendation made by the Commission of Agricultural Costs and
Prices (CACP) in four out of seven years for rice. As against the historical trend, real price of
rice in India has an increasing trend since 1990s despite declining per capita consumption,
accumulating huge public stocks and falling world market rice prices in real terms. This study
stressed that the failure of price policy to successfully adapt to the new environment has
created a number of impacts. First, high prices of rice due to higher MSP reduced
consumption. Second, public expenditure on storage and transport increased. Third, MSP
policy has not been made an effective tool for stabilizing producer prices for other crops and
supporting the diversification of agriculture. Fourth, subsidy outlays are crowding out new
investment needed to boost productivity and marketing efficiency. Finally, the strong price
incentives for rice are contributing to the rapid deterioration of ground water resources and
rising concern with deteriorating soil fertility. The major conclusion was that as long as
producer price policy attempts to meet both income and price stabilization goals, it would be
difficult to serve the efficient allocation of resources in the sector.

Sharma and Thakur (2004) examined the existing market infrastructure, its
performance, limitations, and made suggestions for improvements needed for smooth, orderly
and efficient marketing of agricultural commodities in Himachal Pradesh. With regard to
transportation, the study found a weak correlation between production/marketed supplies of
fruits or vegetables and road density. The use of the available markets was limited due to
problem of transport from villages to the market. It was also found that banking and
communication facilities available in most of the markets were not used for the benefit of the
farmers. In these circumstances, many producers took their products to the adjoining markets
of Delhi, Punjab and Haryana for sale. It was also found that HPMC was successful in
creating competitiveness in marketing of fruits through direct purchases and market
intervention mechanism. The study was in negative side in terms of agro processing and it
remained at the low level of development. It was pointed out that only 1.9 per cent of fruits
were processed and the figure for other crops was negligible.

2.2 GROWTH PERFORMANCE

Deshpande (1994) studied the growth in area, production and productivity of chillies
in Karnataka State for the period from 1969-70 to 1990-91. Area under chilli and its
production showed a significant positive growth rate in the case of state as a whole but the
negative growth in the productivity of chillies was observed. The study concluded that sort of
equilibrium had been set up in the production of chilli, cultivating the same variety, adopting
the same package of practices, getting same level of yield and so on. The study stressed the
need to break down this equilibrium in order to realize high yields and recommended a need
for evolving some promising varieties of chillies, possessing necessary qualities of Byadagi
chilli, which is possible through extensive research works.

Jesy and Sundaresan (1996) analyzed trend in prices of cardamom in India using
exponential function to understand the export performance of cardamom. The growth rate of
price was analyzed using the average annual export price. It was found that price had shown
a high growth of 6.92 per cent. The real price behaviour of cardamom was examined by
deflating the annual prices by wholesale price index. It was found that the real prices showed
wide fluctuation.

Kumara et al. (1996) studied the growth rates of area, production and productivity of
rice in Bihar state of India using time series data from 1959 to 1990 by dividing them into,
1959-68 (period I), 1969-79 (period II) and 1980-90 (period III). The study found that the
growth rate of yield was positive during green revolution period and negative before green
revolution period in all the zones of the region. The growth rate of area was negative in both
periods in all the zones.

Saraswat (1996) studied the trend in area and production of citrus fruits in Himachal
Predesh, using time series data from 1975 to 1992. The area under citrus had increased at an
annual growth rate of 11.09 per cent in the Himachal predesh, but growth rate higher than the
state average was observed in Una, Hamirpar, Bilaspur, Kangra and Chamba districts.
Overall, all the districts had shown the growth of more than 8 per cent per annum. As regard
to production, the annual compound growth rate was found to be 4.74 per cent in Himachal
Predesh. The highest growth rate was observed in Una district (31.98%) followed by
Hamirpur (16.72%). The study concluded that the state had witnessed a fast growth in citrus
cultivation both in area and production.

Mundinamani et al. (1999) estimated the trends in market arrivals, prices and
production of groundnut in the selected markets in Karnataka State of India by employing the
Orthogonal Polynomial regression analysis. The study found that the trend pattern of arrival of
groundnut in the study markets was mixed one and that of prices was almost identical with a
continuous upward movement. In Bijapur and Talikoti markets, arrivals of groundnut showed
mild ups and downs during the initial period and considerable increase from 1983-84 onwards
whereas Raichur market showed a mild increasing trend through out the period concerned.
The study further revealed that though the production of groundnut showed wide fluctuations
in Bijapur district, the arrivals of groundnut showed a steep rise particularly latter part of the
period. This was mainly due to the arrival of groundnut from outside the market areas.

Kamal and Meenu (2000) worked out the compound growth rate for paddy in Punjab
using data on area, production, and yield for the three periods viz., period I (1970-71 to 1983-
84), period II (1984-85 to 1997-98) and overall (1970-71 to1997-98). Chow-test was applied
to test the difference in the growth rate between two time periods. The null hypothesis of no
difference between the growth rates was tested against the alternative hypothesis that the
growth rates for the two periods were significantly different. Results indicted that the annual
compound growth of the area, production and yield of paddy was 6.90, 8.82 and 1.79 per
cent, respectively for the whole period. Results of the Chow-test showed that there was a
marked difference in the growth rates of area, production and yield between the two periods
showing a significant decline in area, production and yield during the second period.

Suhag et al. (2000) analyzed the extent of instability in area, production and yield of
major crops in Haryana over time using secondary data from 1967-68 to 1996-97. The whole
period was divided into two sub groups, i.e., period I (1967-68 to 1981-82), and period II
(1982-83 to 1996-97). Cuddy Della Valle Instability index (CDI) was employed to measure the
instability. In calculating CDI, a linear trend was first fitted to the time series data to find the
trend. Since trend was significant, the coefficient of variation (CV) for unadjusted data was
multiplied by the square root of the unexplained portion of the variation in trend equation. This
was explained mathematically as follows.

CDI = CV ⁄ √1-R2
Where,
CDI = Cuddy Della Valle Instability Index, CV = Coefficient of variation and R2 =
Square of correlation coefficient.

Measure of CDI revealed that among the 11 crops considered, area fluctuation was
highest for potato followed by rapesseed & mustard and barley with respective values of
13.38, 5.63 and 5.12 for the whole period 1967-68 to 1996-97. Analysis of yield fluctuation
indicated that CDI was highest for bajra (6.17) followed by jowar (6.07) and gram (4.9) for the
entire period. Period wise analysis revealed declining yield variability in period two for all
crops except jowar and cotton.

Gyanendra and Chandra (2001) estimated growth rates of area, yield, production,
cost and profit of paddy in India by fitting different functional forms on time series data from
1975 to 1998. The compound growth analysis showed that overall growth rate in area under
paddy was small (0.47 per cent per annum) during the period concerned. The maximum
growth rate in area was 1.57 per cent per annum, which was recorded during 1986-87 to
1990-91 period. Linear trend analysis on yield revealed a growth rate of 2.58 per cent per
annum with a maximum rate of 5.24 per cent per annum for the period 1986-87 to 1990-91.
The results indicated that the overall growth rate in paddy production was 3.06 per cent per
annum. The maximum growth rate was observed during 1986-87 to 1990-91 (6.89 per cent
per annum). Growth trend in cost of production showed 8.09 per cent increase per annum
during the period 1975-76 to 1996-97. The growth rate in minimum support price, which was
worked out using the similar functional form, was 8.27 for the whole period. It was found that
the best function for estimation of growth rate in profit was cubic function. It was found that
margin of profit had tendency to get reduced in due course of time. This may discourage
farmers’ investment in increasing productivity. The study concluded that higher growth rate of
paddy yield had been the major factor to increased production and increase in net profit was
very low due to higher rate of increase in cost.

Sanjay et al. (2001) examined instability in pulses area, production and yield in
Rajasthan by working out coefficient of variation for the period 1967-68 to 1992-93 by dividing
it into two sub periods: 1967-68 to 1979-80 (period one) and 1980-81 to 1992-93 (period two).
Among the time periods, magnitude of instability of area under gram crop was highest in
period two in all the selected districts and the state as a whole. Among the districts, the
minimum variation in area was recorded for Kota district (17.34 per cent) in period one and
maximum variation was reported in Alwar district (47.63 per cent) during the period two.
Analysis further revealed that cowpea exhibited highest variability in productivity during both
period one and two and moong exhibited highest instability in production (133.20 per cent)
during the entire study period. The study recommended use of efficient water management
and moisture conservation techniques to reduce the extent of fluctuations in crop output.

Devraj (2002) estimated the compound growth rate for pulses crops in Uttar Pradesh
using time series data from 1980-81 to 1999-2000. Study found negative growth rates for
area (-0.466) and production (-0.261) whereas positive growth rate (0.206) was observed for
productivity over years when all the pulses were taken into consideration. Among Kharif
pulses, urdbean and mungbean registered positive growth rate for area, production and
productivity over years.

Chahal et al. (2003) examined production performance of cotton in Punjab by using

compound growth rates for area, production and yield for three periods, viz., 1950-51 to 1965-
66 (period I, 1966-67 to 1989-90 (period II) and 1990-91 to 2000-2001 (period III). Area under
cotton during the period I increased at the rate of 1.67 per cent per annum. However, during
the period II, it decreased but statistically non significant. The area under cotton had declined
by 2.13 per cent annually during the period 1990-91 to 2000-01. Overall results showed that
production increased by 2.43 per cent and yield increased by 2.18 per cent as against to 0.25
per cent increase in area. This confirmed that yield was the major contributor to the increased
production of cotton in India.

Dayakar et al. (2003) estimated production, price and market trend of sorghum and
its competing crops, namely cotton, groundnut, red-gram and sunflower using time series
data from 1980-81 to 1998-99 in India. Analysis showed a negative growth rate in production
of sorghum in all the states under study except Maharashtra. The study found that this
decreasing tend was mainly driven by the drastic decrease in area under sorghum. The
commercial crops and some oilseed crops showed positive growth in area. Price analysis
indicated an increase in the price of sorghum during the study period but prices of competitive
crops had increased at a higher rate than that of sorghum.

Singh and Chandra (2003) tested various functional forms and found that exponential
function was the most appropriate to examine the growth trends of area, production and yield
of paddy in India. They studied the growth performance for different periods and used the ‘t’
test to test the significant difference between growth rates of any two periods of aggregate.
The study found that as a result of increase in area under cultivation and yield, the overall
growth rate in paddy production had been very significant (2.96) during the 1975/76 –
1990/00 period. Yield increased by 2.42 per cent where as acreage increased by 0.52 per
cent.

Sujatha et al. (2003) estimated the compound growth rates of mango exports from
India before and after WTO by using secondary data from 1989-90 to 2001-02 collected from
APEDA. The total period was divided into two parts, i.e., 1989-90 to 1994-95 (pre-WTO) and
1995-96 to 2001-02 (post-WTO). The compound growth rate analysis indicated that the rate
of growth in quantity and value of exports was more during post-WTO period in case of fresh
mangoes. However, the growth rates of mango pulp decreased during post- WTO period
compared to pre-WTO period.
 Shaheen and shiyani (2004) studied the period- wise level of instability in area,
production and yield of major fruit crops in the state using data from 1974 to 2002. The whole
period was grouped into three: 1974-80, 1980-90 and 1990-2002. Since simple coefficient of
variation (CV) often contains the trend component and thus over estimates the level of
instability in time series data, the instability index given by Cuddy Della Valle (1978) was
applied. Value of index grater than 40 indicates high stability for area and production and
grater than 20 for high instability for yield and lower than the respective said values indicate
low instability. The study found low instability in area, production and yield of apple crop in all
the periods. High instability in production and yield during the first and second periods was
noticed in case of pear and cherry. For whole period, all the fruit crops showed high instability
in production and yield except apple.

2.3 PRICE BEHAVIOUR

Fonseka (1963) studied the guaranteed price scheme in Sri Lanka using secondary
data. The study describes the price setting, procurement and distribution of rice. The purpose
of the guaranteed price for rice was not only as an incentive to production but also as a form
of income support to the bulk of the rural population. The relationship between guaranteed
price (GP) of paddy (rough rice) and imported price of rice was examined and found that GP
remained always higher than imported price and increased whenever imported price
increased but not reduced when imported price decreased during the period 1948-
1961.Government purchased paddy from farmers through Co-operative societies located at
village level and in 1962 their purchase amounted to be a 56 per cent of the production. The
success of the programme was easy access to producers and availability of storage facilities
adequately. Paddy purchased under the guaranteed price scheme was milled into rice and
passed to the Food Control authorities for issue to consumers on the ration. The study
concluded that the guaranteed price scheme for paddy in Sri Lanka had been successful in
achieving both objectives of increasing production and enhancing farm income.

Mats and Erling (1982) studied the market integration in Haiti using monthly
wholesale prices of rice and other selected grains. The data covered the period 1965-74. This
study applied two methods: correlation of original data (raw) and correlation of residuals
obtained from the trend line. Results indicated average correlation coefficients for the raw
series were lower than those obtained from residual series. The study found that correlation
values were lower in the harvest months when most of the deliveries are made as against
expectation of high correlation.

Ravallion (1986) developed a model to test market integration of rice markets in

Bangladesh. He used the spatial price differentials and identified the central market that
market price influences on other markets. In his study Dhaka market was selected as the
central market. Monthly prices from July 1972 to June 1975 were used for testing the model.
Study results indicated that there was no market integration among the markets selected both
in short and long run due to government intervention in distribution.

Gunawardana and Quilkey (1993) conducted a quantitative analysis to identify the

major determinants of the farmers’ supply of paddy to the official market in Sri Lanka in the
period 1953 to 1989. In their analysis, the farmers’ supply of paddy to the official market is
hypothesized to be a function of the guaranteed price of paddy, the open market price of
paddy, paddy production and the quantity of rice purchased by the consumers in concession
market. The specified model was estimated employing ordinary least squares (OLS) using
annual aggregate time-series data for the period 1953 to 1989. The regression estimates
indicated that higher guaranteed price, larger quantities of domestic paddy output and higher
levels of purchases of rice by the consumers in concession market resulted in larger
quantities of paddy sold by the farmers to the government, while higher open market prices
resulted in lower quantities of paddy sold to the government. The study concluded that the
guaranteed price of paddy and the sales of rice in the concession market are key policy
variables that can be manipulated to influence the farmers’ supply of paddy in the official
market.
 Babar and Lohar (1994) studied trends in arrivals and prices of jaggery in Sangli
regulated market during 1980-92. The seasonal indices of prices and arrivals of jaggery were
worked out. The seasonal price index of price of jaggery showed that it was the highest during
the month of October followed by August and September.

Binod (1995) examined the seasonal variation of groundnut prices in Orissa market
and its impact on area and production. Time series analysis was carried out for estimating the
seasonality of groundnut prices with the help of twelve months moving averages. Relative
seasonal price indices of groundnut price have shown that price was lowest in the month of
March (95.74) and highest in the month September (104.22).

Karwasra and Arora (1995) analyzed the farm level price spread and shares of
farmers, wholesalers and retailers and variations in the shares of each of them in retail price
of wheat and rice over the space and time in selected markets in India. Time series data of
prices from 1965-66 to 1987-88 were used in the study. The farm–retail price spread and
shares of farmers and middlemen in retail price of wheat and rice were calculated for each
year based on the mean values of price spread and shares were presented for whole study
period. The variation in price spread, and farmer’s, wholesaler’s and retailer’s shares in retail
price were studied by calculating the coefficient of variation. The study found that the average
price spread of paddy varied from 16.26 per cent in Andhra Pradesh to 34.40 per cent in
Madhya Pradesh. This was due to differences in availability of marketing facilities and
government procurement operation. It was further found that farmer’s share of consumer
price varied from 90.67 per cent in Andhra to 56.15 per cent in Punjab. An analysis of
variation indicated that variation in retailer’s and wholesaler’s share was more as compared to
farmer’s share in paddy. The reason was that due to speculative activities of the trading
community. There is a large fluctuation in the wholesale and retail prices as compared to farm
price. Similarly, the higher variation in wholesaler’s and retailer’s share in rice was also due to
time lag in paddy supplied by the producer and the rice purchased by the consumer. The
study concluded that farmer’s share in the retail price had shown an increasing trend as
against decreasing wholesaler’s and retailer’s share. As indicated in the study, this was due
to implementation of government price support, procurement and distribution policy along with
development of infrastructure marketing facilities. This study also reported that these policies
helped to stabilize the price variation.

Nasurdeen and Subramanian (1995) studied the price adjustment between oils and
oilseeds in India using the Koyck’s distributed lag model The analysis was carried out to
estimate the price relationship at two stages: (I) Vertical integration – integration of seed price
to price of its oil and cake and (II) Horizontal integration – integration between price of
different oils. This study was conducted for only one market. Bombay market was selected
due to its prominence in the marketing of oils and oilseeds in India and daily wholesale prices
were collected for one year (October 1993 – September 1994). Results of the horizontal
integration showed that Bombay market for oils and oilseeds is well integrated, as the number
of days required for price adjustment was as low as two days for many oils. Similarly,
analysis of vertical integration confirmed the hypothesis that changes in oilseed price is linked
to changes in its oil and cake price. The study concluded that the Bombay oilseed market
showed the characteristics of perfect market conditions by its quick adjustment to price
changes.

Anita (1996) ascertained the spatial integration of agricultural produce markets of

Sabarkantha district of Gujarat. The period of study was 1988-89 to 1993-94 and the crops
comprised of maize, castor, bajra and wheat. The results of the analysis of variance in annual
wholesale prices indicated the variances in the prices between markets for the selected
crops. Nevertheless, analysis of correlation coefficient had shown a high degree of inter-
market price integration. The author’s view was that this happened due to common trend
present in price series over time.

Kasar et al. (1996) studied the seasonal fluctuations in arrivals and prices of red
chilles in Dondaicha market in Maharashtra. Time series data from 1979/80 – 1991/92 were
used. The study found that the arrivals of red wet chillies began in October and ended in April
and seasonal price index was low in that period. The results also indicated the lowest price
index in January (44.11) and the highest in June (180.14) for red chillies indicating a high
degree of seasonal price fluctuation.

Sathees and Mathew (1996) conducted a study on seasonal price behavior in

coconut and coconut products using time series data from 1971 to 1990. In this study, the
seasonal indices of the respective time series data were worked out by the ratio to moving
average method assuming a multiple model. The coefficient of average seasonal price
variation (ASPV) was estimated by using the following formula,

ASPV = (HSPI – LSPI) / (HSPI + LSPI) x 200

HSPI = Highest Seasonal Price Index, LSPI = Lowest Seasonal Price Index

The monthly state average price of coconut exhibited a pronounced seasonality with
a standard deviation of 3.75 and average seasonal price variation of 10.21. The seasonal
behavior of monthly state average price indicated that the farm harvest price of nuts were low
during the peak production period. During the lean season of production from September to
February, the prices exhibited upward trend thereby indicating that the growers were not
enjoying the benefit of better prices, as bulk of their produce was disposed as raw nuts
immediately after harvest when prices were low. The study concluded that the average farm
harvest price of coconut was subjected to pronounced-seasonal fluctuations despite the fact
that production of nuts is available throughout the year. The vertical integration through
processing may provide growers or group of growers better flexibility to deal with market
uncertainties.

Jesy and Sundraesan (1996) used the Ravallion market integration model to find out
the relation between prices of cardamom which prevailed in three auction centers, viz.,
Kerala, Tamil Nadu and Karnataka. In this study, the Kerala market was taken as the central
market and its prices were compared with prices in Tamil Nadu and Karnataka separately. In
order to measure the relative influence of these two sets of forces, an index of Market
Connection (IMC) was constructed, which was defined as the ratio of the lagged local market
to the lagged central market coefficient. Analysis found that one rupee change in the Kerala
market price between current and last year brought about changes in prices in Tamil Nadu
market by Rs. 0.99 during the same time period. It further revealed that if Kerala market price
is more than Tamil Nadu market price during last year meaning that it will increase the
difference in price in Tamil Nadu market by RS.0.57 whereas if Tamil Nadu price is more than
Kerala during last year the difference will decrease by Rs.0.57. The value of the Index of
Market Connection (IMC) was found to be less than one between Tamil Nadu and Kerala
market reflecting a high degree of short run market integration.

Sahewalla and Talukdar (1996) examined the stability of tea prices at Guwahati and
Calcutta tea auction centers during the period 1978 to 1993, which was sub divided into two,
1978-1983 and 1984-1993 by constructing the Instability Index developed by Parthasarthy
in1994. Result indicated that CTC tea was unstable at Calcutta auction center in period one
while it was second period for Guwahati tea auction center. It was also noted that the
instability of prices of total tea was higher during the first period. The study further revealed
that the magnitude of instability was relatively higher for price than the quantity auctioned in
both the auction centers.

Sharma and Sharma (1996) investigated the levels of and variation in wholesale
prices of potato, onion and tomato in Delhi, Bombay, Calcutta and Madras markets using time
series data for 1989-1993. Results indicated that among the different markets, average
wholesale price of potato was lower in Delhi and Calcutta relative to Bombay and Madras. It
further revealed that potato wholesale prices within a year were least variable whereas onion
and tomato prices were more but about equally variable overtime. Price variation had not
changed in case of potato wholesale prices whereas it had varied considerably in case of
onion and tomato wholesale prices.

Sundaravaradarajan et al. (1997) conducted a study on decision making of farmers in

relation to marketing of paddy at various centers. In this study, stability of market arrivals of
paddy and its price was used to examine performance of regulated markets. Coefficient of
variation was applied to test price stability. Time series data on arrivals and prices of paddy
were collected from Pondicherry regulated market from 1978/79 – 1995/96 for the study. The
study found that the extent of instability of market arrivals was relatively low as compared to
price in all paddy varieties. The coefficient of variation around trend line showed that the
variation in arrivals was relatively higher than the price of paddy. The study pointed out that
standard weight, competitive bidding, better price, immediate payment and direct sale were
major factors influencing the producers to opt for the regulated market.

Samarajeewa and Gunatilaka (1999) studied the demand function for coconut in Sri
Lanka using co-integration analysis. The study made use of 20 years time series data from
1978 to 1997 to estimate the demand function for coconut oil in cooperating own price,
substitute prices and income. The results of Dickey faller and augmented Dickey faller tests
revealed that the quantity consumed and price of palm oil are integrated to zero while prices
of coconut oil and soya oil and income are integrated to the order one.

Anjani and Harbir (2000) studied growth and instability of exports and imports of
livestock products in India using data from 1974 to 1994 period. In this study, instability index
was defined as follows,

Where, I = the instability index, et = value of the residual of the exponential trend line
in the year, n = number of observation and k = number of variables.

Study revealed Σet 2the

I =√that ÷ n-k
exports of dairy products exhibited highest variability while
exports of meat and meat preparations were more stable. The high growth rate of imports of
live animals was accompanied by a high volatility.

Ananthi (2000) carried out a study on Indian rice exports using time series data from
1980/81 to 1997/98. In this study, instability analysis was performed to examine variation of
export quantity of basmati rice and non-basmati rice. The variation around the trend rather
than the variation around the mean was used as an index of instability. The study found that
the coefficient of variation with respect to export quantity of basmati rice was 31.37 per cent
and 183.58 per cent for non-basmati rice during the period 1980/81 to 1997/98 period. A
steady mounting demand from importing countries and stable domestic production might have
led to stable exports of basmati rice from India while high variation of non-basmati rice was
due to fluctuation in demand that has led to unstable exports.

Madhusudan (2000) examined whether intra-state and inter-state regional markets

are integrated and linked together into a single economic market using the maximum
likelihood method of co-integration, with the help of monthly wholesale prices of rice during
March 1984 to April 1997. The selected market centers are: Dumka, Gaya, Jamshedpur and
Patna from Bihar; Balasore, Cuttack, Jeypore and Sambalpur from orissa; Allahabad,
Azamgarh, Gorakhpur and Nowgarh from Uttar Pradesh; and Contai, Sainthiaand, Siliguri
from West Bengal. The results indicated that the regional rice markets within and across the
states are spatially linked in the long run. On the basis of findings of regional market
integration, the study indicated the success of price policy and market liberalization
programmes undertaken in India. The major policy suggested was withdrawing or reducing of
government intervention in pricing from these markets.

Metha and Srivastava (2000) analyzed the seasonal behavior of prices of wheat,
potato, onion, arhar, groundnut, and maize by computing seasonal indices through the ratio to
moving average method. Monthly wholesale price index for six years (1994-1999) was used
for computation. The analysis decomposed the time series by multiplicative model, i.e., with
the assumption that various components (T, S, C& I) in the time series operate
proportionately to the general level of the series. Seasonal price index for wheat showed an
upward swing from July to September because organized traders and merchants controlled
market after the peak marketing season in June. Value of seasonal price index for maize
varied from –5.9 to +5.0 from the mean (100) implying that its supply and consumption was
nearly equi-spread throughout the year. Low index value of arhar for March to September
implied that arhar is a long duration crop with maturity ranging between 4-7 months.
Groundnut had a sharp price fall during September and October due to arrival of major output
of kharif crop. Price of onion varies significantly within a year as indicated by high degree of
variation of seasonal index (-15.6, + 20.7). This was due to absence of substitute and
perishability. The study also found a high degree of variation in prices (-34.3, +27.1) for potato
because it is highly perishable and seasonal.

Patel et al. (2001) analyzed the temporal changes in input-output prices and their
impact on income from oilseeds. A series of price indexes such as input/output price index,
gross income index and parity index were computed to study the profitability of groundnut,
rapeseed-mustard, castor and sesame. The study found that parity indices of gross income to
prices of agricultural inputs were less than 100 for rapeseed-mustard during the entire period,
which indicated that over time, the price of inputs increased at a higher rate compared to
gross return realized from the crop. This affected the level of profitability adversely over the
base year despite of high increase in the level of producer price. The study concluded that in
the state of Gujarat the increase in gross income from the selected oilseeds crops was not
sufficient to cover the increased inputs used in their production.

Visva (2001) estimated the producer’s share for paddy (rough rice) in West Bengal for
three selected markets using time series data. Producer’s share in consumer rupee was
expressed as a percentage of the retail price. The study found that variation in producer’s
share was more pronounced in Sainthia market than that in Bolpur and Rampurhat. In case of
month wise variation, the study revealed an abrupt up and down in producer’s share
throughout the study period. In December 1995 producer’s share was 76.56 per cent, which
suddenly fell to 66.2 per cent in the next year.

Dayakar et al. (2003) studied the trends and inter and intra year fluctuations in the
wholesale prices of sorghum during the period 1980 to 1999 for major producing districts in
India. Trend estimates indicated that the prices of sorghum showed an increasing trend in all
the states under study. The average increase in prices of sorghum per year per quintal varies
from Rs.29.94 in Gujarat to Rs.17.35 in Maharashtra. The average seasonal price variation
was from 34.05 per cent in Karnataka to 9.20 per cent in Tamil Nadu.

Jyothi et al. (2003) examined the instability of quantity, value and price of onion and
potato in terms of export to ascertain the export performance of these two crops during the
period 1970-71 to 1999-2000 in India. The coefficient of variation around the trend and the
Coppocks’s instability index were applied to test instability. The results indicated that in both
onion and potato, the prices of exports were found to be stable when compared to the
quantity and export earnings.

Jyotish and Soumyananda (2003) evaluated spatial integration of potato markets in

Hooghly district of West Bengal for the period form January 1998 to December 2000.
Bivariate price series correlation, Engle-Granger test and Error Correction method were used
on weekly wholesale and retail prices in the selected three markets. Results of all the
methods revealed that selected potato markets were integrated. Similarly, the wholesale price
of one market and retail price of other market pairs were co-integrated. Further, wholesale
and retail prices of the same market were also found to be co-integrated. The study pointed
out that good communication and infrastructure facilities available in the district contributed to
market integration.

Parmod Kumar and Sharma (2003) analyzed market integration among four
wholesale paddy markets in Haryana with the help of co-integration and error-correlation
mechanism. The study period was divided into pre-liberalization period (October 1978 to
September 1989) and post-liberalization period (October 1989 to September 2001). Results
indicated that markets were integrated in the long run although price transmission was found
to be lacking in the short run. Price adjustment among the markets was taking around 2-3
weeks time period and adjustment process was found to be quicker in the post-liberalization
period compared to pre-liberalization period.

Rafeek et al. (2003) examined the market integration at farm and retail level in rice
trading in Hambantota and Kandy market in Sri Lanka with the help of the model developed
by Ravallion. Monthly producer, wholesale and retail prices of different quality rice (Samba
and Nadu) during the period 1997 –2000 were used for the analysis. In this study, two models
were developed: 1) farm price was regressed with lag farm price, wholesale price in Colombo
and its lag price, and 2) wholesale price was regressed with lag wholesale price, retail price
and lag retail price. The Model I was used to ascertain the market integration between farm
and wholesale level while the Model II was used to test market integration between wholesale
and retail level. The results showed a low degree of market integration between farm and
wholesale markets while the wholesale and retail markets exhibit a greater degree of market
connection. The study pointed out that changes in wholesale prices poorly transmitted to farm
gate prices consequently leading to widening of the farm-wholesale margin.

Ramesh (2003) examined market integration between major groundnut markets of

Gujarat with the help of zero order correlation coefficient method. The result found that
correlation coefficient among all the selected market pairs turned out to be near about 0.90
and above. However, degree of integration between the markets having short distance was
generally more as indicated by higher correlation coefficients. The study concluded that
markets in groundnut are well integrated with one another due to availability of good
communication facilities and associated transportation infrastructure like rail and road.

Sananse et al. (2003) analyzed the variability in the export of fruits and vegetables in
India using an index of instability suggested by Cuddy Della in 1978. This index refers to an
average year to year per cent variation in export earning adjusted for a constant percentage
trend. This index would be zero when all values are stable at given level or changing at
constant rate. Higher values of index indicate greater year-to-year fluctuation around trend.
This index is applied when trend coefficient is found significant. The instability index was
worked out using data from 1995-96 to 2001-2002. Analysis showed that at constant prices
the instability in fresh fruits and vegetables was 11.49 per cent whereas it was 15.76 per cent
for processed fruits and vegetables. This revealed that the instability was more in case of
processed fruits and vegetables as compared to fresh fruits and vegetables. It was also found
that the instability in fruits and vegetables export was higher at current prices than that of
constant prices in all the periods under study indicating destabilizing of price fluctuations.

Alka et al. (2004) applied the market integration model given by the Ravallion to
explore the relation between wholesale prices of rice in the local markets and the central
market in Orissa. The monthly wholesale prices of four markets namely, Sambalpur, Jeypore,
Balasore and Cuttack were analyzed with respect to the central markets of Bankura in West
Bengal and Kakinada in Andhra Pradesh. The study period referred to November 1995 to
October 2000. To eliminate the effect of inflation, prices were deflated by consumer’s Price
Index for agricultural labour. Results showed the importance of Bankura market for price
formation of rice in local market of Orissa as compared to Kakinada market of Andhra
Pradesh. The Index of market connectedness showed low degree of short run market
integration as evidenced by values more than unity. Analysis also revealed that in all the
integrated markets, the degree of integration declined with the increase in distance between
local market and reference market, which indicated inadequacy and poor quality of
transportation facilities.

Amit et al. (2004) studied the market integration of apple markets using co-integration
method. The selected markets were Bangalore, Mumbai, Calcuta, Chandigarh, Delhi and
Chennai. The Co-integration model explained more than 75 per cent of price variation in all
the paired markets except Calcutta. Market integration analysis showed that many important
markets such as Delhi, Mumbai, have integration with lag price of Bangalore and Calcutta
markets. Similarly, in Delhi, Mumbai and Chennai prices of apple are associated with lag price
of Calcutta and Chandigarh. In Calcutta market, apple price was associated with lag price of
Delhi. Overall results indicated that Chennai, Delhi, and Bombay markets are well integrated
indicating the existence of price dependency among various markets.

Chahal et al. (2004) estimated trend and seasonal variation in arrivals and prices of
green peas. The time series data for market arrivals and prices for green peas in the markets
of Hoshiarpar and Ludhiana were obtained from the Office of the Punjab State Agricultural
Marketing Board for the period of 1994-95 to 2002-03. To analyze the trend and seasonal
variation in green peas market arrivals and prices, multiplicative model was used. The trend
component was computed by Ordinary Least Square (OLS) method using the linear model
while seasonal variations in market arrivals and prices were computed by using twelve-month
moving average method. The estimated trend equations of prices indicated that there was an
increase of prices by RS 60.12 and RS 74.08 per quintal per annum in Hoshiarpur and
Ludhiana market, respectively. The price analysis of peas showed that the seasonal index of
price was the lowest during the peak harvest season.

Hathurusinghe and Ravichandran (2004) analyzed the price of rice in Sri Lanka for
the period 1985 to 2002 using percentages, averages and ratios. This analysis showed
declining trend in real prices, lower absolute margins in lean supply period due to availability
of imported rice at cheaper rates, higher margins during the harvest time and declined
farmer’s share due to increase in marketing cost. The study also found that rice markets were
well integrated and inter-dependent. The study suggested the need of changing traditional
inward looking policy of achieving self-sufficiency in major food commodities towards the
strategy of competitive production for the domestic market and for the export market in the
context of open economy.

Ranveer et al. (2004) estimated the producer’s share in the consumer’s rupee for
apple grown in Himachal and sold in Delhi market during the period 1975-76 to 2001-02. In
this study, data such as producer price, cost incurred by grower, trader’s cost and margin
were collected from the various studies conducted by Economic Research Center, H.P
University and were analyzed to come up with producer’s share in the consumer rupee. The
investigation revealed that during 1975-79, the net price received by the apple growers
decreased whereas during 1979-84 it increased and again decreased in 1985-95. However,
the net price received by growers was relatively higher in 2001-02 than other periods under
study. Analysis of data over a period of time revealed that rise or fall in the share of growers
was more proportional to the rate of rise or fall in price level. This was because seller’s cost
remained constant and did not change with prices. As study reported, the empirical evidence
showed that benefits of rise in prices not coming to farmers and the traders took them
reflecting the inefficiency of the marketing system.

Elsamma and Nandamohan (2004) analyzed the trends in rice production in Kerala
using exponential function both in linear and quadratic form. The study referred to the period
1975 –2000. The results of the exponential linear model (compound growth) showed a
negative growth in area (-3.15%) and production (-1.80%) while productivity was positive but
not statistically significant. The findings of the growth rates estimated using log quadratic
equation revealed that area and production of rice showed significant deceleration with
significant acceleration in productivity during the period under reference. The conclusion
made in the study was declining trend in area under rice with positive trend in yield. The said
reasons for declining area were unprofitable price situation and difficulties in cultivation with
high cost of labour and other inputs. Study recommended need of attention on increasing
yield by reducing yield gap through eliminating constraints to potential productivity.

Varghese (2004) analyzed price behaviour of cardamom grown in Kerala. In the

analysis the long-term trends in auction price, wholesale prices and export price and price
transmission were examined. Log linear growth equation was applied to estimate the trend for
the period 1970-71 to 2000-01. Results exhibited an upward trend. The average annual trend
value was 2.94 for auction and 2.87 for wholesale and 2.88 per cent for export price. These
results revealed that these three prices are moving almost in the same manner showing a
clear indication of market efficiency. With regard to price behaviour it was hypothesized that
auction and wholesale price of cardamom are determined by the export price. Results
indicated that a change by a rupee in export price leads to 1.03 rupee change in the auction
price and 1.08 rupee in wholesale price. The results of the price transmission models showed
that cardamom marketing appeared to be efficient from one market level to another. It also
showed that export price has a very significant role to determine the prices at auction and
wholesale level.

Yogisha (2006) studied the extent of spatial integration in the arrivals and prices of
ragi, groundnut, potato and onion grown in the Kolar district in Karnataka state. The selected
markets were Chikkaballapur, Chintamani, Kolar and Srinivaspur based on the maximum
arrivals of agricultural commodities in the year 2004-05. For each market time taken to reflect
changes in prices was compared with Bangalore market prices for the same commodities.
The Koyck’s distributed lag model was used to test the market integration. Results indicated
that number of days required to reflect Bangalore market price varied significantly by markets
as well as commodities. In case of potatoes the required period was lowest in Chintamani (3.5
days) and the highest in Kolar (16.2 days). The number of days required to reflect Bangalore
market prices on groundnut was 5.2 days at Kolar and 16 days at Srinvaspur.

2.4 EXPORT COMPETITIVENESS

Anderson and Ahn (1984) examined the protection policy and changing comparative
advantage in Korean agriculture from the mid-1960s to 1980s. The domestic resource cost
(DRC) methodology was used to measure the foreign exchange earnings foregone by
keeping resources in rice production. They concluded that agricultural production was unlikely
to continue to achieve its objective of slowing the decline in food self-sufficiency and helping
farmers keep pace with urban incomes unless it was increased continuously.

Jamal (1987) examined the cotton pricing policies pursued by the Pakistan
Government and the nature of its intervention in cotton trade and quantified the effects of
price distortion over the period 1977-78 through 1982-83. Support prices were found to be
closer to revenue maximization prices than to the border prices adjusted to farm gate level.
The two distinct phases in the trends of NPCs indicated the government’s divergence in
maximizing foreign exchange in earlier years to revenue maximization in later years.

Gulati et al. (1990) worked out the National Protection Coefficient (NPC) and Effective
Protection Coefficient (EPC) for rice growing states in India, namely, A.P, Bihar, M.P, Orissa,
Punjab and U.P under the exportable and importable hypothesis during 1978 –1986. The
values of NPC under importable hypothesis for the six districts were less than unity and under
exportable hypothesis only Punjab was considered and it had NPC of 0.97. The EPC for all
the states under reference was less than one under importable hypothesis and for Punjab
under exportable hypothesis it was 0.87. These results showed that rice cultivators were more
taxed on the pricing front under import competitive hypothesis.

Umapathi (1994) estimated export competitiveness of cotton grown Chitradurga

district. The National protection Co-efficient computed for DCH-32 cotton from 1983-84 to
1991-92 under exportable and importable hypothesis indicated an overall situation of anti
protection to cotton cultivation in the study area. The National Protection Co-efficient was
found lower than one and indicated that DCH-32 seed cotton would be an efficient export and
efficient import substitute crop.

Datta (1996) calculated Nominal Protection Co-efficient (NPC), Effective Protection

Co-efficient (EPC) and Domestic Resource Cost (DRC) for Indian Basmati and non-basmati
rice. The results revealed that India has very slender competitive strength in export of basmati
rice. However, DRC analysis showed that Indian exporter has some amount of buffer,
because India required spending of only RS 0.89 on non-tradable expenditure in order to earn
on rupee of foreign exchange. In case of non-basmati rice these ratios were below one
indicating moderately competitiveness of the product.

Maji (1996) estimated Nominal Protection Co-efficient (NPC), Effective Protection Co-
efficient (EPC) and Domestic Resource Cost (DRC) for Indian rice. It was found that NPC was
less than one indicated that rice products were not protected through policy incentives.
Similarly, DRC of less than one implied that a low domestic resource cost could earn a much
higher value in foreign exchange through export.

Reddy (1997) worked out the Nominal Protection Co-efficient (NPC) of groundnut
maize, jowar, and sunflower in Karnataka. While the values of NPC of jower and maize under
the importable scenario were less than one indicating that they were efficient import
substitutes their values of NPC under exportable hypothesis were greater than one. Whereas
the values NPC of groundnut and sunflower under importable and exportable scenario were
greater than one, reflecting that they are neither, import neither substitutes nor the efficient
exportable commodities.

Ravi and reddy (1998) analyzed the export competitiveness of jowar, maize,
groundnut, sunflower, cotton and coffee grown in the Karnataka state using nominal
protection coefficient (NPC). The NPC had been estimated under exportable and importable
hypotheses for the period from 1984-85 to 1993-94 except coffee, which was related to the
period 1992-93 to 1994-95. The study found that values of NPC under exportable hypothesis
were grater than one all the commodities studied except cotton which had shown Karnataka
state was lacking comparative advantage in exporting of jowar, maize, groundnut, sunflower
and coffee. However, values of NPC for jowar, and maize under importable hypothesis were
less than one showing efficient import substitutes.

Vinu (1998) examined the export competitiveness of rice grown in Karnataka.

National Protection Coefficient (NPC) was calculated taking the ratio of domestic wholesale
price of rice prevailing in the selected market of the state to world reference price of rice
(Bangkok). Results indicated that values of NPC of both fine and medium quality rice during
kharif season under irrigated condition were below unity in all the zones under study during
1994 –1997 under importable hypothesis. This means that domestic prices were less than the
international prices. The study stressed that export competitiveness should be enhanced
through improved productivity and quality, better technologies, better marketing
arrangements, improving standards to meet international quality specification and improved
transport structure.

Tamanna et al. (1999) examined the export potentialities of fruits from India by using
Nominal Protection Co-efficient (NPC), which is the ratio of domestic price to the border price.
The NPC values were less than one for almost all the years (1989-90 to 1996-97) except
during 1990-91 and 1991-92 in the case of mango and 1994-95 in grape. NPC values in
mango (0.87) grape (0.59) and banana (0.49) were lower than one indicating their
competitiveness in the international market. It was also found that export of Indian mango to
Australia was most profitable (NPC=0.23) followed by Sweden, France, Japan, Switzerland,
Belgium, Singapore etc. Similarly, grapes possessed higher export potential in Seychelles,
France and Mauritius. Banana fruit was highly competitive for export to USA, Russia, Jordan
and UAE. The important issue was cultivation under organic farming as environmental
concerns in economically developed countries (more so Europe e.g., German) gain strength
day by day and likely that demand for organically grown products would increase.

Ashalatha (2000) analyzed the export competitiveness of Indian cashew using

nominal protection coefficient technique. Under the exportable hypothesis, the nominal
protection coefficients were found to be lesser than unity with an average value of 0.91
implying that the Indian cashew kernel is competitive in the international market and is an
efficient export commodity.

Balppa (2000) examined the export competitiveness of vegetables from Northern

Karnataka. The world average reference prices of vegetables were collected from the export
statistics of Directorate General of Commercial Intelligence Statistics, Calcutta. The domestic
price was approximated by the average wholesale prices of vegetables in Hubli market. The
analysis of export competitiveness showed that all the commodities were found to be
competitive for their exports to other countries as evident from values of the Nominal
Protection Coefficients with less than unity. Therefore, it was recommended in the study that
the advantage of export competitiveness of fresh vegetables be exploited through proper
planning and development of suitable infrastructure.

Mahesh (2000) studied the export competitiveness of Indian tea exports using
national protection coefficient (NPC) and domestic resource cost (DRC) methodology. The
results indicated that under importable hypothesis, the NPC and DRC were 0.71 and 0.66
respectively and under exportable hypothesis, NPC and DRC were 0.98 and 0.93
respectively, implying that Indian tea exports were competitive and also good import
substitute.
 Ali and Ahmad (2001) studied the export competitiveness of Indian meat industry.
They concluded that export of ovine meat was constrained due to increased domestic
demand resulting in higher domestic prices. The export of poultry meat was not competitive
due to higher cost of production and higher domestic prices. Only bovine and pig meat is
competitive in the global market. The potential reforms in the international trade policy and
implementation of WTO norms would reduce restrictions on trade and protection of domestic
meat industry. This may bring new global competitive environment under trade regime. India
may enjoy greater competitiveness for different species of meat, as producer prices in India
are lesser as compared to other countries of the world.

Jabir and Shamim (2001) investigated the export competitiveness of different species
of meat in India by using Nominal Protection Coefficient (NPC) for the period of 1980 to 1999.
The border prices/international reference prices had been worked out under exportable
hypotheses. Meat prices were converted into US dollars to stabilize the exchange rate
fluctuation. The study found that both bovine and pig meat were competitive in the global
market. The export of poultry meat was not competitive due to higher cost of production and
higher domestic price due to increased domestic demand. Analysis of NPC over the years
had shown that during 1980-81 world border price of bovine meat was 50 per cent higher than
the domestic price (NPC = 0.49) and it came down to 25% during 1998-99 (NPC = 0.75).

Jayesh (2001) examined the export competitiveness of pepper using national

protection coefficient (NPC). The NPC was less than unity (0.817) for Sirsi and (0.849) for
Calicut indicated that pepper was competitive for its export to other countries from Sirsi
(Karnataka) and Calicut (Kerala) markets. The study recommended need to improve the
quality of the product to enhance the export.

Kumar et al. (2001) concluded that exports of potato from India have been fluctuating
and was quite negligible compared to the total potato production. The national protection
coefficient (NPC) for potato was largely above one (1.23) when the Official Exchange Rate
(OER) was used while it was below one (0.97) when Shadow Exchange Rate (SER) was
used, indicating moderate export competitiveness.

Mahadevaiah (2001) studied the export competitiveness of Karnataka’s cotton

production by estimating the domestic resource cost (DRC). DRC was estimated under both
import and export scenario. In this study, the point of competition between domestic
production and imports from New York was taken for importable hypothesis. Under exportable
hypothesis, the pre-assumption was that Indian cotton would compete with the New York
market. In the study, DRC was worked out by taking the marginal value product of the non-
tradable inputs such as manure, human labour and rental value of land. In case of tradable
inputs like fertilizer, pesticide and interest on working capital were valued at the world
reference price. Results showed less than one of DRC under both import and export scenario
indicating that to earn one rupee of foreign exchange, the cotton farmers in Karnataka have to
spend less than one rupee worth of non-tradable inputs in the production of cotton. Finally,
the study concluded that domestic cotton fairly enjoys export competitiveness.

Joson (2002) examined the export potentials for potato grown in Karnataka. In this
study, National Protection Coefficient (NPC) was computed both under importable and
exportable scenario. The point of competition between domestic production and imports from
UK was taken for importable hypothesis. Results of the NPC calculation under importable
hypothesis revealed that Indian potato was uncompetitive in the international market during
the period 1999-2002. The study recommended that cost structure of potato cultivation be
reduced if potato is to be export competitive.
Jyothi et al. (2003) studied the competitiveness of onion and potato exports from
India for the period of 1996-97 to 1999-2000 by using Nominal Protection Coefficient (NPC).
Degree of competitiveness was measured based on value of NPC, less than 0.5 for highly
competitive, 0.5-1.00 moderately competitive and grater than one non competitive. In this
study, NPC was calculated using official exchange as well as shadow exchange rate (SER),
which was 1.2 times the official exchange rate. The NPC value of onion calculated at SER for
the period of 1996-97 to 1999-2000 was 0.80 indicating moderate competitive nature of Indian
exports. In case of potato, exports during the same period, the average NPC value was 0.63
showing its high competitiveness.

Raisunddin (2004) made an assessment of comparative advantage of rice in

comparison with other agricultural products in Bangladesh. In this study a number of
indicators such as net financial return, net economic return and domestic resource cost, were
worked out for the period 1996/97 – 1998/99. Net financial return is calculated by valuing
output and input at actual market price. Net economic return was calculated with output and
tradable input valued at world prices. Rice grown in Boro season had comparative advantage
as opposed to what which is a competing crop. It was also found that Bangladesh had a
fabulous comparative advantage in cultivation of vegetables as indicated by low values of
DRC, which was in the range of 0.05-0.11 for many vegetables. The study advocated need of
public research investment in non-cereal crops as the country strives for diversification.

2.5 RESOURCE USE EFFICIENCY

Abeysekara (1976) in his study of production function analysis of paddy farming in Sri
Lanka used the Cobb-Douglas type production function in which total output was regressed
with land, labour, fertilizer, agro-chemicals, tractor services, buffalo services and seed. All
variables were valued in monetary terms except for land (acre) and labour (man days). The
study was based on farm records maintained by 107 paddy farmers for the 1972/73 Maha
season in five selected districts of Sri Lanka. Study fond that land, labour, fertilizer and seed
had significant and positive impact on paddy production. In this study, return to scale was
found to be 1.186. Allocative efficiency analysis revealed that paddy farmers in Sri Lanka had
been concerned with achieving efficient uses of land and buffalo services while labour and
fertilizer allocation was inadequate. The reasons given for under use in fertilizer were cash
shortages and high degree of risk associated with output. The major recommendations made
in the study were expansion of farm credit facilities and investment in farmer education.

Nelf et al. (1993) made an assessment in utilizing nonparametric and parametric

production functions using data collected from 153-grain farmers in Illinois in United States. In
their study, nonparametric single-output radial output technical efficiency frontier,
nonparametric multiple-output radial output technical efficiency frontier, deterministic
parametric frontier with half-normal error term and stochastic parametric frontier with
normal/half-normal composed error term were applied. All four models indicated that Illinois
grain farms had average efficiency ratios with over 80 per cent. However, Nonparametric
models provided higher efficiency measures than the parametric models. An attempt was also
made to analyze the relationship among the four models using correlation coefficients.
Results showed a high correlation among the parametric and nonparametric models and a
low correlation between parametric and nonparametric models.

Radam and Latiff (1995) studied the technical efficiency for paddy cultivation using a
cross section data of North West Selengor in Malaysia. The data employed in this study
consisted of information on production and input used for a sample of 317 paddy farmers in
Northern selangor in the main season of 1990. The output produced was in physical unit (kg).
The inputs for production included land (ha), fertilizer, herbicide, insecticide and fungicide,
which are in physical units and labour in man-days. Results of the production function
analysis revealed that the production of these farms was technically inefficient and the farms
could have produced 74 per cent more output than what they have actually produced if they
operated with overall technical efficiency. It was further found that the output could have
doubled if optimal efficiency was achieved. Another source of inefficiency is due to non-
optimal scale of production. About 38.8 per cent of farmers were operating at increasing
returns to scale and 56.8 per cent of farmers at decreasing return to scale. On average, the
output could have been increased by 22 per cent if the farmers had been operating at optimal
scale.

Singh and Naresh (1998) studied the technical efficiency in rice cultivation in Punjab.
The analysis of technical efficiency in rice cultivation showed that there was considerable
variation in efficiency across regions and size categories of farmers in Hoshiarpur district and
Sangrur district. The main reason for high technical efficiency was observed to be timely
transplanting and application of irrigation, fertilizers and pesticides in appropriate dosages.

Umashankara (1998) studied production efficiency of rice farming in hilly zone of

Karnataka state of India by using Cobb-Douglas production function and frontier production
function approach. Independent variables used were area, farmyard manure, fertilizer, human
labour and seeds. Resource use productivity analysis indicated that in lowland paddy
cultivation, land, fertilizer and seed had a significant contribution to output while human
labour component was found to contribute negatively to the output. In upland situation, only
land contributed most significantly to the output while seed and human labour contributed
negatively to the output. The technical efficiency in paddy production was observed to be
high, as more than 70 per cent of efficiency were achieved by 90 per cent of the farmers.
However, less than five per cent of the farmers were found to have achieved the allocative
efficiency of more than 70 per cent. The study stressed the importance of investment in
paddy cultivation on the basis of returns realized from each of the factors of production.

Hazarika and Subramanian (1999) analyzed the production efficiency of Indian tea
industry. The study was conducted in Assam taking a sample from two major tea-producing
districts viz., Sibsagar and Dibragarh districts. A three-stage stratified random sampling
procedure was followed. The technical efficiency in production was estimated by using the
stochastic frontier production function of the Cobb-Douglas (CD) type. Estimate of CD
production function was made for small/medium and large estates separately. The result
showed that effective area of the tea estate had significant positive influence on the
production of green tea. The coefficient for effective area of small and medium estates was
0.859 indicating that one per cent increase in the area will result in 0.859 per cent increase in
total green tea leaf production at their mean level. For the large estates, the figure was 0.685.
It was also found that every one per cent increase in fertilizer used will increase the
production by 0.262 per cent for small/medium estates and one per cent increase in area
under 50 years of age would reduce production of green leaf by 0.092 per cent. Return to
scale was found to be 1.28 for small/medium estates and 1.41 for large estates, which implied
that an increase in the use of the selected variables would result in more than proportionate
increase in total production of tea. It was also observed that the farm specific technical
efficiency varied between 0.64 and 0.99 with a mean technical efficiency of 0.88. This implied
that tea production in Assam could be increased by 12 per cent on average by adopting the
technology used by the best performers.

Badal and Singh (2000) made an attempt to examine resource use efficiency in maze
and its competing crops of wheat and rice in Bihar. Due to problems of multicollinearity, the
production responses were estimated on per capita basis. The regression coefficients were
less than unity for all the inputs. This implied that each input was depicting diminishing
marginal productivity. The elasticity of human labour was positive and significant for all the
selected crops indicating that it was the most important factor increasing farm returns from
cultivation of these crops. Return to scale was less than one except in the case of HYVs of
rabi maize which was unity. This indicated that these farms were better managed than those
of HYV rabi maize and there was a scope to increase maize production in rabi through
judicious use of resources and better management. Analysis of marginal values, which
measure the allocative efficiency, showed that human labour was over used in the production
of local varieties of kharif and rabi maize and in the production of HYVs of paddy because
their MVP/price ratio was less than one.

Mythili and Shanmugam (2000) measured the technical efficiency in paddy cultivation
in Tamil Nadu using an unbalanced panel data of 234 farms for the period 1990-91 to 1992-
93. The study used the stochastic frontier production function approach and the Cobb-
Douglas functional from. Output was expressed as a function of human manpower (man-
hours), area (hectares), fertilizer (kilograms) and capital expenditure incurred on bullock
labour, machinery and pesticides (rupees). The maximum likelihood method was used to
estimate frontier function. The study found that the technical efficiency varied from 46.5 per
cent to 96.7 per cent with a mean value of 82 per cent. The mean technical efficiency
indicated that on average, the realized output could be increased by 18 per cent without any
additional resources. The study recommended the need for improving farmers’ practices
through extension services and training programmes.

Amarasinghe and Weerahewa (2001) assessed technical efficiency of potato

production in Badulla district in Sri Lanka. The extent by which a farmer lies below its
production frontier is regarded as the measure of technical inefficiency. A stochastic frontier
production function was employed to explain technical efficiency using data from 55 farmers.
Yield of potato was regressed as a function of land, labour, mechanical services, agro-
chemicals and seed. Technical efficiency was regressed as a function of age of the farmer,
education level of the farmer and farm assets. According to the econometric results, labour
and seed rate significantly affect the potato production. Production technology exhibits
decreasing return to scale. The average level of technical efficiency of farmers was found to
be 72 per cent indicating that the production would increase by 28 per cent if all the farmers
achieved the technical efficiency level of the best farmer. However, the average yield of the
best farmer too was far below the potential yield. The results of the model for the inefficiency
effects indicate that educated farmers tend to be more efficient than the others.

Rama Rao et al. (2003) examined the levels of technical efficiency in the production
of rice in Andhra Pradesh through application of stochastic frontier production function. Yield
responded significantly to all the inputs namely, labour, seed, farmyard manure, plant
protection chemicals, except fertilizer. Analysis of frontier production function indicates the
presence of significant inefficiency in the production of rice. The average level of technical
efficiency was estimated to be about 0.85 indicating that it was possible to improve yield by
15 per cent by following the efficient crop management practices. The differences in technical
levels were significantly influenced by age and education of the farmers and the area under
rice to total cropped area. The negatively significant coefficients for age and education
suggest that as the age and the education of the farmer improve, the efficiency decreases.
However, farm size was not found to have any significant relationship with technical
efficiency. The study pointed out that increasing technical efficiency by following the best
farmers’ practices could increase profitability from rice farming.

Basanta et al. (2004) studied the efficiency of rice farming in Nepal as a means of
exploring the reasons that hinder productivity growth in rice farming. This study used a two-
step methodology. In the first step, data envelopment analysis (DEA) was used to model
efficiencies as an explicit function of discretionary variables. In the second step, farm specific
variables such as a farmer’s risk attitude, age, education, gender and family labour
endowment are used in a Tobit regression framework to explain variations in measured
inefficiencies. The results found that Farrell’s overall economic efficiency was 66 per cent
meaning that the sample farms can potentially reduce their overall cost of rice production by
34 per cent and still achieve the existing level of output. The results of the Tobit regression
method showed that younger farmers are more likely to be inefficient than their older
counterparts and more educated farmers are more likely to be efficient as compared to their
less educated counterparts.

Debnarayan and Sudpita (2004) examined the extent of technical efficiency of paddy
under different types of tenure and different farm sizes in West Bengal using a Data
Envelopment Analysis (DEA). Two types of villages – technologically advanced villages
having high incidence of irrigational and HYV facilities and technologically backward villages
having no irrigational and HYV facilities were selected. The use of high technological inputs in
agriculture is not so important in improving the efficiency level of the farms. Similarly, the
proportion of efficient farms increase with increase of farm size except the lowest farm size
where all the farms are efficient.

Illukpitiya et al. (2004) studied the technical efficiencies of small-scale rice farmers in
Sri Lanka and the factors contributing to technical inefficiencies in rice farming by using the
stochastic frontier production function methodology. In this analysis two models were
developed. One is relationship production and inputs and the other is relationship between
inefficiency and factors contributing to it. In the first model, production is a function of area,
inorganic fertilizer, organic fertilizer, labour, seed (dummy: 1 for certified seeds and 0 for
otherwise) and method for plating (dummy: 1 for transplanting and 0 for broadcasting). In the
second model, technical inefficiency is a function of the age, education, experience and the
hours of extension advice obtained. Data were collected from 46 households selected from
the Badulla district of Sri Lanka in the 1998-99 season. Results showed that area, inorganic
fertilizer and transplanting had positive impact on production while labour and seed has no
significant contribution to the production indicating overuse. It was further found that the
overall mean technical efficiency of the paddy farms was 0.74 and factors affecting technical
efficiency were experience in farming, education, age, and extension contacts. Overall results
implied that there is potential for improving the efficiency of paddy farming and thereby
increasing farm revenues. In paddy production, technical efficiency can increase if farmers
are given the proper motivation and necessary facilities for improvement.

Reddy and Sen (2004) studied the technical inefficiency in rice production in Bihar
and investigated the influence of farm specific socio-economic characteristics on inefficiency.
Technical inefficiency of the individual farm was estimated through stochastic frontier
production function analysis. To study the effect of socio-economic factors on inefficiency, the
sample farmers were grouped into various categories based on each factor and then the
average inefficiency of each group worked out and compared. Analysis of variance was
carried out to know whether various groups differ significantly in their inefficiency level or not.
Besides this correlation, analysis was also carried out to know the relationship. The study
reveled the existence of technical inefficiency in the production of rice in the study area. It was
also found that technical inefficiency in the production of rice is negatively related with farm
size, education of the farmer, experience, extension contacts and percentage of good land
and positively related with age and fragmentation of the land. To reduce the inefficiency in the
rice production encouraging co-operative type of farming, land consolidation, improving
literacy rate, strengthening extension services and providing alternative employment
opportunities were among the recommendations.

Kumar et al. (2005) estimated the efficiency levels of individual rice farms applying
Data envelopment Analysis (DEA) approach, which is based on linear programming
technique. A linear Tobit regression equation was used to identify the factors associated with
efficiency. Data were collected from a sample of 50 farmers selected in Bageswer district in
Uttaranchal. The study found that the overall technical efficiency in the case of improved rice
growing farms was higher than that of rice farms growing local varieties. The study also
suggests that efficiency initially increases and eventually declines with age. Moreover, higher
education was found to be associated with higher efficiency level.

Pouchepparadjou et al. (2005) employed two separate production functions of Cobb-

Douglas type for adopting farms and non-adopting farms for paddy grown in the Union
Territory of Pondicherry. Output was regressed with seed, urea, other inorganic fertilizer,
labour, operational cost, land area, water and plant protection chemicals. All variables were
measured in value term. The model was estimated using the Corrected Least Square
technique. In addition, the logistic regression model was used to understand the degree and
direction of each factor in the adoption of the technology. The independent variables included
in the regression were age, agricultural income, other income, education, experience,
livestock, non-land assets and operational area. The results of the frontier functions revealed
that the average level of technical efficiency was 0.35 among adopters and 0.37 among non-
adopters. The levels of technical efficiency were more or less the same, for both adopters and
non-adopters. This implied that there was great potential for IPM adopters to further increase
output using available inputs and technologies more efficiently. The results of the regression
model run for examining factors influencing adoption of IPM indicated that the education of
the farmer and contacts made with agricultural extension personal had significant and positive
influencing the rate of adoption of IPM. The study recommended the need of policies to
improve education and extension services by further investment in human capital and related
factors.

2.6 COSTS AND RETURNS

Keerthipala (1987) studied the economics of farming systems in Mahaweli systems B
and C in Sri Lanka using primary data collected from a sample of 130 farmers. The survey
found that nearly 62 per cent of farmers in system B and 73 per cent in system C followed a
double crop paddy (p-p). The other important cropping patterns in the lowlands included
double crop of paddy with subsidiary food crops such as chillies, onion, grams etc. (p-s, p-s),
paddy followed by fallow (p-f) and a double crop of paddy with subsidiary food crops in Yala
and perennials (pr; p-p,s). The study found that although farming system was paddy based,
paddy farming was less profitable than major subsidiary crops such as chllies, cowpea,
vegetables, manioc etc. In Mahaweli system B the net return of paddy in Yala season was
Rs.6577 per hectare, as compared to Rs.29040 for chillie (highest) and cowpea Rs.9681
(lowest).

Chahal and Chahal (1989) worked out the economics of irrigated crops in Punjab.
They observed that the per acre variable costs incurred were highest for paddy followed by
maize, sugarcane, wheat, cotton and groundnut while gross returns were maximum for
sugarcane followed by wheat, paddy, cotton, groundnut and maize. Among the crop
combination, the annual returns to fixed farm source were the highest for sugarcane followed
by paddy-wheat, groundnut-wheat and maize-wheat systems. The returns per unit of irrigation
were the lowest for paddy-wheat combination and highest for groundnut-wheat combination
followed by cotton-wheat, sugarcane and maize-wheat. The study recommended that cotton-
groundnut system should be encouraged.

Jayasuriya (1989) studied the profitability of different cropping patterns in Mahaweli

system C in Sri Lanka using a primary data obtained from 150 farmers in 1988. It was found
that 53 per cent of farmers grew paddy – paddy (double cropping) and earned net income of
Rs.10880 per hectare while farmers who grew paddy and non-paddy crops (chillie &
vegetables) in both seasons obtained the highest income of Rs.19012 per hectare. The net
returns per hectare of onion, vegetables and green gram were Rs.18493, RS.17979 and
Rs.12084, respectively. The major cropping patterns identified in the study area were, paddy
– paddy; paddy – paddy & non-paddy crops and paddy in both seasons along with perennial
crops in part of the low land. The study suggested diversification rice fields during the Yala
season to increase farm income.

Santha (1993) worked out the cost of cultivation and profitability of paddy crop in
Kerala using a primary data collected from three cultivation seasons. The findings showed
that the cost of cultivation per hectare was minimum for Viruppa season, which was found to
be Rs.3726.16 while there was not much difference between the cost of cultivation during
Mundakan and Punja, which was Rs.4641.51 and Rs.4625.50, respectively. The input-wise
split up revealed that the major share of the total cost was on hired human labour, which
accounted for 22.62 per cent for Virappa and 25.57 per cent for Mundakan and 27.22 per cent
for Punja. The next important input was the imputed value of rent on land. The cost A, which
forms the paid out cost accounted only for 62.54 per cent in Viruppa, 65.04 per cent in
Mundakan and 67.74 per cent in Punja. The profitability analysis revealed that return per
rupee invested was the highest for Viruppa (1.4) followed by Mandaka (1.33) and Punja
(1.24).

Mohandas and Thomas (1997) studied the economics of rice production for different
size holders such as small, medium and large farmers in Kuttanad areas of Kerala. The analysis
showed that the percentage increase in gross income per hectare from rice cultivation was
highest among marginal farmers followed by large and small farmers. The results of the study
showed that cost escalation is the most important factor, which makes rice cultivation a
relatively less remunerative enterprise. They suggested that mechanization should be followed
wherever possible and thus reduce the cost of human labour.

Baliyan et al. (1998) analyzed the costs and returns per hectare for sugarcane and its
competing crops in Muzaffarnagar district of Western Uttar Pradesh. Wheat in rabi and sorghum
during kharif are the two main competing crops of sugarcane in the study area. On average,
total costs per hectare of sugarcane (planted) and sugarcane (ratoon) were higher by 20 per
cent and 3.64 per cent than that of wheat + sorghum respectively. The net returns per hectare
from sugarcane (planted) and sugarcane (ratoon) were 1.5 and 6 times more than that of wheat
+ sorghum, respectively. This study concluded that sugarcane is more profitable than wheat +
sorghum and therefore farmers should divert their acreage to the sugarcane crop from the
acreage under wheat + sorghum to maximize their farm incomes.

Shaik et al. (1998) worked out costs and returns of major crops grown Andhra
Pradesh. The overview of the study revealed that human factor constituted the kingpin of total
cost of all the crops including paddy in all the zones of Andhra Pradesh while the adoption of
plant protection measures was abysmally low in almost all the crops except in cotton. The
analysis of profitability in case of cereals indicated that paddy claimed a lion’s share of higher
profitability in high potential irrigated zone of Krisna-Godavari compared to other zones.
Similar situation was observed in case of maize in Krishna-Godavari zone, which was due to
wider acceptance of the farmers in case of technology.

Umashankara (1998) worked out costs and returns in paddy farming in hilly zone of
Karnataka. The cost of cultivation per acre in low land situation (transplanted) was higher
(Rs.4930.96) than upland situation under drill sown (Rs.4716.04). This was due to increased
usage of labour, fertilizers, pesticide and improved varieties of seeds in anticipation of higher
yield. The share of variable cost was 96 per cent of total cost in both situations. Among the
variable costs, the cost on human labour was the single largest item. The average yield was
found to be 15.1quintil per acre for lowland situation as compared to 13.1 quintal for upland
districts. The net return was Rs.3498.46 per acre in lowland and Rs.2442.38 per acre in
upland situation.

Singh and Singh (2000) estimated the cost and return of rice in different ecosystems
viz., Rain-fed upland (RU), Rain-fed lowland (RL), Irrigated with high yielding varieties (IHYV),
Deepwater rice (DR) and Boro - rice (BR) in India. The cost of cultivation (Cost C) per hectare
was highest on IHYV farms (Rs.12111.04), which was slightly higher than BR farms
(Rs.12104.98) with lowest on DWR farms (Rs.5165.21). When total cost was divided into
factors of production, it was found that hired human labour along with imputed value of land
jointly contributed to more than 50 per cent of the factor cost under all the rice ecosystems.
The study also revealed that net profit was much higher on BR farms (Rs.13615 per ha.) than
IHYV farms (RS.3329 per ha.) owing mainly to significantly higher yields on BR farms (6.43
t/ha) compared to IHYV (3.9 t/ha). In conclusion, the study reported that future food needs of
the eastern India could be successfully met by extending the area under boro rice wherever
possible.

Krishna (2001) worked out the costs and returns of paddy cultivation in Kerala
through a sample of 100 farmers for the year 2000-2001. The total cost of cultivation per
hectare was found to be Rs.31043.75. Of this the lion’s share was attributed to human labour,
which amounted for 61.46 per cent of total cost. Total returns form per hectare cultivation was
Rs.27023.68. Since it was below the total cost incurred, the net income was found negative
with a loss of Rs.4020.08 per hectare and the benefit –cost ratio of 0.87, indicating
unprofitable situation. However, rice and prawn cultivation together earned profit making B-C
ratio to be 1.27. The study concluded that there was an increased trend towards double crop
of prawn due to higher profitability of the prawn farming and loss incurred in rice crop. One of
the major recommendations made in the study was mechanization of rice farming operations
due to higher wage rate prevailing and scarcity of labour at proper time.

Neelappa (2002) studied the costs and returns structure in cultivation of paddy in
Tungabhadra command area (TBP) of North Karnataka. The profitability aspect of paddy
cultivation in TBP was analyzed by computing per hectare cost and returns. The hectare cost
of cultivation of paddy was Rs.26192, RS.25938 and Rs.23822 for farmers in Bellary and
Raichor districts and for prize- winning farmers, respectively. The variable costs constituted
the major proportion of total cost of cultivation of paddy farming, which was about 85 per cent.
The expenditure on human labour was found to be major item of variable cost. The gross
return per hectare of paddy cultivation was Rs.42851 (Bellary) and Rs.40735 (Raichur). It was
Rs.45350 for prize-winning farmers. The net returns per rupee spent in paddy were estimated
to be Rs.1.64 for farmers in Bellary, Rs.1.57 for farmers in Raichur and Rs.1.90 for prize-
winning farmers.
 Sandeep (2002) examined the economics of existing cropping systems in Bidar
district of Karnataka. In this study, B-C ratio was computed for different cropping systems and
it was found sugarcane as the most profitable cropping system under irrigation condition with
a profit of Rs.50616.55 per hectare and a benefit-cost ratio of 3.28. Red gram system was the
next best profitable system under rain-fed condition as judged by the benefit–cost ratio of
2.37. The B-C ratio was 1.84 for paddy-wheat cropping system. The study recommended the
need for crop diversification to avoid unforeseen economic losses of mono cropping.

Maharjan et al. (2003) carried out a study to measure the profitability of growing
various crops in the Northern dry zone of Karnataka. The breakeven yield was computed to
measure the profitability. The decision criteria is if the actual yield is beyond the breakeven
yield, the farmer will start earning the profits and if the actual yield is below the breakeven
yield the farmer incurs loss. Breakeven yields were relatively quite stable in crops HYV paddy,
sunflower and cotton in kharif season, bengal gram and sunflower in rabi season, groundnut
in summer season and annul crop sugarcane. The crops HYV paddy, hybrid maize, sunflower
and cotton in kharif season, hybrid wheat, bengal gram, sunflower in rubi season, HYV paddy
and groundnut in summer and annual crop sugarcane were profitable as the actual yield was
grater than the breakeven yield for these crops over the years.

Mali et al. (2003) studied economics of production and marketing of banana in

Jalgaon district of Western Maharashtra. Jalgon district was selected purposively because it
accounts for 62 per cent of the total area under banana crop in the state. In this study,
banana growers were categorized into three sub-classes viz., small (up to 1.00 ha), medium
(1.01-2.00 ha) and large (2.01 ha and above) on the basis of area under banana. For
estimation of cost of cultivation of banana the depreciation for farm building, irrigation
structure, implements, machinery and hand tools was worked out by using straight-line
method. Interest on working capital was charged at the rate of 13 per cent for the complete
period of banana crop. Interest on fixed capital was charged at the rate of 10 per cent per
th
annum. Rental value of land was imputed at the rate of 1/4 of the gross value of produce
less land revenue and other taxes. The yield per hectare was 533.14 quintals and per hectare
net profit was Rs. 66761.87.

Sileshi et al. (2003) analyzed the changes in the costs and returns of wheat, paddy
and cotton crops in Punjab to ascertain the performance of agricultural sector because these
three crops together contributed 89.31 per cent to the total agricultural output of the state
during 1996-97. The study concentrated on post-green revolution period from 1971-72 to
1996-97 and the whole period was again divided into three sub-periods such as 1971-72 to
1980-81 representing the initial stage of green revolution, 1981-82 to 1990-91, peak stage of
green revolution period and 1991-92 to 1996-97, maturity stage of green revolution. Results
indicated that at current prices, the total cost of paddy cultivation increased by 136.86 per
cent from Rs.5952.53 in 1982-83 to Rs.14159.37 in 1993-94 per hectare. However, at
constant prices, the increase was only 0.43 per cent indicating that it was the inflationary
pressure. At constant prices, there was a decrease in the variable cost due to increased level
of mechanization that pushed the fixed cost and reduced the variable cost on labour. Gross
return of paddy at current prices, had increased by 156.98 per cent in 1993-94 over 1982-83,
return over variable cost by 224.60 per cent and net returns by 257.64 per cent. However, at
constant prices, gross return increased by only 10.94 per cent, return over variable cost by
40.42 per cent and net return by 54.53 per cent.

Wadear (2003) assessed the socio-economic viability of selected different farming

systems in North Karnataka. In this study, two farming systems were identified; farming
system–I, crop-dairy animals-drought animals and farming system-II, crop-drought animals.
The study found that farmers in zone one (North eastern Transition) incurred a total cost of
Rs.15789 in growing a hectare of farming system-II and it was higher than farming system-I
(Rs.12203). However, net returns over variable cost was higher for faming system-I (Rs.6197)
as compared to farming system-II (Rs.4581) while net returns over total cost were very
meager in farming system-II (Rs.94) and it amounted to Rs.3801 for farming system-I. The B-
C ratio for farming system-I was 1.31 and for farming system-II it was 1.01. The study
suggested combining dairy farming with crops to enhance and sustain farm incomes.
 Dawit and Basavaraja (2004) examined the cost of production of wheat in Dharwad
district of Karnataka State using primary data. The costs incurred in wheat production were
tabulated under cost A, Cost B and Cost C concepts. The net profits at three cost concepts
were worked out to know the profitability in wheat production The results of the study
indicated that the average yield per hectare was found to be 9.8 quintals and 9.61 quintals for
small and large producers, respectively. The higher productivity of wheat per hectare for small
producers as compared to their large counterparts was due to more personal attention and
use of more family labour in farm activity. However, gross and net returns per hectare were
marginally higher for large producers because large producers realized higher prices by
selling the produce through regulated markets. Benefit cost ratio at cost A, Cost B and Cost C
was greater than one for both small and large farmers but value was higher for larger farmers.

Jeevika (2004) analyzed the income from rice farming in Sri Lanka under different
scenarios. This analysis showed a number of important findings. First, tariff protection is not
good solution for augmenting paddy farm income even disregarding the impact on
consumers. Second, if fertilizer is provided free of charge with higher import tariff rice farming
does not generate a sufficient income or provide a reasonable income for living. Third, the
income of a rice farmer with one acre is 20 per cent of the average income of the country in
1980/81 and it declined to 10 per cent in 1990/91 and further dropped to five per cent in
2000/01. The study concluded that paddy farming when it is practiced, as mono crop
cultivation on a small scale cannot provide a sufficient income for farmers.

Ravi Kumar et al. (2004) studied the most profitable cropping pattern of small and
medium farmers in North Coastal Zone of Andhra Pradesh using primary data. A farmer with
a land holding less than or equal to 2 acres was categorized as small farmer and the farmer
with holding ranging between 2.1 acres to 5 acres was categorized as a medium farmer in the
study. Benefit-cost (B-C) ratios of major crops, namely paddy, sugarcane, maize and paddy-
fallow black gram, were worked out to study the profitability. It was found that for both in small
and medium farmers, the B-C ratios were higher for paddy and paddy fallow black gram crops
respectively. The study therefore concluded paddy followed by black gram was the most
profitable cropping pattern. Another conclusion was cultivation of two crops per year more
profitable than adopting monoculture with sugarcane.

Sikander and Sandeep (2004) examined the profitability of paddy, maize and wheat
crops grown in Himachal Pradesh for the year 2001-2002. In this study, different cost
concepts of Cost A1, Cost A2, Cost B and Cost C were calculated. As regard to Cost C,
paddy was the highest cost (Rs.20835) followed by maize (Rs.18709) and wheat (Rs.17102)
per hectare. For all the crops, the lion’s share of cost was incurred by labour. In respect of
gross returns per hectare, it was highest on paddy crop followed by wheat and maize. The
study further found that net returns were positive on paddy crop as compared to the wheat
and maize crop where net return was negative. The negative return was due to low yield.
However, net profit per quintal was negative for all three crops.

Sreeja (2004) studied the economics of rice, tapioca, coconut and rubber grown in
Kerala by analyzing costs and returns data for the year 2002-03 collected from Kollam district.
Analysis of cost of production data for rice revealed that variable cost accounted for 82.37 per
cent of the total cost and labour cost along represented 69 per cent of the total cost. The cost-
benefit ratio for rice was 1.09 which was the lowest compared to other crops studied
indicating that all crops concerned other than rice had a better income to the farmers. The
findings further confirmed the trend in changes in cropping pattern. Area under cereals
dropped by 34 per cent from 1982-83 to 2001-02 period mainly due to the reduction in paddy
area, which was converted for other profitable crops.

Ashok Kumar (2005) estimated cost and returns structure for selected hybrid
vegetables seed production of tomato, brinjal, okra and ridge gourd under contact farming in
Haveri district of Karnataka state. Item wise cost analysis indicated that variable cost accounted
for 90.79 per cent of the total cost for tomato, 85.78 for brinjal, 83.03 for okra and 87.50 for ridge
gourd. Labour cost was the highest representing 52.85 per cent of the total cost for tomato,
45.45 for brinjal, 45.24 for Okra and 37.32 for ridge gourd. In this study returns were analyzed
under different scenario viz., gross return, net returns over variable cost net returns over total
costs and returns per rupee of expenditure. The analysis found that cultivation of hybrid seeds
was profitable to the farmers in the study area as evident by over unity of benefit –cost ratio. It
varied from 1.40 for ridge gourd to 2.76 for tomato.
 III. METHODOLOGY
In this chapter, a comprehensive view of the methodology adopted for the
investigation viz., the study area, source of data and analytical techniques applied are
presented.

3.1 DESCRIPTION OF THE STUDY AREA

0 0
Sri Lanka is a tropical island situated between the latitudes 5 55’ 9 51’ North and
longitudes 790 41’, 810 54’ East. The country has a total land area of 6.46 million hectares of
which 1.94 million hectares covers with forest and wood area. Total agricultural land area was
2.35 million hectares in 2004 accounting for 36.38 per cent of the total land area in the
country.

Administratively the country is divided into nine provinces, and 25 districts. Under the
system of decentralization of administration in 1989, authority has been devolved by the
central government to the nine provinces, each of which is administered by an elected
Provincial Council. For civil administration purpose, the local authorities in each province
comprises Municipal councils, urban councils and Pradeshiya Sabhas, which demarcates on
the size of the area administered and the degree of development of the area. The
representative head of the central government in each district is the District Secretary. The
District Secretary supervises and coordinates the various administrative functions in the
district. For example, the District Secretary supervises paddy-purchasing programme of the
government being implemented after closing down of the Paddy Marketing Board. He chairs
the district agricultural committee, which is held once a month to review the performance of
agricultural programmes in the district. The administrative districts are divided into divisions,
called Divisional secretaries, each of which is supervised by a Divisional Secretary.

Sri Lanka has a population of about 19.61 million in 2005. Average annual growth
rate in population was 1.2 per cent in 2005. Population density in 2001 was 299 per sq. km
and it was 259 in 1990. About 79 per cent of the population lives in rural areas and the growth
rate of urban population is low in Sri Lanka. The gender ratio, i.e., the number of males per
100 females was 98 in 2001 as compared to 104 in 1981. The population of Sri Lanka is
ageing: the proportion of those above 65 years of age increased to 7 per cent in 2001 from
5.4 per cent in 1981 while the proportion of below 18 years old declined to 32.9 per cent in
2001 from 41.6 per cent in 1981. The average household size was 4.2 persons in 2002.

The annual precipitation over the island follows a distinctly bimodal pattern receiving
rainfall from the northeast monsoon (October-January) and the southwest monsoon (May-
September). The annual rainfall in Sri Lanka varies from 900 mm to 5500 mm depending on
the location, with an island-wide average close to 1900 mm. Topography plays a major role
in determining the rainfall distribution. The entire island benefits from the northeast monsoon.
The mountains intercept the southwest monsoon and as a result the highlands and the
southwest portion of the country receive 1900-5500 millimeters (mm) of rain per year and the
mean annual rainfall is 2400 mm. This area is called as the Wet Zone. Rainfall probability
data show that in the Wet Zone, rainfall is adequate and sufficiently reliable to grow crops
during the both season.

The remaining 75 per cent of the country comprising lowlands, to the north and east,
benefit little from the southwest monsoon and receives 900-1900 mm rainfall per annum. The
average annual rainfall is 1400 mm. The area is divided into the Dry and Intermediate Zones.
In the Dry Zone, the bulk of the rainfall occurs during the northeast monsoon. In the Dry and
Intermediate Zones there is adequate rain in the Maha (wet) season (October –March) for
crop production under rain-fed conditions. The Yala (dry) season (April to September) permits
the cultivation of only short-season, drought resistant crops.

The mean temperature varies from 21-320C. Temperature is not a limiting factor in
crop production at higher elevations except where frosts occur for short duration. Humidity in
the country is high and variable. The average relative humidity is between 70 and 80 per cent.
The relative humidity in the coastal regions is slightly higher than in the lowland situations.

The country is divided into three major agro-ecological zones: Wet, Dry and
intermediate based on the annual rainfall (Figure 3.1). The Wet Zone demarcates the area,
which receives moderately high mean annual rainfall of over 2500 mm and comprises the
Southwest Quadrant of the island covering about 1.52 million hectares. The Dry Zone is the
area, which receives a mean annual rainfall of less than 1750 mm comprising principally the
Northern and Eastern sectors of the island with nearly 4.12 million hectares. The Intermediate
Zone demarcates the area, which receives a mean annual rainfall between 1750-2500 mm,
comprising of nearly 0.84 million hectares.

At the time of political independence in 1948, the economic structure of Sri Lanka
was characterized by a dual economic system: modern and plantation sector. The former
consisted of the export oriented plantation agriculture and the later consisted of the domestic
subsistence agricultural sector. Apart from export processing activities related to plantation
agriculture, the manufacturing sector included only a few industrial ventures for import
substitution. The share of manufacturing output was only four per cent of GDP in 1950 while
agricultural sector accounted for 50 per cent. Economic structure began to change
significantly after introduction of open economic policies since 1977. Sri Lanka was the first
South Asian country commenced in economic liberalization. The major policy changes include
removal of quantitative restrictions in imports, relaxation of foreign exchange use, closing
down or privatization of loss making state-run organizations, and provision of tax
concessions/relief for grater private and foreign participation.

Due to these policy reforms services and manufacturing sectors grew faster and
hence contribution to GDP from agricultural sector gradually declined. The sectoral
contribution in 2005 was 20 per cent from agriculture, 25 per cent from manufacturing sector
and 55 per cent from service sector. Agricultural exports declined to 17.3 per cent of total
export in 2001–03 as compared to 94.6 per cent in 1970-71. Per capita income in Sri Lanka in
2005 was U$ 1200 and the country is now treated as a low middle-income country. At the
time of independence it was U$90 and U$ 143 in 1977 when the economy was liberalized.
The economic growth rate is 5.6 per cent in 2005. During the period before liberalization,
1950-1977 it was 3.2 per cent and after liberalization, 1978- 2005 it went up on an average to
5.2 per cent per year. This growth achieved despite the civil war in the country over two and
half decades.

Despite the structural changes being taken place in the economy since 1977 with the
introduction of the open economy, the agricultural sector still plays an important role in the
economy. It contributes 20 per cent to the GDP, 35 per cent to the employed population and
20 per cent to the export earning. Nearly 80 per cent of the population who lives in rural areas
depends on agriculture directly or indirectly for their livelihood. Major crops grown in the
country are paddy, tea, rubber and coconut, which occupies over 75 per cent of the
agricultural land.

The performance of agricultural sector was not impressive during post liberalization
period. Growth rate in agriculture secretor was around 2 per cent, less than haft of the
economic growth during last two decades. This was below the level (3.0%) achieved pre-
liberalization period. Average annual rate of growth in crop and livestock production was only
one per cent during 1985-1994 and it further declined to 0.2 per cent during 1995-2004. The
growth on per capita basis reported negative (-0.9%) during 1995-2004. Due to poor
performance in agricultural sector, a large percentage of the poorest rural households remain
engaged in agriculture (World Bank, 2002).
Fig. 3.1 Map showing the major agro ecological zones in Sri Lanka
3.2 SELECTION OF DISTRICTS

Polonnaruwa, Kurunegala and Kalutara districts were purposively selected for

production function analysis, which represent dry, intermediary and wet zone respectively
(Figure 3.2). These districts were purposively selected due to following reasons. The number
of rice farmers who committed to suicide was the highest in Polonnaruwa district. Also, this
district was ranked second in production next to Ampara. Over 95 per cent of the rice lands is
under irrigation in the district. Kurunegala district was chosen because of highest production
recorded in the intermediary zone in the country. Kalutara district was the highest rice
production in the wet zone.

For profitability analysis, three more districts, namely Anuradhapura, Badull (Mahaweli)
and Hambantota (Walawe) were selected to add a variety of competitive crops for the analysis. In
these six districts, shifting rice lands into non-rice crops is being taken place.

3.3 SELECTION OF MARKETS

Based on the importance of the rice wholesale markets in the country, Colombo,
Gampaha, Kurunegala, Kandy and Polonnaruwa were selected for the analysis of market
integration (Figure 3.2). Colombo, Gampaha and Kandy markets are located in major
consumption areas and the Kurunegala and Polonnaruwa are in major producing areas in the
country. Colombo is the oldest and biggest market in the country. There are about 65 commission
agents in the market. Millers supply rice to sell on a commission basis (5%). Gampaha market,
second largest rice wholesale market, known as “Maradhagahamula” is located 50 km away from
Colombo. The number of traders in the market is approximately 40. There are about 50 rice mills
around this market and most of traders in the market are millers themselves. Kurunegala market
has around 25 wholesalers. Kandy is the second largest city in the country. This market serves
the central part of the country. There are about 30 traders in the market. Polonnaruwa market is
a smaller one with around 20 traders.

3.4 SELECTION OF CROPS

After discussion with officials in the district agricultural office in the selected districts,
competing crops with rice were identified for the analysis of profitability of rice and its
competing crops. One crop was selected for each district taking into account nature of the
crop as shown in Table.3.1 However, these crops are not strictly limited to the selected district
and can be grown in other districts as well. And, cost of production does not vary much
among the districts. Maize has a growing demand as an animal feed and hence farmers
started cultivation of maize in irrigated rice filed recently. Watermelon was also introduced
recently in irrigated rice fields for export. Banana is a popular fruit in the domestic market.
Leafy vegetable was selected because it has been widely grown in rain-fed rice land nearby
major cities like Colombo and Galle.

Table 3.1 District wise selected competitive crops

SN District Zone Crop

1 Anuradhapura Dry Maize
2 Polonnaruwa Dry Chillie
3 Badulla Dry Water melon
4 Kurunegala Intermediary Soybeans
5 Hambontota Dry Banana
6 Kalutara Wet Leafy-vegetable
Fig 3.2 Mape showing the study area in Sri Lanka
3.5 NATURE AND SOURCE OF DATA

The present study was mainly based on secondary data (time series) and collection
of primary data was limited to fill the data gap in the existing data set. Accordingly, primary
data was collected on land rent, depreciation cost and cost of importing rice through key
personnel interviews. For the quantitative analyses, the study period lied from 1960 to 2004
and the entire period was divided into two period, 1960–1977 (period one) and 1978-2004
(period two). The year 1977 was a landmark in the economic and social position of the post
independence period. In that year the policy shifted from inward looking development strategy
to outward looking development strategy making free the economy from an array of controls.
Since closed economic polices were prominent before 1960, the year 1960 was selected as a
starting point of the period one. There was not much change in economic policies after

independence till 1960. The country mainly exported tea, rubber and coconut and
imported essential food items like rice before 1960. Due to balance of payments problems the
newly elected government changed the economic policy in 1960.

The details of the secondary data collection are described in Table 3.2. Data had to
be collected from different sources due to non-availability of all the data in one source.
Similarly, reference period varied depending on the requirement of the analysis applied and
the availability of data. Department of Census and Statistics (DCS) is the responsible agency
at national level for collection and compilation of statistics. Area, production, productivity and
prices were collected at national level from the DCS for the period 1960-2004 for analysis of
growth performance. Monthly producer and retail prices of rice were collected from 1970 to
2004 because there is no data on monthly basis before that. Monthly prices were used to
study seasonal price variation.

Table 3.2: Details of secondary data collection

SN Type of data Coverage Frequency Period Source

1 Area, production & National Annual 1960-2004 Dept. of Census and
productivity Statistics.
2 Producer price & National Annual 1960-2004 Dept. of Census and
retail price Statistics.
3 Producer & retail District Monthly 1970-1980 Dept. of Census and
price Statistics.
3 Producer, wholesale District Monthly 1980-2004 Agrarian Research
& retail price Institute
4 Cost and returns District Seasonal 2005 Yala Department of
Agriculture

Agrarian Research and Training Institute (ARTI) collects market data required for
market information service. It is the only organization, which collects wholesale prices since
1980. Producer, wholesale and retail prices of rice for the period 1980-2004 were obtained
from the ARTI for the analysis of price spread.

The Socio-economic Planning Center of Department of Agriculture is the responsible

agency for maintaining cost of production data on principal food crops. The Center conducts
the cost of production survey each and every season soon after the harvest and publishes a
report for the season. In the present study, cost of production data collected in Yala season in
2005 was used for the production function analysis. A three stage sampling procedure was
adopted for the cost of production survey in Yala 2005. In the first stage, representative
districts were selected considering the distribution of national cultivated extent. In the second
stage, Agrarian Service Centers (ASCs) covering 51 percent of the total cultivated extent
were identified in the selected districts. At third stage a sample of 50 farmers were randomly
selected from the identified ASC regions for rice and 30 farmers for each non-rice crops. The
survey was conducted by trained enumerators using a pre-tested structured schedule.
 In addition to these sources, published and unpublished reports were used for
information collection, especially for the first objective of the study i.e., documentation of
marketing policies on rice.

3.6 ANALYSIS OF DATA

The methods of analysis and analytical techniques used in the present study are
listed in Table 3.3 and details are given in the forgoing sections. In case of market integration,
three analytical techniques were used to test market integration under different scenario.

Table 3.3: Methods of analysis and analytical techniques

SN Method of analysis Technique

1 Growth rate analysis Exponential
2 Trend analysis Linear simple regression
3 Seasonal price variation Ratio to moving average
4 Market integration 1) Zero order correlation, 2) Ravallion Model, 3)
Koyck distributed lag model
5 Stability analysis Coefficient of Variation
6 Open market price behaviour Multiple regression
7 Market margin Price spread
8 Terms of trade analysis Parity ratio
9 Production function Cobb-Douglas production function
Frontier production function
10 Export competitiveness National Protection Coefficient (NPC)
11 Profitability analysis B-C ratio
12 Impact assessment Income and employment indicators

3.6.1 Growth r ate analysis

Growth of any variable represents its past performance. The analysis of growth is
usually used in economic studies to find out the trend of a particular variable over period of
time. It clearly indicates the performance of the variable under consideration and it can be
very well used for making policy decisions. In the present study growth rate analysis was
carried out to compare performance of production and marketing of rice during pre and post
liberalization period. Pre liberalization period lies between 1960 and 1977 and post
liberalization period is from 1978 to 2004. The growth function was estimated separately for
period one and period two and the period as a whole.
The growth in area, production, yield, and prices of rice in Sri Lanka were estimated
by using exponential growth function. The salient feature of the model is that the increase at
any movement is proportional to the size already achieved. The exponential function can be
expressed mathematically as follows.
t
Yt = ab ut _________________________________________ (3.1)
Where,
Yt = Dependable variable, i.e., area, yield, production and prices
a = Intercept
b = Regression coefficient
t = Years, which takes values, 1,2, ……..n
ut = Disturbance term for the year t
Equation (3.1) was transformed into log linear form as follows.
ln Yt = ln a + t ln b + ut _______________________________ (3.2)

Equation (3.2) was estimated using Ordinary Least Square (OLS) technique. The
regression coefficient so obtained was tested for their significance using ‘t’ test. If the
calculated ‘t’ value is more than table ‘t’ value at the given level of significance, the regression
coefficient is considered to be statistically significant, which implies that there is a growth in
the variable concerned. Also, the significance difference between growth rate during pre and
post liberalization period was tested using ‘t’ test. If calculated ‘t’ is greater than table ‘t’ at
given level of significance then two growth rates differ significantly. The compound growth
rate (g) in percentage form was then computed from the identity given in the equation (3.3).
g = (Antilog of log b – 1) x 100 ____________________ (3.3)

3.6.2 Trend analysis

The secular trend in prices, marketing margins for two periods and the entire period
was worked out as given linear trend equation (3.4). Also, the trend in expenditure on each
selected input for the post liberalization period was estimated for the district of Polonnaruwa
where the incidence of farm suicides is high. The same could not be performed for the pre-
liberalization period due to absence of time series data on cost of production on rice.
Yt = a + bt + ut ___________________________________________ (3.4)
Where,
Yt = Dependent variable, i.e., prices, marketing margins, farmer’s shares and
expenditure on each inputs
a = Intercept
b = Regression coefficient
t = Years, which takes values, 1,2, ……..n
ut = Disturbance term for the year t
By using ordinary least square technique the parameters ‘a’ and ‘b’ were estimated. .
The regression coefficient ‘b’ was tested for their significance using ‘t’ test. In this form ‘b’
indicates absolute increment in the dependent variable such as prices, marketing margin,
farmer’s share and input cost.

3.6.3 Seasonal price variation analysis

The seasonal price variation in producer and retail price of rice was studied before
and after liberalization in order to understand price fluctuation within a year. For pre-
liberalization period, price indices were computed for the period 1971-1977 because monthly
prices are available only for that period. In computing indices for the post-liberalization period,
whole period was grouped into four with seven years interval as in pre-liberalization period, a)
1978-1984, b) 1985-1991, c) 1992-1998 and d) 1999-2005. In addition, indices were worked
out for the whole period of liberalization, 1978-2005. Producer price is the average of the
major rice producing districts of Kurunegala, Polonnaruwa, Anuradhapura, Ampara and
Hambantota and retail price was averaged for the country.

Indices of seasonal variations in prices were constructed by ratio to moving average

method in the multiplicative model of time series analysis. In the multiplicative model,
hypothesis is that the components (trend, seasonal, cyclical and irregular fluctuations) are
linked together in a multiplicative faction. Using this method, a 12-month moving average is
computed. Since results thus obtained fall between successive months instead of the middle
of the month as for the original data, a 2-month moving average of this 12-month moving
average is computed. This result is often called a centered 12-month moving average. After
this has been done, the original data for each month is expressed as a percentage of the
centered 12-month moving average corresponding to it. Percentages for corresponding
months are then averaged to obtain the required index. The procedure can be expressed
mathematically as follows.
O=TxCxSxI __________________________ (3.5)
Where,
O = Original data, T = trend, C = Cyclical, S = Seasonal and I = Irregular
The seasonal factor is obtained as follows.
S = O/M __________________________ (3.6)
Where,
M = Twelve-month centered moving average.
Seasonal index is obtained as follows.
S* = S x 100 ____________________ (3.7)
 The magnitude of seasonal variations in producer and retail price of rice at two points
of time were measured by estimating coefficient of average seasonal price variation, which is
defined as follows.
ASPV = [HSPI – LSPI] x 200 ____________________ (3.8)
HSPI + LSPI
Where,
ASPV = Coefficient of average seasonal price variation
HSPI = Highest seasonal price index and
LSPI = Lowest seasonal price index

3.6.4 Market integration analysis

Market integration is a situation in which arbitrage causes prices in different markets

to move together. Price is one market varies with the actions of buyers and sellers in other
markets. In a competitive market with free flow of information, the price differences between
two markets will be equal to or less than transport costs between two markets. The study of
market integration determines the relationship between the prices in the two markets that are
spatially separated. Spatial price relationships have been widely used to indicate overall
market performance. Integrated markets are those where prices are determined
interdependently.
In the present study Colombo, Gampaha, Kurunegala, Kandy and Polonnaruwa were
selected for analysis of market integration. Colombo, Gampaha and Kandy markets are the
three largest markets located in major consumption areas while rest of the markets are
situated in major production areas. In order to study the market integration the analytical
techniques used are correlation coefficient, Ravallion model and Koyck distributed lag model.

3.6.4.1 Correlation coefficient

The degree in which price formation in one market is related to the process of prices
formation in other markets can be shown through a correlation matrix of prices in these
markets, traditionally, using simple correlation coefficients tested market integration. Although
considerable progress has been made in designing test procedures for market integration,
none of the current approaches to testing market integration has challenged the basis of the
correlation coefficients approach (Baulch, 1997). Karl Pearson’s product movement
correlation coefficient was employed to assess the relationship between two markets. The
correlation coefficient was defined in the equation (3.9). Its value varies from minus one to
plus one. It the value is zero there is no relationship between two markets. If it is less than
one relationship between two markets has negative in price formation. This means that
increase in one-market decreases in another market. The positive value indicates that there is
a positive relationship meaning that increase in one market leads to increase in other market
in price. Degree of relationship is strong when the value is close to one. It the value is exactly
one it indicates perfect relationship either positive or negative depending on the sign of the
value.

∑XY - (∑X) (∑Y)/N Cov (X,______________

Y) (3.9)
r= =
Where,
√[∑X2 – (∑X)2] [ ∑Y2–(∑Y)2] SD (X) SD (Y)
r N
= Correlation coefficient N
X = One market
Y = Second market
N = Number of observation

3.6.4.2 Ravallion model

It is widely believed that wholesale price of rice at Colombo market influences the
price determination of other wholesale market (Ubaidullah, 1999). This hypothesis was tested
using the market integration model developed by Ravalion (1986). The Alexander & John
(1994) used this model to study market integration for the Indonesian rice market.
Accordingly, the Ravallion model is explained in equation (3.10).
 (Pit – Pit-1) = (αi – 1) (Pit-1 – Rt-1) + βi0(Rt – Rt-1) + (αi + βi0 + bi1 – 1) Rt-1 + Uit ___________ (3.10)

Where,
Pit = Price in the local market (i) at time ‘t’
Pit-1 = Price in the local market (i) at time ‘t-1’
Rt = Price in the Central market at time ‘t’
Rt-1 = Price in the Central market at time ‘t-1’
Uit = error term
Long run integration (αi + βi0 + bi1) = 1
Short run integration βi0 = 1

Timer (1987) developed the Index of market connection (IMC) on OLS estimation of
equation (3.10) as follows. IMC indicates the contribution of the regional market and the
reference market past prices on current regional prices. The value less than one is an
indication for short run integration.

IMC = αi / βi0 + bi1 _________________________ (3.11)

In the present study Colombo market was taken as central market and its prices were
compared with prices in Gampaha, Kurunegala, Kandy and Polonnaruwa referred as local
markets in the above expression. Separate regression for each local market was estimated in
linear functional form using OLS technique.

3.6.4.3 Koyck distributed lag model

The Koyack distributed lag model was used to examine the market integration of oils
and oilseeds in India (Nasurudeen & Subramanian, 1995). This model is explained in
equation (3.12) given below. In this model one advantage is that there is no need to
demarcate markets as reference and local. Current price of the one market depends on the
current price of another market and distributed its lag prices. Therefore this model is known
as distributed lag model.

Pit = α + β0Pjt + β 1Pjt-1 + ………. + βk Pjt-k + Ut ________________ (3.12)

Where,
Pit = Price of ‘i’ market in t period
Pjt = Price of j market in t period
α and β = Regression parameters to be estimated.

Assuming that the βs are of same sign and decline geometrically, then it follows as,

βk = β0λk ______________________ (3.13)

Where,
K = 0,1,2, ……

0 < λ < 1 the rate of decline of the distributed lag and (1 - λ) is the speed adjustment.
Equation (3.13) explains that each successive β is numerically less than each
preceding β, implying that as one goes back into distant past the effect of lag on Pjt becomes
progressively smaller. If λ is close to 1 the slower is the rate of decline in βk. If λ = 0, the more
rapid is the decline in βk. If λ = 0, the more rapid is the decline in β k. With the assumption of
non-negative values for λ, Koyck rules out the βs from changing sign and λ<1, lesser weight
has been assigned to the distant βs than the current ones and the sum of the βs which gives
the long-run multiplier finitely, namely,

∑∝k=0 βk = β0 (1/ 1-λ) ___________________ (3.14)

As a result of equation (3.13) the infinite lag model (3.12) can be written as
 2
Pit = α + β0 Pjt + β1λPjt-1 + β2λ Pjt-2 + …..+ µt _____________ (3.15)

The model is still not amenable to easy estimation since there remain a large number
of parameters to be estimated and the parameter λ enters in a highly non-linear form. By
lagging equation (3.12) by one period, it becomes,

Pit-1 = α + β0 Pjt-1 + β1λPjt-2 + β2λ2 Pjt-3 + …..+ µt-1 ____________________ (3.16)

Multiplying equation (3.16) by λ

2 3
λPit-1 = λα + β 0 λPjt-1 + β1λ Pjt-2 + β2λ Pjt-3 + …..+ µt-1 ____________ (3.17)

and subtracting equation (3.17) from (3.15)

Pit = α + β0 Pjt + λPjt-1 + νt ___________________ (3.18)

Where α = α (1-λ), νt = (U - λUt-1) a moving average of Ut and Ut-1.

In a sense multicollinearity is resolved by replacing Pjt-1, Pjt-2 ……by a single variable

Pjt-1. The β gives the short run price adjustment corresponding to a unit change in jth price.
The long run adjustment is measured through equation (3), i.e., βk = β0/ (1-λ). Similarly, the
number of days required to realize 90 per cent adjustment was estimated by

Ln (0.9βk (λ-1) + 1) ________________ (3.19)

N= X 30
Lnλ
Where,
N = the time period i.e., the number of days required to realize the 90 per cent long-
term adjustments.

The equation (3.18) was estimated by OLS method

3.6.5 Instability analysis

To study stability with respect to prices and marketing margins during pre and post
liberalization period coefficient of variation (CV) was worked out around the mean (CV1) and
around the trend (CV2) using the annual data. If there is trend in time series data CV around
the mean is over estimated. Hence, the most appropriate one is CV around the trend (CV2).
The formula used by Hyma Jyothi et al (2003) to compute the degree of variation around the
trend (CV2) was applied in the present study.

CV1 = [SD / X ] x 100 _________________________ (3.20)

Where,
SD = Standard deviation
X = Mean
2
CV2 = CV1 x √1-R ________________________ (3.21)

Where,
R2 = coefficient of multiple determination of the linear trend equation.

3.6.7 Marketing margin analysis

In the marketing of agricultural commodities, the difference between the price paid by
consumer and the price received by the producer for an equivalent quantity of farm produce is
often known as a farm-retail price spread or price spread. Often this is also called the
marketing margin. The total margin includes (a) the cost involved in moving the product from
the point of production to the point of consumption, i.e., the cost of performing the various
marketing functions and of operating various agencies and (b) the profits of the various
market functionaries involved in moving the produce from the initial point of production to the
ultimate consumer.

The analysis of marketing margins is important as it reveals many facets of marketing

and the price structure as well as the efficiency of the system. The magnitude of marketing
margin relative to the price of the product indicates the efficiency of the marketing system. It
refers to the efficiency of the intermediaries between the producer and the consumer in
respect of the services rendered and the remuneration received by them. The estimates of
the marketing margin helps in findings the total cost incurred on the marketing process in
relation to the price received by producer and the price paid by the consumer.

In view of this situation, present study included an estimation of the producer’s share
in the consumers’ rupee. It expressed as a percentage of the retail price as given below.

Ps = [Pf / Pr ] x 100 ______________________________ (3.22)

Where,
Ps = Producers’ share of the consumers’ rupee
Pf = Producer price
Pr = Retail price

3.6.8 Terms of trade analysis

Agarwal (1986) worked out the index numbers for different parity concepts to study
the cost and return of food grains in the State of Rajasthan in India. Similiarly, Patel et al
(2001) constructed parity indices to study the input –output relationship of oilseeds in India. In
this analysis, price parity indices were constructed to know the behaviour of producer price of
rice in relation to its input prices and consumer products prices. In computing parity price
between output and input prices, fertilizer and labour were selected as inputs because these
inputs constitute the highest category in the total cost of rice production. In computing parity
price between output and consumer product prices, milk powder, soap and kerosene oil were
selected as consumer products in this analysis because these three products are essential
items used daily and producers entirely depend on the market in use of them. In constructing
price parity indices, price index for each item was worked out by taking the annual average
price of producer price, input prices and consumer products prices. Then producer price index
was divided by each input and consumer product price index to get the party indices for
producer price and other selected items. This can be expressed mathematically as follows.

PPI for input = [OPI,] / IPI ___________________ (3.23)

PPI for consumer products = OPI / CPI _____________ (3.24)

Where,
PPI = Parity price Index, OPI = Output price index, IPI = Input price index
CPI = Consumer price index

3.6.9 Production function analysis

The production function portrays an input-output relationship. It describes the relation

between physical rates of output and physical rates of input usage (Mukheriee, 2005).
Production function is defined as a schedule showing the maximum amount of output that
can be produced from a fixed amount of resources, given the existing technology. In short,
the production function is a catalog of a firm’s output possibilities.

The most important objective of any farm is to realize optimum output through co-
ordination and utilization of the farm resources. This reflects the resource productivity. In
order to study the on farm resource productivity, the Cobb-Douglas (CD) production function
of the following type was used.

b1 b2 b3 b4 b5 u
Y = boX1 X2 X3 X4 X5 e __________________ (3.25)

Where,
Y = Output of the farm in Kg
X1 = area under rice in acres
X2 = Human labour in man days
X3 = Quantity of seed used in Kg
X4 = Quantity of fertilizer used in Kg
X5 = Value of plant protection chemicals used in Rs.
U = Random variable
b1 to b5 = Elasticity coefficient s of respective inputs.

The function was estimated in the log linear form.

ln Y = In b0+ b1 In X1 + b2 In X2 + b3 In X3 + b4 In X4 + b5 In X5+ln U ____ (3.26)

The method of ordinary least square was adopted to estimate the coefficients. The regression
coefficients so obtained were tested for their significance using “t” test. The formula used for
the 't' test is,
t = bi / SE (bi) ________________________________(3.27)

Where,
bi = the regression coefficient of the independent variable
SE(bi) = the standard error of the regression coefficient bi
t = the calculated 't' value

The coefficient of multiple determination (R2) was also worked out to test the
goodness of fit of the model.

3.6.9.1 Economic efficiency of rice cultivation

To capture the ability of the farmers to achieve the maximum obtainable crop
output with minimum level of inputs under the existing situation and given technologies,
careful examination of farm specific technical efficiency and input specific allocative
efficiency of the farmers is necessary.

Technical efficiency evaluates the farm's ability to obtain the maximum possible
output from a given set of resources, while allocative efficiency explores the needed
adjustments in equating the marginal revenue with the marginal cost for maximizing
profitability. Given the resources (inputs) a producer is said to be technically inefficient if
he fails to produce the maximum possible output. Similarly, cost minimization or profit
maximization producer is allocatively inefficient if he fails to allocate the inputs optimally
given input and output.

The Cobb-Douglas production function does not distinguish between technical

efficiency and allocative efficiency (Sampath, 1979). It ignores the problem of technical
efficiency by assuming that all the techniques of production are identical across farms
and each fanner is technically efficient, which many a times is untrue.

Farrell (1957) introduced the concept of efficiency, using the frontier production
function approach. This function distinguishes technical and allocative efficiency. Farrell
proposed that efficiency should be measured in a relative sense, as a deviation from the best
performance in a representative peer group.

Timmer (1971) modified the procedure in a number of ways and imposed a Cobb-
Douglas type specification on the frontier and evolved an output-based measure of
efficiency.
 The Cobb-Douglas function takes the general form
Y = f (X) eµ, µ ≤ 0 _______________________________ (3.28)

Where,
Y = Output / dependent variable
X = Input I independent variable
µ = Error term
This function in log form would be
ln Y =ln b0 + ∑n bi ln Xi +µ , µ ≤ 0
i =1

The above equation was estimated using Corrected Ordinary Least Squares
(COLS) regression. As a first step, ordinary least squares (OLS) were applied to the
equation to yield best linear unbiased estimates of bi coefficients. The intercept estimate
'b0' was then corrected by shifting the function until no residual is positive and one
becomes zero. This was done by adding the largest error term of the fitted model to the
intercept.

The new production function with the shift in the intercept is the frontier production
function and it gives the maximum output obtainable for given level of input and it would be of
the form
n
In Y* = b0 + ∑ bi ln Xi + µ , µ ≤ 0 ________________________ (3.29)
i=1
The Timmer's measure of technical efficiency (TE) of farm i is the ratio of actual
output to the potential output on the production function given the level of input use on farm i.
* _____________________________________________
TE = Yi / Yi (3.30)
Where,
th
Yi = Actual output of i farm
Yi* = Maximum output obtainable by the ith farm for given levels of input

To classify the efficiency achieved by the farmers the arithmetic mean and standard
deviation of output of overall farmers were cultivated.

Allocative efficiency was assessed by comparing the marginal value product (MVP)
of each of the inputs with the respective marginal factor cost (MFC). The marginal product
(MP) was estimated from the parameters of Cobb-Douglas production function and the
geometric mean levels of the output and input. The MVP of each resource was calculated by
multiplying the marginal product of the resource by the price of the product. The formula used
to compute MVP is given below.

MVP (Xi) = [bi] [Y] [Py] / Xi _____________________________________________ (3.31)

Where,
bi = Elasticity of production of i input
Y = Geometric mean of output
Xi = Geometric mean of i input
Py = Price of the product

In the formula geometric mean was used, as it is especially adapted to rates of

change and average rates. The criterion evaluation for determining resource use efficiency of
resource was given below.

MVP/MFC > 1 under utilization of resource

MVP/MFC = 1 optimum use of resource
MVP/MEC < 1 excess use of resource
3.6.10 Export competitiveness

Nominal protection coefficient (NPC) was computed to determine the extent of

competitive advantage enjoyed by the commodity in the context of free trade. It is defined as
the ratio of the domestic price to the world reference price of the commodity under
consideration.
Symbolically,
_____________________________________________
NPC = Pd / Pr (3.32)

Where,
NPC = National protection coefficient
Pd = Domestic price of the commodity in question
Pr = World reference price of the commodity in question, i.e., what the farmer
would have received in case of free trade.

If the nominal protection coefficient is grater than one, then the commodity is
protected, compared to the situation what would prevail under free trade and if it is less than
one the commodity is unprotected. In terms of export competitiveness NPC is grater than one
means that the country does not have comparative advantage in exporting the commodity
concerned.

NPC is estimated under two scenarios viz., import scenario and export scenario.
Under importable scenario, the competition is deemed to take place at the domestic port and
therefore international and domestic transportation cost accord a natural protection to the
domestic commodity. Under exportable scenario, competition is assumed to take place at
foreign port and therefore domestic commodity has to be extra efficient to the tune of
international transportation costs at least. These two hypotheses therefore yield different
estimates of protection.

In the present study importable scenario was applied because Sri Lanka has not exported
rice yet. The domestic price referred to the wholesale price of rice in the Colombo market in Sri
Lanka. The reference price was taken FOB price in India and Pakistan, major exporting countries to
Sri Lanka and adjusted to the wholesale market in Colombo by adding transport costs, marketing
and trading margins. Monthly FOB price of rice in 2005 was obtained from rice importers who
maintain records and averaged for the year. The procedure followed in computing NPC under
importable hypothesis is explained in Table 3.4.

Table 3.4: Nominal protection coefficient of Sri Lankan rice under importable hypothesis
SN Particulars Place Unit
1 FOB price India & Pakistan U$/Mt.
2 Freight charges To Colombo U$/Mt.
3 Insurance (0.1% of CNF) To Colombo U$/Mt.
4 Equals CIF price (1+2+3) Colombo U$/Mt
5 Exchange rate Sri Lanka 1U$ = Rs
6 Equals CIF price Colombo Rs./Mt.
7 Plus port clearance charges Colombo Rs./Mt.
8 Equals landed price (6+7) Colombo Rs./Mt.
9 Operating cost and Profit Colombo Rs./Mt.
10 Price of imported rice (8+9) Colombo wholesale market Rs./Mt
11 Price of local rice Colombo wholesale market Rs./Mt
12 NPC (11/10) Colombo wholesale market Rs./Mt

3.6.11 Profitability analysis

Profitability analysis was carried out to examine the competitive profitability of rice
with its competing crops. In this exercise, costs and returns of rice and its competing crops
were worked out. Both fixed and variable costs were taken into account. In the cost of
production surveys conducted by the Department of Agriculture fixed costs were excluded.
Finally, benefit- cost (B-C) ratio was computed each crop as follows.

Gross income ________________________ (3.33)

B-C ratio =
Total Cost

3.6.12 Impact assessment analysis

To highlight the benefit of crop diversification impact assessment was carried out.
The impact assessment indicators used are employment, income, consumption and
agricultural GDP. In this analysis, tabular analytical techniques such as averages,
percentages and ratios were employed.

3.7 DEFINITIONS OF TERMS AND CONCEPTS USED

Cost of cultivation: Cost of cultivation includes both paid cost and imputed cost on own inputs
at market rate. Paid costs are the expenses incurred in organization and carried out the
production process. They include outlays of funds for inputs used in production. In the short
run total costs comprise of fixed and variable costs.

Fixed cost: An input is called a fixed input if its quantity is not varied during the production
process. Expenditure incurred on such inputs forms the fixed cost. Fixed cost items used in
the present study are land rent, land revenue, interest on fixed capital and depreciation of
farm equipments.

Variable cost: An input is called a variable input if its quantity is varied at the start or during
the production process. Costs of variable inputs are called variable cost. The variable inputs
used in the study are labour, seed, fertilizers, plant protection chemicals, machine power and
interest on working capital.

Seeds: The cost of purchased seeds was based on the amount paid by the farmers. The farm
produced seeds were imputed based on the prices which prevailed at he time of sowing /
planting in the study area.

Labour: The cost of hired labour was calculated at the prevailing wage rates paid per day (8
hours) in the study area for men women and children. The same wage rates were imputed for
family labour. While expressing labour in man-days women days were converted into man-
days by taking one-women day equals to a 0.7 man-day except planting, harvesting and
weeding in such cases one women day equals to one man-day. A child working day was
converted to a man-day using a conversion factor of 0.5.

Interest on working capital: The working capital consists of the expenditure on labour, seeds,
fertilizer, plant protection chemicals, machine power and miscellaneous such as maintenance
and entrainment costs. The interest on working capital was calculated at the rate of 12 per
cent per annum. It was charged for a six months for crops except banana because crop
duration was less than six moths. The interest rate is based on the prevailing charges of the
financial institutions in the study area on short and medium terms loans.

Depreciation charges: Depreciation charges on implements such as water pump, sprayer and
hoe were calculated by straight-line method. This comprised of dividing the original cost less
junk value of the implement by its expected life. This was apportioned to individual crop in
proportion to acreage under the crop.

Interest on fixed capital: Interest on fixed capital was calculated at the rate 8 per cent
on the depreciated value, as the fixed deposits in commercial banks would fetch the rate of
interest. The amount so calculated was apportioned to the crop acreage based on duration of
crops.

Land revenue: Land revenue was taken at the rates levied by the government. Rental
value of land: Rental value of land was calculated at the prevailing rate in the market. Gross
income: Gross income was computed by multiply output produced with its price. Domestic
price: This refers to the wholesale price of rice in Colombo market.World price: World price
relates to the FOB price in India for raw rice and Pakistan for parboiled rice. These are the
two major countries that Sri Lanka imported rice in 2005. Producer price: This refers to the
price per unit of output that producer receives. Prices of major rice producing districts,
namely, Kurunegala, Polonnnaruwa, Anuradapura, Amapara and Hambantota were
averaged.
Retail price: Retail price relates to the price paid by the ultimate consumer while buying from
a retailer.

Parity price: Two parity prices were worked out: parity between output price and input price
and parity between output price and consumer product price. They were expressed as price
ratios of output to input and consumer product.
 IV. RESULTS
In this chapter, the main findings of the study are presented under the following
heads.
4.1 Marketing policies on rice
4.2 Growth performance of area, yield, production, prices, costs and returns of
rice,
4.3 Price behaviour of rice
4.4 Export competitiveness of rice
4.5 Resource productivity and resource use efficiency in rice farming
4.6 Comparative profitability of rice farming
4.7 Impact on crop diversification on agrarian economy
4.8
4.1 MARKETING POLICIES

Rice is treated as a political commodity in which successive governments in Sri

Lanka since independence have been intervening both in production and marketing of rice
through a number of policy measures. In this section, output-marketing policies being
implemented since independence in 1948 are described. A various marketing policies could
be grouped into: 1) procurement policy, 2) distribution policy, 3) buffer-stock policy, 4) trade
policy, 5) credit policy, 6) infrastructure policy and 7) market regulation policy.

4.1.1 Procurement policy

History of the government intervention on rice purchasing goes back to the Second
World War period. During that period due to difficulties in importing rice, the British
Government introduced the Internal Purchasing Scheme (IPS) in 1942 to purchase rice from
farmers for equitable distribution to the nation. The IPS was made compulsory for farmers
after one year of its implementation because supply obtained from farmers was inadequate to
distribute to the nation under public distribution programme. Under the compulsory rule farmer
had to sell two bushels (41.74 Kg) of rice in Maha (major season) and one bushels of rice in
Yala (minor season) per acre to the government.

The IPS came to an end in February 1948, coinciding with Sri Lanka’s independence
and the Marketing Commissioner was authorized to purchase rice (rough) at Rs.8.00 per
bushel under scheme know as “ Marketing of Home Grown Produce Programme”. A special
committee appointed by the government in 1948 recommended the implementation of a
guaranteed price scheme for rice (rough) and a number of other crops. Accordingly, the
government introduced the Guaranteed Price Scheme for rice (GPS) in 1948. It was a
voluntary scheme. Farmers were free to take a decision to sell either to government at
predetermined price or open market at prevailing price. The initial purpose of GPS was to give
an incentive to the producers in a form of income support to produce. In view of this,
Guaranteed Price was always put above the world price of rice before liberalization as shown
in Table 4.1 and Figure 4.1. This procedure was continued until the economy was liberalized
in 1977. It can be observed from the Table that the GPS was increased whenever the world
price increased but it remained unchanged when world price decreased before 1977. For
instance, the world market price of rice continued to decrease from 1953- 1961 but the GPS
remained unchanged.

After 1977, fixing GPS was based on the cost of production (COP) in principle and
the GPS became a floor price. When the market price is lower than GPS the government
intervenes to stabilize the price. Although cost of production was a major determinant in fixing
GPS it was not fixed on a regular basis in accordance with cost of production. GPS was
changed only 18 times during the period 1951-1997 (46 years) and it remained without
changed from 1993 – 1997. There are some instances where GPS changed either before or
after election due to political reasons. Examples are 1977, 1983, 1990 and 1993.
Similarly, as shown in Table 4.2 there was no proper time for announcement of the
price. In some years such as 1973, 1974 and 1981, price was changed twice per year while it
Table 4.1: Guaranteed price and import price of rice

Year GP CIF Price Ratio Year GP CIF Price Ratio

Rs/Kg. Rs/Kg* GP/CIF Rs/Kg Rs/Kg*. GP/CIF
1948 0.38 0.37 1.02 1973 0.86 0.63 1.36
1949 0.38 0.37 1.02 1974 1.58 1.79 0.88
1950 0.38 0.37 1.02 1975 1.58 1.45 1.08
1951 0.43 0.39 1.10 1976 1.58 1.16 1.36
1952 0.57 0.54 1.06 1977 1.58 1.18 1.33
1953 0.57 0.52 1.10 1978 1.92 2.68 0.71
1954 0.57 0.45 1.27 1979 1.92 2.89 0.66
1955 0.57 0.38 1.50 1980 2.40 3.17 0.75
1956 0.57 0.36 1.58 1981 2.52 4.08 0.62
1957 0.57 0.32 1.78 1982 2.76 3.63 0.76
1958 0.57 0.33 1.73 1983 2.99 4.27 0.70
1959 0.57 0.32 1.78 1984 2.99 4.11 0.72
1960 0.57 0.32 1.78 1985 2.99 3.44 0.87
1961 0.57 0.31 1.83 1986 3.40 4.38 0.78
1962 0.57 0.32 1.78 1987 3.40 4.29 0.79
1963 0.57 0.30 1.90 1988 3.89 5.69 0.68
1964 0.57 0.35 1.63 1989 3.89 6.93 0.56
1965 0.57 0.36 1.58 1990 5.35 7.31 0.73
1966 0.57 0.36 1.58 1991 6.61 7.31 0.90
1967 0.67 0.43 1.59 1992 6.61 7.93 0.83
1968 0.67 0.67 1.00 1993 7.53 7.57 0.99
1969 0.67 0.54 1.24 1994 7.53 7.90 0.95
1970 0.67 0.49 1.37 1995 7.53 8.47 0.88
1971 0.67 0.48 1.40 1996 7.53 9.89 0.76
1972 0.67 0.36 1.81 1997 7.53 9.34 0.81
Source: Annual reports of Central Bank of Sri Lanka
* Rough rice (1.5 kg of rough rice = 1 kg of rice)
remained a longer period without change for some instances such as 1953-1966 and 1993-
1996. Theory says that the price should be announced before the planting period enabling
farmers to take decisions on resource allocation for different crops. Sri Lanka did not follow
this principle. Even Sri Lanka did not have a responsible agency like Commission for
Agricultural Costs and Prices in India to recommend the government on price fixing.

Until Paddy Marketing Board (PMB) was set up in 1971, various Departments, such
as the Department of Marketing Development, the Department Agrarian Service and the
Department of Co-operative Development operated the GPS. Under the Act of 1971 Paddy
Marketing Board, the Board was given monopoly power to purchase paddy from farmers and
distribute rice to the consumers through cooperatives. However, monopoly power was only
applied during the period 1973-75 when the price of rice in the world market increased
considerably. The monopoly power was abolished in 1977 with economic reforms and the
PMB intervention was limited to the period when open market prices dropped below the GPS.

The procedures and conditions governing price guaranteed were operated for several
years on an administrative basis. However, in 1961, the Agricultural Products (Guaranteed
Prices and Control of Milling and Hulling) Act was enacted, which gave legal sanction to the
entire scheme. The Act provided for the grading and fixing guaranteed price for agricultural
products and the control of hulling and milling of rice and matters concerned with it.

As mentioned earlier, the GPS was a voluntary programme in which farmers were
free to take a decision either to sell to the government or the open market. There was an
exception for the period 1973-75 when the government imposed a compulsory rule to sell to
the government all the excess rice due to shortage of rice available for rice rationing scheme.
As shown in Figure 4.2, the purchase made under the GPS varied over the years due
to the nature of voluntary scheme. The GPS purchases at the initial stage limited to 2.47 per
cent of the production mainly due to low marketable supply and lack of proper purchasing
mechanism. During the period 1955-66, purchases increased to 45 per cent of the production.
The reason was high marketable production resulting in increasing production and high price
fixed by the government for GPS. According to the FAO study in 1957, producer price of rice
(GPS) in Sri Lanka was the second highest next to Japan (Bansil, 1971). Another study of
FAO in 1962 indicated that 77 per cent of producers interviewed had sold their paddy to the
government (Fonseka, 1963). Quantity purchased under GPS again dropped continuously
due to higher open market prices, malpractices of government marketing agencies and limited
funds provided by the government to purchase rice. When the GPS was terminated in 1997,
the purchases dropped to one percent of the production.

4.1.2 Distribution policy

Distribution policy refers to the supply of rice to the consumers. Government

involvement in rice distribution commenced with the rice-rationing scheme (RRS) in 1942.
Due to limited imports at the time of War, the colonial government started supplying of rice to
the consumers in a limited way through the rationing scheme in order to ensure equitable
distribution. Under the RRS the government provided certain quantity of rice per week to all
citizens of Sri Lanka above the age of one year at a subsidized price as shown in Table 4.3.
The initial issue was two pounds per week and increased to 4 pounds in 1954 and
continued to till 1966 when the amount was reduced to two pounds and issued at free. As
shown in the same Table, the amount was changed over time depending on the availability of
government funds till the scheme was terminated in 1978. Since 1976 the free rice was not
issued to the income tax payers. This was the first effort made to target the food subsidy
though the number was small. Prices were highly subsidized and also varied over time. It was
estimated that price of rationed rice was 50 per cent below the world price and 75 percent
below the domestically produced rice. According to a FAO study in 1960, the consumer price
of rice in Sri Lanka was the lowest in the world (Bansil, 1971).

Due to universal rice rationing scheme, rice consumption has increased considerably
as shown in Table 4.4. Until 1970 the total rice consumption increased rapidly from 94 to 107 kg
per person per year. The country has never reached that amount until today. This was mainly
due to rationed rice. The ration proportion was more than 70 per cent of the total rice
 Table 4.2: Change in Guaranteed Price of Rice

Period Price Rs/kg %Change over Period Price Rs/kg %Change over last
last year year
1948 0.39 - 1980 Nov 2.43 24.61
1951 Aug 0.44 12.82 1981Jan 2.55 04.93
1952 Sep 0.58 31.82 1981 Sept 2.79 09.41
1967 Nov 0.68 17.24 1983 Mar 3.03 08.60
1972 Nov 0.72 05.88 1985 Nov 3.40 12.21

1973 Mar 0.88 20.54 1988 Aug 3.89 14.41

1973 Oct 1.21 37.50 1990 Feb 5.35 37.53

1974 Mar 1.46 20.66 1991 Mar 6.61 23.55

1974 July 1.60 09.58 1993 May 7.53 13.91
1977Nov 1.95 21.87 1997 Jan 7.53 00.00

Source: Annual reports of Central Bank of Sri Lanka

GP Rs/Kg.
11 CIF Price Rs/Kg*
10
9
8
7
G P & C IF

6
5
4
3
2
1
0
1948
1952
1956
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996

Year
Fig. 4.1 Guaranteed price and import price and import price of rice
 50
45
40
Percentage 35
30
25
20
15
10
5
0
1948-54 1955-66 1967-79 1980-87 1988-95
Period

Figure 4.2 Government purchase as a percentage of production of rice

Table 4.3: Changes in Rice Rationing Scheme

Time Quantity Pound per Week Rationed Price

Free Paid Total Cents/Pound
1942 0 2 2 12.5
1953 July 0 2 2 53.0
1953 Oct 0 2 2 27.5
1954 Nov 0 4 4 27.5
1955 May 0 4 4 25.0
1955 Oct 0 4 4 12.5
1956 May 0 4 4 20.0
1958 June 0 4 4 12.5
1959 June 0 4 4 12.5
1960 Apr 0 4 4 12.5
1966 Dec 2 0 2 0
1970 Sep 2 2 4 37.5
1973 Feb 2 2 4 50.0
1973 Oct 1 2 3 100
1974 Apr 1 1 2 115
1974 Aug 1 1 2 110
1975 Mar 1 1 2 110
1975 Nov 1 1 2 100
1977 1 4 3 100
Source: Administrative reports of the Food Commissioner’s Department
consumption until the ration was reduced by 50 per cent in 1966. After removal of rice rationing
scheme the per capita rice consumption declined to 91 kg in 1979. The present consumption
level is around 100 kg.

The RRS was replaced to the Food Stamp Scheme (FSS) in 1979. Sri Lanka was the
first developing country introduced the FSS. By 1978, the expenditure on food subsidy was
approximately 20 per cent of total government expenditure. High producer price and low
consumer price caused a heavy financial burden on the government. The revision was aimed at
more targeted welfare programme. Eligible people were selected on the basis of monthly income
of the family less or equal to Rs.300/= (US$ 20). This income limit for eligibility to receive the
stamps was applied to households with five or less members and the limit was raised by Rs.60 for
each additional member. Some 50 per cent of the population was included in the programme at
the outset.

The value of the stamps issued per month depends on the age of each member of
the household and it was as follows: Rs.25 for children aged 8 years and below, Rs.20 for
children over 8 and below 12 and Rs.15 for persons aged 12 years and above. The FSS is a
direct income support given to selected beneficiaries for purchase of a number of essential
food items including rice at market prices from Co-operative stores and authorized private
traders. With the FSS the dual pricing policy was disappeared for rice. Rice is the major
commodity sold under FSS. The proportion of stamps spend on rice by the recipients ranged
between 70 and 90 per cent of stamp expenditure during 1979-81 period but it has come
down to below 50 per cent in 2005 due to low quality and high price compared to open
market.

The FSS was able to minimize the government intervention in food marketing and to
protect the low- income households from the removal of price subsidy. Further, the food
subsidy share in the total government expenditure was able to reduce to three per cent from
15 per cent in the mid 1970s. Its share in the GNP declined from about five per cent to 1.3 per
cent. However, identification of correct beneficiaries was the major problem encountered in
this programme. According to the findings of the consumer finance survey in 1980/81
conducted by the Central Bank of Sri Lanka, nearly 30 per cent of the poorest quintiles did not
participate in the programme while 45 per cent of the fourth quintiles were in the programme.
Food stamp programme was converted to another programme called Janasaviya in
1989 and again changed into Samurdi programme in 1995. Nevertheless, food stamps were
given into the beneficiaries in both programmes with some modifications. Under the
Janasaviya programme, Rs.1458 was given to the family with five members or above. Of this
Rs.1000 may be used for consumption purpose and the recipients have the option of saving
the balance Rs.458. The unused money was able to deposit in a saving account in a state
bank.

In 1995 Janasaviya programme was replaced by a Samurdhi (meaning prosperity) in

order to provide strong social net to the poor. In this programme the most vulnerable families
in the country are given an income transfer of Rs.1500 per family while other poor families are
given Rs.1000 per family per month. It is compulsory to deposit 25 per cent of the given
amount in the saving account to use for emergency purposes such as sudden illness and
funerals or for investment in a self- employment project. There is also provision in the
programme to provide Rs.100 for single member families and Rs.200 for month for two
member families. In 2005 some 719,884 families received the Rs.1500 or Rs.1000 per month
and some 362,093 received Rs.200 or Rs.100. A total of 1.1 million poor families in Sri Lanka
received the Samurdi benefits out of 4.9 million families, which represents 22.45 per cent of
the total families in the country.

The operational mechanism of the government rice purchasing and distribution

programme till 1996 was illustrated in Figure 4.3. As shown in the Figure, there were three
government organizations involved in the system. The PMB was responsible for purchasing
rice (rough) from the farmers, processing into milled rice and handing over the rice stock to
the Food Department, which was responsible for holding stocks and distribution of rice to the
Cooperative Unions. Cooperative Societies located at village level, which come under the
Cooperative Unions, were responsible for purchasing rice (rough) from farmers and handing
Table 4.4: Importance of rationed rice in per capita consumption

Year Rationed Rice Total Consumption % of Rationed Rice

Kg/Year Kg/Year
1955 66.66 93.84 71.04

1960 81.25 107.28 75.34

1965 84.44 105.58 82.82

1970 51.17 105.54 48.47

1975 45.61 80.19 56.99

1979 30.91 90.95 33.99

Source: Annual reports of the Food Commissioner’s Department

Fig. 4.3: Government paddy purchase and rice distribution system 1971-1996
Fig. 4.4: Marketing channel for rice 1997 - 2005
over them to the PMB and distribution of rice to the consumers. By the end of 1962, Food
Department’s storage was sufficient to 12 millions bushels per month. Co-operative Societies
purchased 56 per cent of the total production of paddy in 1962 due to easy access to
producers (Fonseka, 1963).

After closing down of the PMB in 1997, the Cooperative Wholesale Establishment
(CWE) came into the system as shown in Figure 4.4 which highlights the rice distribution
system including both private and public operation from 1998-2005. The private sector
occupied over 90 percent of the rice market at all three levels, producer, wholesale and retail
and its market share now increased to over 95 per cent after removal of CWE in rice trading
after its privatization in 2006. Today government intervention in rice trading limits to the state
owned Co-operatives. The government provides credit at subsidized rate to the Co-
operatives through the Ministry of Co-operatives to purchase from farmers and distribute rice
to the stamp holders at a price fixed by the Co-operative union based on the market price.

4.1.3 Buffer stock policy

The purpose of buffer stock is twofold: keeping of rice for emergency purposes such
as war, flood and stabilization of prices in the market. From 1948 to 1993 the Food
Department maintained buffer stock of rice. Since Food Department had monopoly power of
importation of rice till 1993, buffer was kept in imported rice. The norm of the buffer was three-
month requirements. The private importers who got import licenses were responsible for
keeping buffer from 1993 to 1996 under the supervision of the Food Commissioner. The
system was called ‘bondsmen scheme” because rice imported by private traders kept in Food
Department’s store which was given on a commercial basis under the supervision of the Food
Commissioner. There were 12 bondsmen in operation at the time of closing the programme.
Of them five were foreign businessmen.

The Food Commissioner depending on the amount imported decided the quantity of
buffer held by each importer. It varied from 1000 to 5000 Mt. The norm was one- month
requirement of rice to keep as buffer. The duty rate was decided at the time of releasing
stocks to the market after determining the price of the imported rice. The bondsmen were
allowed to keep any quantity of rice in bond and re-export if necessary without having to pay
the duty. The bondsmen scheme was terminated after liberalization of rice imports in 1996
because bondsmen was unable to compete with other importers (direct) who imported small
quantities and directly supplied to the market without holding stocks. Selling prices of direct
importers were low due to low overhead costs such as storage and capital. As a result
bondsmen scheme did not last and since then the country does not have buffer stocks.

The buffer stock programme handled by the Bondsmen was successful as far as
price stabilizations was concerned. The coefficient of variation was the lowest during 1993-
1995 indicating more price stability both in farm and retail markets (Table 4.5). In 1996 price
instability occurred due to shortage of domestic production resulting in severe drought. The
lowest rice production after 10 years was recorded in 1996. Price instability was able to
mitigate due to effective buffer stock management. The success of bondsmen scheme was
due to continued monitoring and good public- private partnership. Food commissioner
regularly monitored the stocks position and decided the price of imported rice to release to the
domestic market after consultation of bondsmen.

4.1.4 Trade policy

Trade policy refers to the import of rice because Sri Lanka does not have surplus to
export rice. Rice import was monopoly of the government till 1993. The Department of Food
was the authorized agency to import rice. In 1993 the private sector was allowed to import
rice under licenses and strict quota system. The Food Commissioner decided the quota after
considering domestic production and food security concerns of the country. Rice import was
initially offered to the offshore three companies. There were 10 registered companies by 1995
and only eight of them were active in the trade. This new system continued till 1996 when rice
import was liberalized by removing quantitative restrictions.
Table 4.5 Coefficient of Variation of rice prices

Year Rough rice Parboiled rice (Retail Raw rice (Retail

(Farm level) level) level)
1990 14.56 9.92 6.98

1991 16.28 8.41 7.82

1992 10.57 6.27 6.11

1993 8.37 5.32 4.64

1994 7.33 4.21 4.10

1995 6.52 4.87 3.87

1996 12.59 7.27 9.88

1997 13.51 11.23 11.80

1998 13.52 10.54 11.13

1999 7.24 4.72 4.42

2000 15.36 7.76 6.59

2001 11.30 5.85 5.15

2002 13.47 6.69 7.05

2003 12.13 8.34 8.21

2004 14.23 9.58 8.67

Table 4.6: Duty changes in Rice Imports to Sri Lanka

Year Date Rate

1995 01Feb – 17 April 1996 35%
1996 18 April – 31 Jan 1997 0
1997 01 Feb – 19 Nov 35%
1997 20 Nov – 31Jan 1998 0
1998 1 February 35%
1999 22 Oct – 31 Dec 10%
2000 1 January 35%
2000 17 July 35% + Licensing
2001 21 February 35% + 40% Surcharges + Licensing
22 November 0% + Licensing
09 December 17.5% +40% Surcharges + Licensing
2002 1 January 35% + 40% Surcharges + Licensing
21 January Specific duty of Rs.7 per kg
6 November Specific duty of Rs.5 per kg
2003 5 March Specific duty of Rs.7 per kg
19 August Specific duty of Rs.9 per kg
Source: Ministry of Finance and Planning
After liberalization of rice imports anyone can import rice at 35 per cent duty. In principle,
duty rate remained 35 per cent till January 2002 when specific duty was imposed on imported
rice. However, duty waver was granted to import more to reduce rice prices in the market,
while surcharges and licenses were put on import to protect rice farmers by time to time as
shown in Table 4.6. It can be seen from the Table that duty was changed three times in 2002
and 2003. Reason for reinforcing licensing was arrival of imports at low prices due to export
subsidy given by exporting countries like India. The CIF prices came down to Rs.9 per kg
even at 35 per cent duty, below the cost of production. For the first time after economic
liberalization, rice was allowed to import without duty due in 1996 to meet the scarcity of
domestic rice as a result of drought experienced in that year. The 1996 rice production was
the lowest recorded after 1979. In some instances duty reduction was made irrationally. In
1999 duty was reduced to 10 per cent despite the ever-highest production in that year.

4.1.5 Credit policy

The government provided credit to the PMB to purchase rice (rough) from the farmers
through two state banks at subsidized rate until it was closed down in 1997. Since then, credit
is given to the CWE, Co-operatives and Mahaweli Authority to purchase rice (rough) from the
farmers. In addition, two state banks and private banks provide credit to the millers to
purchase paddy under the pledge loan system, which follows the double log method. Under
the double log system one key is with the borrower and the other with the bank. Quantity
purchased is used as collateral. Banks often charge the market interest rate.

Credit provided by two state banks and private banks, known as formal sector, for
purchase rice during the period of 1998–2002 is presented in Table 4.7. It shows that formal
sector covered maximum of 35 percent credit requirement in 2000. The government insisted
two state banks to provide more credit to purchase paddy in 2000 due to parliamentary election
though credit requirement is low in the year concerned resulting from low rice production. The
commercial banks estimate credit requirements based on the country’s rice production in the
year.

Table 4.8 details the information on credit given to the millers by banks. In addition to
two state banks, Rural Development (RD) bank is also considered as a state bank because it
comes under the control of the Central Bank of Sri Lanka. The Table shows that loans
provided by private banks were low all the years because paddy purchase was not
considered as a good investment due to uncertainty of government rice import policy, which is
based on ad-hoc decisions. Consequently millers incurred losses in many times. The good
example was duty change in 1999. Government announced at harvest time that there was no
duty reduction this year (1999). With this announcement private sector purchased paddy at
high price which was a record. The government broke the promise by reducing duty to 10
percent during the last quarter of the year, which caused huge losses to the traders and many
of them were bankrupt.

In addition to the subsidized credit provided through banks, the Treasury provides
interest free loans to the government organizations, farmer organizations and farmer
companies to purchase rice (rough) from the farmers at a price determined by the
government. The amount given and recovery rate of treasury loans are detailed in Table 4.9.
This program started in 1998 but did not operate in 1999 because the government
encouraged the private traders to purchase paddy in that year. However, the maximum
amount was given in 2000 with Rs.730 million. The bulk of the money was issued to the
cooperatives through the District Secretaries (administrative Head in the district) under this
programme.

As shown in the last column of Table 4.9, the recovery rate was low. The maximum
amount able to recover was 38 per cent in 2002. The recovery rate was low in 2000 because
the co-operatives were forced to purchase rice (rough) at higher rates and faced difficulties in
selling at a profit. The principal reason for low recovery rate was losses incurred in trading by
government agencies due to inability to compete with private traders (Task force report 2003).
Table 4.7: Credit Provided by Formal Sector to Purchase Paddy

Agency 1998 1999 2000 2001 2002

Private Sector Rs. Ml 968 2131 1984 1221 1452

Co-operatives Rs.Ml 402 281 1059 193 282

CWE Rs.Ml 450 450 500 1000 256

Mahawli Rs. Ml 20 40 0 0 0

Total Rs. Ml 1840 2902 3543 2414 1990

Annual Production. ‘000 Mt. 2691 2868 2860 2694 2859

Price of paddy Rs/kg 9.79 11.80 10.42 11.91 13.31

Credit Requirement Rs.Ml 8562 11000 9684 10430 12369

% of Formal Sources 21.5 26.4 36.6 23.2 16.1

Source: Office of the Advisor on Sustainable Development

Table 4.8: Loans Granted to Millers by Banks for Purchasing Paddy (Rs. Million)

Year State Banks Private Banks RD Banks Total

1998 814.00 114.03 42.70 970.73

[83.85] [11.75] [4.40] [100.00]

1999 1760.00 146.15 225.20 2131.35

[82.58] [6.86] [10.57] [100.00]

2000 1654.60 241.00 88.80 1984.40

[83.38] [12.14] [4.47] [100.00]

2001 951.00 267.60 2.80 1221.40

[77.86] [21.91] [0.23] [100.00]

2002 1189.20 243.10 20.20 1452.50

[81.87] [16.74] [1.39] [100.00]

2003 971.10 242.30 11.40 1224.80

[79.29] [19.78] [0.93] [100.00]

Note: Figures in parentheses indicates percent to the total loans in respective years
Source: Office of the Advisor on Sustainable Development
Table 4.9: Funds provided by Treasury to government agencies and recovery rate to
purchase rice (rough)

Year Amount Released Amount Recovered (Rs.Ml) Recovery

(Rs.Ml) %
1998 3 3 100

1999 0 0 0

2000 730.33 147.03 20.13

2001 547.93 195.66 35.71

2002 383.42 145.75 38.01

2003 610.04 107.79 17.68

Total 2274.72 599.23 26.34

Source: Office of the Advisor on Sustainable Development

Table 4.10: Credit Subsidy for rice Purchase by government agencies

Year Interest Charged % Market Interest Subsidy

% %
1998 11 22 50

1999 14 24 42

2000 15 25 40

2001 17 28 39

2002 12 18 33

2003 8 14 42

Source: Central Bank of Sri Lanka

Credit subsidy is defined as a difference between the interest rate in the open market and the
interest charged from the borrowers. As shown in the Table 4.10, subsidy varied from 50 per
cent in 1998 to 33 percent in 2002. The Treasury who ultimately pays the balance to the bank
under the credit guarantee scheme determines the rate charged from borrowers. It was found
that credit subsidy was high in election years, i.e., 1998 presidential and 2000 for
Parliamentary elections. It is argued that the subsidy is necessary to invest in agriculture,
especially in marketing of rice where high risk and high investment are involved.

4.1.6 Infrastructure policy

Infrastructure policy aims at development of physical infrastructure such as road and

storage, and institutional development required to smooth function of marketing activities.
Since there is no specific policy on physical infrastructure in relation to marketing, policies on
institutional development will be presented in this section.

Institutional policy deals with institutional arrangements towards the development of

rice sector. The operation of GPS was given to the Department of Marketing Development
and later to the Department of Agrarian Service till 1971. The government decided to open up
a separate organization with monopoly power in 1971 in order to streamline the system and to
obtain rice required for the rice- rationing scheme. Setting up of the Paddy Marketing Board to
purchase and distribute rice was the major year mark in institutional policy.

After liberalization of the economy in 1977 the institutional policy direction changed
from direct to indirect intervention in marketing. Major effort made in this direction were
setting up a food supply monitoring system, closing down of PMB, establishment of farmer
organizations/companies and development farmer–trader linkages. These measures will be
discussed separately in the following sections.

Under the technical assistance of USAID the government set up a food supply
monitoring system soon after the economic liberalization in order to watch the market
operation and make remedies when necessary. As shown in Figure 4.5, the government
established two high power committees, namely the National Food Policy Committee chaired
by the Prime Minister and the Cost of living Committee chaired by the Food Minister. The
former was decision- making body on food supply management while later dealt with market
monitoring functions by reviewing the prices and stocks on a weekly basis and made
recommendations to the National food policy committee. Marketing Research Unit (MRU) was
established to provide necessary guidelines and information to these two committees.

This system operated continuously till 1995 and then it was changed in order to
speed up the decision marking process. Though the Cost of Living Committee met once a
week, the National Food Policy Committee met once a month, which caused a delay in
decision markings causing a number of ill effects especially food imports to meet the deficit in
the market. In order to avoid this delay, the cabinet that meets every week, took over the
functions of national Food policy Committee. It was observed that this monitoring system
works well by coordinating different ministries relating to food. The members of the Food
Security Committee consist of all the Secretaries or their representatives and Heads of the
Departments concerned Ministries. However, in some instances especially during the election
periods, political authority took decisions by passing recommendations made by the
committee.

In parallel to the monitoring system, the government established a Market Information

System (MIS) under the technical assistance programmes of USAID and it was further
improved under the UNDP project titled “Food information and marketing intelligence” with a
view to provide timely, reliable and accurate information to the market participants including
farmers to take informed decisions in their respective fields. Farmers need market information
to plan production and marketing that is what and when to plant, when and where to sell at
what price. Traders seek market information to plan their purchasing and storage
programmes; where to buy at what price, when to stocks and release them. Consumers also
get benefits from market information to bargain prices with traders at the time of purchasing.
 After 1995 Government has made special efforts to establish farmer organizations
and farmer companies under the Agrarian Service Act of 1995 and the Company Act of 1898.
The purpose of the programme is to develop strong market structure, which will work
efficiently and effectively under the new market environment. It is expected that farmer
organizations/companies would purchase and storage paddy, which enhance market
competition. However, this program was not successful as envisaged because leaders lack
skills to run the organization. Under this programmme there was no training on business
management.

Fig. 4.5: Food supply monitoring system

Another area that government made intervention was facilitating to establish farmer-trader
linkages by supporting forward sales contracts. The Central Bank of Sri Lanka initiated this
forward sales contract programme in 1998 in order to develop orderly marketing and to
reduce the price risk faced by both farmers and traders. In this programme, the farmer and
the trader often the rice miller make a sale agreement at the planting time whereby the farmer
agrees to sell the amount agreed at the predetermined price. The trader agrees to accept the
offer.

As shown in Table 4.11, this programme is highly successful. The number of

agreements increased from 188 in 1999 to 14250 in 2005. The value of the agreements
increased from Rs. 7.7 millions to Rs.745 millions during the period concerned. The major
reason for success was provision of subsidized credit to those who join this programme to
purchase paddy.

4.1.7 Market regulations

In order to regulate the marketing activities under the open economy the government
has imposed a series of regulations. The Consumer Protection Act No. 1 of 1979, the Food
Act of 1980, Consumer Credit Act No. 29 of 1982, the Sri Lanka Standards Institution Act No.
6 of 1984 and the Fair Trading Commission Act No. 1 of 1987 are the most important among
them. The Consumer Protection Act makes provision for the regulation of internal trade for the
protection of consumers and for establishment of fair trade practices. The Food Act was
promulgated to regulate and control the manufacture, importation, sale and distribution of
food, and to establish a Food Advisory Committee. Also, this Act deals with certain
prohibitions on manufacture, importation, sale and distribution of foods. The Consumer Credit
Act was enacted to define and regulate duties of parties to hire purchase agreement and to
provide for matters connected therewith. The Sri Lanka Standards Institution Act provides for
the establishment of the Sri Lanka Standards Institution. This Institute formulated standards
for rice as shown in Table 4.12. The Fair Trading Commission was established by Act No. 1
of 1987 for the control of monopolies, mergers and anticompetitive practices.

4.2 GROWTH PERFORMANCE OF AREA, YIELD, PRODUCTION

AND PRICE OF RICE

An analysis of past growth in area, yield, production and prices of any commodity is
useful in understanding the present scenario and to forecast the future. The quantification of
these aspects in different commodities is immediate need for formulating effective policies to
make prices stable and thereby safeguard the interest of the farmers as well as the
consumers (Dayakar Rao et al., 2003).

The performance of rice production and marketing was evaluated for the period 1960-
2004 (includes two sub-periods) using an exponential growth model. The estimated annual
compound growth rates of area, yield, production and prices are presented in Table 4.13.
Results of the exponential growth functions are detailed in Annex I –III. Most of the growth
functions except for area for the period II and real prices for the whole period were statistically
significant at one per cent.

Growth rate in area showed a 1.67 per cent increase per annum during the pre-
liberalized period (period I, 1960-1977). However, during the post-liberalized period (period II,
1978-2004) it was negative but statistically insignificant indicating that there was no growth in
area under rice after liberalization of the economy. Thus the growth rate in area for overall
period (1960 – 2004) was only 0.73 per cent per annum. In case of yield, growth rate during
period I was 1.69 per cent per annum and 1.21 per cent period II indicating a slow growth
during the latter period. Consequently, yield registered a higher growth rate of 1.84 per cent
per annum during the entire study period by passing the growth rate in area. Production
increased by 3.89 per cent annually during the first period as compared to 0.95 per cent
during the second period. The overall growth in production was 1.03 per cent per annum.
Table 4.11: Progress of the forward sales contracts programme on Rice

Year 1999 2000 2001 2002 2003 2004 2005

No. Agreements 188 1905 3855 6334 9850 13130 14270

No. of Farmers 188 1905 4600 8520 11247 13470 16200

Forward Price RS/kg 12 12/14 12/14 12/16 14/15 13/16 14/17

Quantity Mt 640 5639 13280 15796 20850 28367 31650

Value Rs. Million 7.7 68.7 161.7 198.3 412 563 745

Source: Central Bank of Sri Lanka

Table 4.12: Standards for rice (rough)

SN Characters /Grades Requirements

Special 1 2 3

1 Moisture % 14.0 14.0 14.0 14.0

2 Foreign matters % 0.2 0.5 1.0 1.5

3 Dis-coloration % 0 2.0 6.0 10.0

4 Damaged grains % 0 1.0 2.0 4.0

5 Broken grains % 10.0 20.0 35.0 45.0

6 No. Paddy grains per kg 0 10.0 30.0 50.0

Source: Sri Lanka Standards Institute

Table 4.13: Annual growth rate of area, yield, production, and price of rice, 1960-2004

SN Particulars Compound growth rate %

Period I Period II Overall
(1960-77) (1978-04) (1960-04)
1 Area (ha) 1.6733** -0.0921NS 0.7328**

2 Yield (Kg/ha) 1.6899** 1.2107** 1.8469**

3 Production (000’t) 3.88958** 0.9578** 1.0278**

4 Farm price (Rs/Kg) 8.1683** 8.2679** 9.1943**

(Nominal)
5 Retail price (Rs/Kg) 10.3062** 9.1440** 10.3570**
(Nominal)
6 Farm price (Rs/Kg) 3.5273** -2.6430** -0.3034NS
(Real)
NS
7 Retail price (Rs/Kg) 5.8851** -2.3057** 0.3268
(Real)
Note: ** Significant at one per cent NS – Not Significant

The annual compound growth rate of farm price in nominal terms was 8.17 per cent
during the pre-liberalized period, 8.27 during post-liberalized period and 9.19 per cent for the
whole period. Similarly, the increase in retail price registered 10.31 per cent, for the first
period, 9.14 per cent for the second period and 10.36 per cent for the whole period.
Nevertheless, the behaviour in real prices was different. Both farm and retail prices increased
by 3.53 and 5.89 per cent respectively per annum during the pre-liberalized period as against
to negative growth rate of 2.64 per cent in farm price and 2.31 per cent in retail price during
the post-liberalized period. As a result, real prices either at farm or retail level did not show
any significant growth for the period of 1960 – 2004.

Compound growth rates for cost and returns in nominal terms for 1979-2004 (post-
liberalized period) are presented in Table 4.14. Detail results of the estimated functions are
given in Annex IV. Regression coefficients of the all the functions are statically significant either
at one or five per cent level. Results reveal that labour cost increased at a higher rate (12.12%)
than that of other inputs during the post liberalized period. This has significant impact on
escalation of cost of rice production because labour cost itself attributes over 40 per cent of the
total cost. There is no database for pre-liberalized period to make comparison. Total cost of
production increased by 9.90 per cent and gross income by 8.79 per cent. Net income
increased by only 4.93 per cent. In this cost analysis, fixed cost and interest on capital were not
taken into account. The rate of increase in net income was well below the inflation rate, which
was above 12 per cent on average.

4.3 PRICE BEHAVIOUR OF RICE

Food prices play a key role in determining farmer income as well as standard of living of
the people in a country. In the long run, prices, incomes and profit are expected to allocate
farm and marketing resources efficiently. In the short run, these economic signals and
incentives motivate food producers and marketing firms to shift resources from low value to
high value products and markets. Therefore, food prices have been a subject of considerable
research. In this section, secular trend in prices, marketing margins and farmer’s share;
seasonal price variation; spatial price variation; relationship of open market producer price
with guaranteed price and relative price of rice (rough) (parity price) were examined.

4.3.1 Trends in price, marketing margins and farmer’s share

The trends in prices, marketing margins and farmer’s share were computed using a
linear regression analysis and results are presented in Table 4.15. All regression coefficients
are significant at one per cent level. Producer price increased by Rs.0.08/kg per year and the
Table 4.14: Growth rate analysis of cost and return in Polonnaruwa district (1979 – 2004)

SN Particulars Compound Growth rate %

**
1 Wage rate 13.16

2 Labour cost 12.12**

3 Material cost 10.64**

4 Machinery cost 11.51**

5 Total cost 10.76**

6 Gross income 8.79**

7 Net income 4.93*

Note: ** - Significant at 1 per cent level, * Significant at 5 per cent level

guaranteed price increased Rs.0.06 per year during the pre-liberalized period but the rate of
increase in both producer price and guaranteed price was much higher during the post-
liberalized period, Rs.0.50/kg and Rs.0.38/kg per year respectively. This is mainly due to
inflationary effect. Increase in retail price was higher than that of producer price during both
period, but rate of increase was higher in the post- liberalized period. A sharp increase in
marketing margin (Rs.0.47/kg) was observed during period – II as compared to Rs.0.05/kg
during period – I. On the contrary, farmer’s share decreased in both pre and post liberalized
period, which was 1.68 per cent in former period and 0.58 per cent in latter period.

4.3.2 Seasonality in prices

Variations in the prices of agricultural commodities are so violent affecting the overall
interests of farmers. These variations are mainly influenced by market forces, government
policy and season of production An understanding of the variations in the prices helps the
farmers in making crop production plans and the policy makers for formulating long term
planning on price adjustments. Within the year price variation is measured by constructing the
seasonal indices.

For computing seasonal indices, time series data relating to monthly price of rice
were subjected to the ratio-to-moving averages method. Twelve monthly centered moving
averages were used for the purpose. Since monthly data is available only 1971-1977 period
indices were computed taking seven year data for the pre-liberalized period. The post-
liberalized period was divided into four-sub periods taking seven years for each period. The
seasonal indices computed for producer and retail prices are presented in Table 4.16 and
4.17.

Seasonal price index of producer price of rice was below 100 in two periods in a year
before the economy was liberalized; March – May and the month of September (Table 4.16)
and (Figure 4.6). Arrival of major (Maha) season crop to market caused prices low during the
period March to May and the minor (Yala) season crop reached the market in September in
the year. Due to increased production in major season, index remained below 100 throughout
the period from March to September in the year after liberalization of the economy. The price
index ranged from 83.65 in April to 116.85 in December during pre-liberalized period and it
varied from 86.96 in April to 114.73 in January during post liberalized period. The April is the
peak arrival of rice to the market and December and January are two principal lean supply
moths. From February on wards major season crop reach the market. In the both periods, the
seasonal price indices were lowest during post-harvest season and highest during pre-
harvest season. There appears to be no change overtime in the pattern of seasonality.
Table 4.13: Annual growth rate of area, yield, production, and price of rice, 1960-2004

SN Particulars Compound growth rate %

Period I Period II Overall
(1960-77) (1978-04) (1960-04)
1 Area (ha) 1.6733** -0.0921NS 0.7328**

2 Yield (Kg/ha) 1.6899** 1.2107** 1.8469**

3 Production (000’t) 3.88958** 0.9578** 1.0278**

4 Farm price (Rs/Kg) 8.1683** 8.2679** 9.1943**

(Nominal)
5 Retail price (Rs/Kg) 10.3062** 9.1440** 10.3570**
(Nominal)
6 Farm price (Rs/Kg) 3.5273** -2.6430** -0.3034NS
(Real)
NS
7 Retail price (Rs/Kg) 5.8851** -2.3057** 0.3268
(Real)
Note: ** Significant at one per cent NS – Not Significant
Table 4:16: Seasonal price index of producer price of rice

Month Index Index Index Index Index

1971 – 1977 1978 - 1984 1985 – 1991 1992 - 1998 1998 - 2004
January 112.35 106.23 111.96 108.01 114.73

February 107.60 104.82 109.80 94.37 106.73

March 98.28 95.45 93.42 89.11 92.19

April 83.65 94.63 86.96 90.26 91.87

May 98.45 96.34 91.70 94.73 93.61

June 101.42 97.73 92.63 99.14 95.03

July 102.45 98.32 99.68 100.85 95.97

August 101.67 96.30 98.46 100.63 96.94

September 94.32 97.97 96.48 97.75 97.15

October 109.35 102.01 101.83 102.43 108.95

November 112.70 104.36 109.01 110.55 111.15

December 116.85 106.70 108.21 112.26 91.87

% increase 39.67 10.86 28.74 25.98 20.99

to the lowest
ASPV 33.12 11.99 25.14 22.99 18.99

Note : ASPV Coefficient of average seasonal price variation

 116
Value

113
110
107
104
101
98
95
92
89
86
83
80
1971-77

r
ry

r
y

ne
ch

r
ly
il

er
t

be
ay

be

be
us
ar

pr

Ju
ua

ob
Ju
ar

em
nu

em
ug

m
1978-84
br

ct
te
Ja

ov

ec
Fe

O
ep
1985-91

D
S 1992-98
M onth
1999-04

Fig. 4.6 Seasonal price index for produce price of rice

Table 4.17 :Seasonal price index of retail price of rice

Month Index Index Index Index Index

1971 - 1977 1978 - 1984 1985 – 1991 1992 - 1998 1998 - 2004
January 106.60 107.00 109.64 110.01 104.68

February 107.60 105.60 108.16 106.44 105.84

March 98.24 99.33 98.23 97.28 99.12

April 88.69 98.37 94.57 92.87 97.96

May 97.54 95.34 92.91 93.97 97.90

June 98.40 96.94 94.08 96.01 96.84

July 99.11 97.32 95.10 95.74 98.12

August 96.36 98.10 95.93 96.86 96.74

September 95.35 96.97 96.08 97.45 98.51

October 96.55 98.01 96.45 98.73 96.68

November 104.70 101.04 103.08 106.32 99.98

December 107.50 105.70 111.70 109.14 104.55

% increase 21.20 10.86 20.23 18.45 9.29

to the lowest
ASPV 19.17 10.31 18.37 16.84 8.88

Note : ASPV Coefficient of average seasonal price variation

 Last two rows of the Table show the magnitude of the seasonal variation. During the
pre-liberalized period, producer price increased to 39.67 per cent compared to the lowest
price index in the year. Similarly, the value of the coefficient of average seasonal price
variation was 33.12 in that period. Both values fluctuated during post-liberalized period but
never reached to such values realized in pre-liberalized period. This implies that seasonal
price variation has declined during the post- liberalized period as compared to pre-
liberalization period. The results also indicate that a sharp drop in seasonal variation during
early period of liberalization and again increased since the mid 1980s till end of 1990s then
dropped once again.

As shown in Table 4.17 and Figure 4.7, retail price of rice remained low during the
period from March to October in the year during both pre and post liberalized period as
indicated by low index values, which were below 100. The lowest price was observed in April
during pre-liberalized period and it was either April or May in post-liberalized period. The low
price period in retails market was similar to that of producer market. Prices remained high
during December to February in two periods. As with producer prices, the seasonal variation
was low during the post-liberalized period as evidenced by low value of price increase over
the lowest price as well as coefficient of average seasonal price variation. A comparison of
two Tables revealed that degree of seasonal fluctuation was higher in farm market than that
of retail market.

4.3.3. Spatial movement in prices

The analysis of the movements in prices in the corresponding markets would help in
ascertaining as what extent the marketing system is efficient in the country. The situation
where prices of a commodity in spatially separated markets move together and price signals
and information are transmitted smoothly across the markets refers to spatial market
integration. Spatial movement or market integration in monthly wholesale prices of rice in
selected markets during the period 1996 -2004 was examined by using three different
approaches; zero-order correlation technique, Ravallian market integration model and
Koyck’s distributed lag model. There is no data series to test the special price variation for
pre-liberalized period. Nevertheless, the degree to which markets are spatially efficient has
important implications for market liberalization and other policy reform (Thompson et al.,
2002).
Table 4.18 shows values of correlation coefficients between selected wholesale
markets in Sri Lanka. There was a strong integration between the selected markets as
evidenced by high values of correlation coefficients which were above 0.93 for all cases and
statically significant at one per cent level. This implies that major wholesale rice markets were
well integrated in Sri Lanka during the post liberalized period.

Ravallion (1986) argued that there exists a group of local (rural) markets and a single
central (urban) market in which the central market dominates the local price formation. He
developed a model to quantify the degree of influence made by the central market on local
markets in price determination. In this study Ravallion’s market integration model was applied
to test how far Colombo market, biggest and oldest market in the country, affects the price
determination of other major rice wholesale markets in the country. In the Ravallion’s model
as described in Table 4.19, βi0 measures the extent to which local price at a given time is
influenced by the change in central market price during the same time period. The term (χi – 1)
measures the extent to which last period’s spatial price differential in the central market is
reflected in this period’s local market price changes. The general level of prices in the central
market may provoke price changes in the local markets, which is reflected by βi1.

All values of βi0 are statically significant at one percent level indicating that selected
local markets are integrated with the central markets. In the first function, where integration
between Gampaha and Colombo markets were analyzed, β i0 = 0.860 implies that one rupee
change in the Colombo market price between current and last month brought about changes
in price in Gampaha market by Rs.0.86 during the same time period. Similarly, price changes
in other local markets studied influenced by price changes in Colombo market with the same
direction and price changes in the Colombo market reflected by over 85 per cent in Kandy
and Polonnaruwa markets and 67 per cent in Kurunegala market. When (χi – 1) = - 0.549, it
 112

109

106

103
Value

100

97

94

91

88
1971-77

r
er
y

ne
ry

ly
ri l

ay

st

be

be

be
ar

Ju

gu
ua

Ap

ob
M

Ju
ar

em

em

em
nu

1978-84
M

Au
br

ct
Ja

pt

ov

ec
O
Fe

Se

D
1985-91
Month 1992-98
1999-04

Fig. 4.7: Seasonal price index for retail price of rice

Table 4.18: Zero-order Correlation matrix between average monthly wholesale prices in
selected markets of Sri Lanka (1996-2004)

Long grain parboiled rice

Markets Colombo Gampaha Krunegala Kandy Polonnaruwa

Colombo 1.000 0.988** 0.971** 0.983** 0.948**

Gampaha 1.00 0.969** 0.987** 0.951**

Kurunegala 1.000 0.953** 0.933**

Kandy 1.000 0.943**

Polonnaruwa 1.000

Note: ** - Significant at one per cent

Table 4.19: Results of the Ravallion market integration model for selected Rice wholesale
markets

SN αi – 1 t value βi0 t- value αI + βi0 + βi1 t- value R2 IMC

** ** **
1 - 0.549 5.973 0.860 23.538 - 0.076 4.299 0.84 0.13
** ** *
2 - 0.472 6.335 0.675 13.653 - 0.040 2.127 0.69 0.08

3 - 0.457 4.868** 0.852 19.037** - 0.027 1.536NS 0.78 0.05

4 - 0.427 5.179** 0.856 13.305** - 0.099 3.532** 0.68 0.23

Note: ** Significant at 1 percent, * Significant at 5 percent,

Reference markets: 1 – Gampaha, 2 – Kurunegala, 3 – Kandy ,
4 –Polonnaruwa

Central market: Colombo

explains that if Colombo market price is more than Gampaha market price during the last
month, it will increase the difference in price in Gampaha market by Rs.0.55 whereas it
Gampaha market price is more than Colombo market price during last month the difference
will decrease Rs 0.57. The degree of integration does not link with the physical distance
between the central market and local markets because Kurunegala market is closer to
Colombo than that of Kandy or Polonnnaruwa.

The index of Market Connection (IMC) was found to be less than one for all the
markets studied reflecting a high degree of short run market integration. This confirms that
Colombo market prices had influence in pricing in all the selected markets; Gampaha,
Kurunegal, Kandy and Polonnaruwa markets.

The Koyck’s distributed lag model has ability to test both short and long run market
2
integration. As shown results of the distributed lag model in Table 4.8, R value ranged from
90.9 to 97.6 for different functions indicating high goodness of fit of the estimated models.
Durbin Watson ‘d’ statistics estimated was between 1.5 and 2.0 confirming that there is no
problem of autocorrelation in the estimated models.

Short run adjustment coefficients (βi) significant at one per cent level indicating short
run integration between the Colombo market and selected other markets, Gampaha,
Kurunegala, Kandy and Polonnaruwa. The value of βI ranged from Rs.0.59 to Rs.0.82 for
different markets under studied. For instance, one rupee change in the Colombo market
resulted in change in Rs.0.82 in Gampaha market. Over 80 percent of the price change in the
Colombo market passed to the other selected wholesale markets in the long run. The number
of days required to change 90 per cent of long run price adjustments varied from 14 – 22 days
for selected markets.

4.3.3 Variability in prices and marketing margins

An attempt was made to study the variations in prices and marketing margins during
pre and post liberalized periods by computing coefficient of variation. Table 4.21 presents the
values of the coefficient of variation around the mean (VI) and around the trend (V2). Both
values are higher during pre-liberalized period than that of post liberalized period except for
gross marketing margin. It is further evidence from the Table that difference is much higher
for CV2, which is more appropriate than CV1 for time series analysis.

The results indicated that instability is higher in pre-liberalized period than post-
liberalized period. Price variation is considerably high as indicated by the values of V2. The
computed value of V2 for the period- I is 32.65 per cent for producer price and 41.62 per cent
for retail price as compared to 14.18 and 13.60 per cent respectively for period- II. Also,
annual variation in retail prices were higher than that of producer price rice in pre-liberalized
period and there is no much difference between two markets after liberalization However, the
value of CV2 for gross marketing margin was 11.66 per cent for period -I and 19.00 per cent
for period – II showing higher instability in gross marketing margins after liberalization. It
confirms argument about the uncertainty in rice trading due to ad hoc government policy.

An attempt was also made to compare price variability in producer, wholesale and
retail prices within a year during post-liberalized period. Results are presented in Table 4.22.
The same cannot be done for the pre-liberalized period due to absence of data. Results
clearly indicate that retail market was more stable than wholesale and farm markets. It further
shows more stability of retail prices after 2000 as evident by 6 percent of value of co-efficient
of variation.
Table 4.20: Distributed lag results of integration of rice wholelesale markets
2
SN Reference α β t- value λ t- value R DW SR LR N
Market
1 Gampaha 170.57 0.821 6.999** 0.054 1.170ns 0.98 1.821 0.821 0.868 13.82

2 Kurunegala 41.805 0.594 14.039** 0.356 7.630** 0.96 1.572 0.594 0.922 22.20

3 Kandy 49.716 0.794 16.748** 0.155 2.948** 0.97 1.673 0.794 0.940 20.17
** **
4 Polonnaruwa 175.219 0.609 11.788 0.242 3.844 0.91 1.961 0.609 0.803 16.78

Note: Central market – Colombo

** Significant at 1 per cent , NS – Not significant
SR – Short run adjustments
LR – Long run adjustments
N – Number of days taken to realize 90 per cent long run adjustments
 Table 4.21:Coefficient of variation of prices and marketing margins of rice

SN Particulars Period I (1960 – 77) Period II (1978 – 04)

CV1 CV2 CV1 CV2
1 Producer price 56.9318 32.6552 46.9595 14.1828

2 Retail price 69.5652 41.6214 60.8199 13.5999

3 Farmer’s share 14.2133 9.8370 10.4693 8.0216

4 Gross marketing 151.0895 11.6641 70.2597 19.9960

margin
Note: CV1 = SD/Mean * 100, CV2 = CV1 * √ 1- R2

Table 4.22: Coefficient of Variation of rice prices, 1991-2004

Year Farm Wholesale Retail Year Farm Wholesale Retail

Market Market Market Market Market Market
1991 15.17 11.30 9.14 1998 10.51 10.02 10.54
1992 10.84 8.16 6.27 1999 5.91 5.91 4.72
1993 10.27 10.40 7.60 2000 13.62 11.35 7.76
1994 7.80 9.82 7.73 2001 8.81 9.15 5.85
1995 7.45 8.54 6.31 2002 11.20 8.73 6.69
1996 15.08 10.50 9.28 2003 9.86 8.92 5.71
1997 14.38 14.56 11.23 2004 11.17 7.57 6.60

Table 4.23: Relationship of paddy prices with rice prices and guaranteed prices of paddy

SN Description Regression line R2 F

PMP = a + bRMP + cGPP
** **
1 Period I PMP = - 0.033 + 0.197RMP + 0.705GPP 0.98 377.284
(1960 – 1977)
** NS
2 Period II PMP = 0.189 + 0.411RMP + 0.075GPP 0.98 374.300
(1978 – 2004)
3 Period III PMP = 0.128 + 0.390RMP** + 0.148GPPNS 0.99 2303.310
(1960 – 2004)
Note: PMP = Paddy market price, RMP = rice market price, GPP = Guaranteed price of
paddy
** Significant at one per cent level, NS-Non-significant
4.3.4 Relationship open market producer price with guaranteed price and
retail rice price

Table 4.23 depicts the regression equations computed to study the relationship
between producer price of rice and guaranteed price as well as open market rice price. It
shows a very high R2 with over 97 percent showing that variation in producer prices in pre and
post liberalized periods was well explained by guaranteed price and open market rice price.
Both regression coefficients in equation one relating to the pre-liberalized period is statistically
significant at one per cent level where as only regression coefficient of rice price was
significant in post-liberalized period and overall period. Results showed that both guaranteed
price and rice price influenced in determining producer price in pre-liberalized period but only
rice price had impact on producer price during post-liberalized period and overall period.

The magnitude of the regression coefficients in the equation one shows that during
the pre-liberalized period one rupee change in retail price of rice resulted in change in
producer price by cents 19 per kg. Similarly, one rupee change in guaranteed price led to
increase in open market producer price by cents 71 per kg. During the post-liberalized period,
a rupee change in rice prices caused an increase of cents 41 per kg of producer price. As
expected producer price had positive relationship with the guaranteed price of rice and open
market rice price. During the post-liberalization period, the rate of increase in producer price
in comparison to retail price of rice is higher than that of pre-liberalized period. In this contest,
stabilization of rice prices towards low level in the retail market hampers the producers
lowering their prices.

4.3.5 Price parity

It is argued that prices of producer price of rice have not increased commensurate
with the level of rise in prices of input and other commodities and this has resulted in fall in
profitability and terms of trade. Therefore parity of rice prices was studied by using the
concept of Output-Input price parity. In this connection, ratios of producer price of rice to price
of selected inputs and consumer products were worked out. Wage of labour and price of
fertilizer were taken into account because expenditure on these two inputs is relatively high in
the total cost of cultivation. Similarly, soap, milk powder and Kerosene oil, which are used
daily and entirely depend on the market, were selected as consumer goods.

As shown Table 4.24 during the pre-liberalized period parity ratios had increased but it
has continuously declined during post-liberalized period. The significant fall in parity ratios of
rice was due to the rise in input and commodity prices at much higher rates than producer price
of rice as a result of reduction or removal of government intervention in input and output market
under the structural adjustment program. The declined parity ratios during the post- liberalized
period eroded the profitability in growing of rice in one hand and reduced the purchasing power
of the rice farmers on the other hand. The end result is declining rice farmer’s well being over
time.

4.3.6 Farmer’s share of the consumer rupee

It was earlier observed that farmer’ share has declined in both pre and post-
liberalized period which was based on the trend analysis. In this section relationship of
farmer’s share with price movements is examined by analyzing monthly-wise price spread
during the period 2000-2004. Farmer’s share often decline in harvest time and increase in off-
season. This phenomenon clearly confirms in Table 4.25. Farmer’s share lowered during the
period of February to March, which coincides with the harvesting of the major season crop.
Again farmer’ share declined either August or September in the year with the arrival of minor
season crop.

On average, farmer’s share was lowest in March (58.89%) with the peak harvesting
of Major season crop and the highest in November (70.60%) and little lowered in December
and January due to arrival of imports. During the harvest time buyer’s market often develops
due to large arrivals because many farmers sell their supplies to meet immediate cash
Table 4.24: Parity ratios of rice (rough)

Price Ratio 1962 1972 1982 1992 2002 2004

a) With inputs
Fertilizer 1.65 1.78 1.37 .0.70 0.68 .64

Labour 1.45 1.53 0.80 0.69 0.45 .0.43

b) With consumer goods

Soap 1.23 1.58 1.36 1.15 0.90 0.84

Milk powder 1.43 1.68 1.06 0.65 0.46 0.38

Kerosene oil 1.46 1.13 0.81 0.89 0.66 0.57

Table 4.25: Farmer’s share of the consumer price of Nadu rice

Percentage
Month 2000 2001 2002 2003 2004 Average

January 63.00 71.36 76.91 64.10 72.07 69.47

February 58.14 72.36 72.66 58.27 66.44 65.57
March 52.00 59.25 60.77 60.26 62.16 58.89
April 53.57 57.26 63.39 61.71 64.39 60.06
May 54.29 61.23 64.50 62.07 64.63 61.34
June 54.39 64.45 64.91 61.63 65.94 62.26
July 57.28 71.82 61.97 60.96 69.48 64.30
August 62.96 70.99 64.93 58.94 68.49 65.26
September 60.87 62.40 61.56 60.73 69.38 62.98
October 65.32 66.77 64.66 62.45 69.04 65.65
November 72.92 70.91 65.80 68.92 74.44 70.60
December 66.74 67.46 71.00 67.51 70.63 68.68
Average 60.33 66.48 66.34 62.57 68.24 64.79
requirements. Imported rice often did not arrive timely and adequately and hence
stockholders control the market during the lean supply months.

4.4 EXPORT COMPETITIVENESS OF RICE

Sri Lanka is now self-sufficiency in rice and imports limit to meet a shortage occurring
when domestic production falls due to bad weather. Now discussion is going on to export rice.
In this study an attempt was made to look into this aspect. To study competitiveness of rice
the national Protection Coefficient (NPC) was estimated under importable hypothesis for the
year 2005. The NPC is the ratio between a commodity’s domestic price and its border price.
In this study competitiveness of parboiled and raw rice varieties was worked out and details
are given in Table 4.26. The values of NPC were grater than unity (1.15) for parboiled rice
and (1.12) for raw rice indicating non-competitiveness of rice export form Sri Lanka. The NPC
above unity also implies that domestic prices received by farmers were above the
international prices and rice farmers were protected to some extent in the free trade situation.
On the other hand, the price paid by the Sri Lankan consumers for rice was 15 percent and
12 per cent higher than what they would pay for parboiled and raw rice respectively in the
absence of trade protection.

4.5 RESOURCE USE EFFICIENCY IN RICE FARMING

The main objective of any production unit is the better co-ordination and utilization of
various scare resources to realize greater returns. In this section, an attempt was made to
analyze the productivity of the various resources in the production of rice and to examine
allocative and technical efficiency in resource use. The analysis was done separately for three
selected districts since the relationship between the factors of production and the production
varies under different production environments.

4.5.1 Resource use productivity

For this purpose, the popularly used Cobb-Douglas (CD) production function was
fitted for the farmers’ data by taking production as dependent variable and varies production
inputs viz., land, labour, seeds, fertilizer and plant protection chemicals as independent
variables. The CD production function was estimated by using least square method after
converting into liner form through log transformation. The production parameters of the
estimated CD production function are presented in Table 4.27. A perusal of this Table reveals
that value of the coefficient of multiple determination (R2) was more than 0.80 for all the
estimated production functions indicating that the included variables explained more than 80
per cent of variation in rice production. The parameters of CD production function directly
measured the elasticity of the respective input. It can be seen from the Table that regression
coefficients are less than unity for all the inputs for all locations. This implies that each input
was depicting diminishing marginal productivity.

Parameters of the CD production function for Polonnaruwa district were found to be

positive and significant for land and seeds. This implies that increase in these two inputs results
in increase in production. The coefficients of labour, fertilizer and plant protection chemicals
were negative but all these coefficients were statistically non-significant. It indicates that
increasing these inputs has no impact on production. The production elasticity of seeds and
plant protection chemicals estimated for the Kurunegala district exerted positive and statistically
significant. This implies that seeds and plant protection chemicals are underutilized. The
elasticity of production with respect to fertilizer was positive but insignificant. The negative
elasticity of production in relation to land and labour was observed but statically insignificant.
Results of the CD production function estimated for the Kalutara district for rain-fed rice reveals
that only elasticity of production of seeds was positive and statically significant, indicating over
use of all other resources concerned. When both Polonnaruwa and Kurunegala districts were
taken into together, elasticity of production for fertilizer was positive as against to disaggregate
results.
Table 4.26 : Nominal protection coefficient of Sri Lankan rice, 2005

SN Particulars Unit Parboiled rice Raw rice

Value per Mt. Value per Mt.
1 FOB price U$ 215.00* 205.00**

2 Freight charges U$ 20.00 20.00

3 Insurance (0.1% of CNF) U$ 0.24 0.23

4 CIF price (1+2+3) at Colombo port U$ 235.24 225.23

5 Exchange rate 1U$=RS 102 102

6 Equals CIF price RS 23994.48 22973.46

7 Port clearance charges RS. 3068.15 3068.15

8 Lading cost at Colombo (6+7) RS 27062.63 26041.61

port
9 Operating cost and profit RS 1142.92 1101.28

10 Price of imported rice at Colombo RS 28205.55 27142.89

wholesale market (8+9)
11 Price of domestically produced rice RS 32500.00 30500.00
at Colombo wholesale market
12 NPC (11/10) 1.15 1.12

Note: * India, ** Pakistan

Table 4.27: Production function estimates in rice in selected districts of Sri Lanka

SN Explanatory Variables Parameters Regression co-efficients

Polonnaruwa Kurunegala Kalutara Polonnaruva &

Kurunegala
1. Intercept
B0 3.0123 0.0561 1.3423 2.7690
2. Land (acre)
* NS NS **
B1 0.7051 - 0.2301 - 0.00008 0.7941
3. Human Labour
NS NS NS NS
(Mandays) B2 - 0.0984 - 0.1480 0.4071 -0.0167
4. Seeds (Kg)
B3 0.3530* 0.5651 0.7502** 0.0596NS
5. Fertilizers (Kg)
NS NS NS *
B4 - 0.0168 0.0307 0.0029 0.1890
6. P.P Chemicals
NS ** NS NS
(Rs.) B5 - 0.0113 0.7350 0.0043 0.0085
7. Co-efficient of Multiple
Determination R2 0.87 0.91 0.81 0.83
8. Calculated F. Value
F 60.0634** 93.7541** 6.8582** 96.1142**
9. Return to Scale n=5
Σ Bi 0.9315 0.9527 1.1643 1.0344
i=1

Note: ** - Significant at 1 per cent level

* - Significant at 5 per cent level
NS – Not significan
 The sum of coefficients (elasticities) in CD production function indicates returns to
scale as presented in Table 4.27. In the present analysis returns to scale varied from 0.93 to
1.16. Student’s ‘t’ test was applied to determine whether these values significantly deviated
from unity. It was observed that all the cases they significantly varied from unity except for the
case of aggregation of Polonnaruwa and Kurunegala districts, where it was found to be 1.03
and not significantly different from unity. The decreasing return to scale was noticed in rice
cultivation for Polonnaruwa and Kurunegala where Σbi values were less than one. This
implies that all the resources concerned increase by one percent the production would
increase less than one percent. However, for Kalutara district, increasing return to scale was
observed, as Σbi is grater than one.

4.5.2 Technical efficiency in rice farming

The frontier production function was used to study the technical efficiency in rice
cultivation both in terms of physical output and organization of resources. The frontier function
was estimated in CD production function setting using the method of corrected ordinary least
squares.

The technical efficiency of production was measured in terms of the physical

maximum attainable output by each farmer based on the Timer method of technical efficiency.
This analysis was carried out to know the level of technical efficiency of farmers operating
with the given level of resources and available technology for rice cultivation. The distribution
of farmers according to different technical efficiency ratings along with mean technical
efficiency is presented in Table 4.28. The average technical efficiency was 0.87, 0.83 and
0.51 for Polonnaruwa, Kurunegala and Kalutare district. This implies that farmers in
Polonnaruwa district can increase their production by 13 per cent without incurring additional
cost and by adopting the best farmers practice. Similarly farmers in Kurunegala and Kalutara
can increase their production by 17 per cent and 49 percent respectively without adding
additional costs. Although the mean technical efficiency is low for Kalutara district, around 20
percent farmers achieved the high level of technical efficiency as compared to 6 per cent for
Kurunegala and 1 per cent for Polonnaruwa.

4.5.3 Allocative efficiency in rice farming

The resource use efficiency analysis assumes grater importance in ascertaining whether
production at the farm level and in turn of the region could be increased profitability to an optimum
level by making relocation of existing resource use pattern. The direct estimates of production
function were used to test the efficiency of different production inputs. In order to examine the
allocative efficiency of inputs, marginal physical productivity (MPP), marginal value product (MVP)
and profitability ratio of marginal value productivity to marginal factor cost (MVP/MFC) were
calculated at the geometric means levels of various resources. The marginal factor/opportunity
cost (MFC/OC) of labour, seeds and fertilizer was actual unit cost at the prevailing rate in the
study area while that of land was imputed taking the rental value of the land. Since the plant
protection chemicals were measured in monitory terms, the opportunity cost was unity.

The MVP and MFC ratios for different resources are furnished in Table 4.29. Detailed
computation is presented in Annex V – VIII. The MVP-MFC ratios for Polonnaruwa district
were grater than one only for land and seeds indicating that there is scope for increase in use
of land in the short run keeping the use of other resources at a constant level. The same is
true for seeds. The MVP-MFC ratios further reveled that farmers in Polonnaruwa district
would increase the profit by reducing the labour, fertilizer and expenditure on plant protection
chemicals as the MVP-MFC ratio for these resources turned out to be negative. The
examination of ratios of MVP to MFC for Kurunegala district indicated that the profit in rice
cultivation could be optimized by using more quantities of seeds and increasing expenditure
made on plant protection chemicals and by reducing labour, land and fertilizer. In case of
Kalutare district, only MVP-MFC ratio of seeds is positive and grater than one. This implies
that farmers in Kalutare could maximize their profits in rain-fed rice farming by increasing the
quantity of seeds and by reducing all other inputs concerned in this study.
Table 4.28: Technical efficiency rating of rice farming

SN Efficiency Polonnaruwa Kurunegala Kalutara

Level
1 High 1 3 11
(1.96) (6.00) (20.75)
2 Medium 44 48 34
(86.27) (76.00) (64.15)
3 Low 6 9 8
(11.77) (18.00) (15.10)
4 Total 51 50 53
(100) (100) (100)
5 Mean 0.87 0.83 0.51

Note: Figures are in the parentheses are percentages to the total

Table 4.29: Ratio of MVP to MFC under different inputs in rice farming

SN Particulars Polonnaruwa Kurunegala Kalutara Polonnaruwa &

Kurunegala
1 Land (acre) 3.08 - 0.90 - 0.00 3.38

2 Labour (Mandays) - 0.37 - 0.36 0.93 - 0.05

3 Seeds (Kg) 13.13 15.24 13.50 8.93

4 Fertilizer (Kg) - 0.28 0.29 0.03 2.31

5 P. P. Chemicals (Rs) 0.44 9.17 0.66 0.20

Note: Polonnaruwa & Kurunegala – Irrigated rice, Kalutara – Rain-fed rice

 As a whole Polonnaruwa and Kurunegala districts, allocative analysis showed that
increasing use of land, seed and fertilizer can increases profitability as indicated by grater
than unity of MVP/MFC. Increasing use of labor and plant protection chemical reduced the
productivity because rupee spend earns less than rupee as return. MVP/MFC ratios for these
two inputs were less than unity.

4.6 COMPETITIVE PROFITABILITY OF RICE WITH COMPETING

CROPS

Competitive profitability of rice against competing crops, namely maize, chillie,

soybeans, banana and leafy-vegetable were analyzed through simple budgeting technique. In
this exercise the benefit-cost (B-C) ratios were worked out for rice and selected competitive
crops for each selected district. . Profitability analysis for rice during the Yala season 2005 is
presented in Table 4.30. In this exercise, total costs are grouped into two; variable cost and
fixed cost. Many cost of production surveys including a regular survey of the Department of
Agriculture do not consider the fixed costs. In order to examine the economic cost of
cultivation all the cost items were taken into account in the present study.

Per acre total cost of production of rice varied from Rs.29,288 in Anuradahapura to
Rs.36,919 in Polonnaruwa district under irrigation. It was Rs25,640 for Kalutara district under
rain-fed. Cost of production of rice in Polonnaruwa was high due to high cost of labour and
fertilizer. In Plonnaruwa district, cultivation commences at the same time in many areas
causing high demand for hired labour. Consequently, many labourers are migrants from
distant districts such as Kegall and Kandy because neighboring districts are major rice
growing districts. Of the total cost, variable cost accounted for over 75 per cent in all the
districts studied. Among the variable costs, the lion’s share was attributed to human labour,
which accounted for over 40 per cent of the variable cost for all the cases. Cost incurred on
machine power ranked the second highest in the total variable cost. Rental value of land
formed the major component of the total cost of cultivation among fixed costs.

Total gross return per acre rice cultivation ranged from Rs.27,131 in Polonnnaruwa to
30,800 Walawe for irrigated paddy while it was Rs. 13512 in Kalutara for rain-fed rice. Return,
from rain-fed rice was considerably low due to low yield, which was Rs.1126 kg per acre as
against to 2267 kg in Mahaweli. The B-C ratio was less than one for all the districts studied
indicating unprofitable situation. In case of Polonnaruwa and Kalutara, return does not cover
even the variable cost.

Results of the profitability analysis of competing crops studied are presented in Table
4.31 for the Yala season 2005. Since bnnana is a perennial crop discounted cost and return
were computed as shown in Annex IX. As shown in the last row in the Table, the B-C ratios
are over unity for all the crops concerned ranging from Rs.1.29 for maize to 2.38 for melon.
Cultivation of horticultural crops was found to be highly profitable though cost of cultivation
was substantially high as compared to rice. As with rice, labour cost was the highest among
the cost items. Nevertheless, family labour is widely used in cultivation of non-rice crops. Per
rupee average return was Rs. 2.33 in cultivation of leafy-vegetable in rice land in Kalutara
district instead of Rs.0.53 of rice cultivation. Figure 4.8 shows the district wise comparison of
B-C ratios of rice and competitive crops.

As could be seen from the Table cultivation of competing crops with rice requires big
capital investment especially horticultural crops, which give the high return. For example in
cultivation of melon in rice land in Mahaweli area, farmers incurred a total cost of Rs.72973
per acre instead of Rs.33001 for rice farming, more than twice. Similarly, the cost of
cultivation of leaf-vegetables in Klutara district amounted to Rs.2,26,696 as compared to
Rs.25,640 for rice cultivation.
Table 4.30: Cost and return of rice farming during Yala season in 2005

SN Particulars Value in Rupees per Acre

A’pura P’naruwa M’weli K’gala Walawe Kalutara
A. Variable cost
1 Labour 10050 15000 13000 11275 11100 10850

2 Seed 1125 1204 1500 1170 1800 1333

3 Fertilizers 3909 5000 4202 3578 3864 3307

4 PPC 1316 2100 1000 2025 2453 900

5 Machine power 5800 5850 4400 4832 6360 4800

*
6 Interest on WC 1200 1413 1068 1125 1246 734

7 Others 300 250 400 180 200 250

8 Subtotal 23700 30817 25570 24185 27023 22174

B. Fixed cost
9 Rent on Land 5000 5500 6800 7000 8000 3300

10 Land revenue 50 50 50 50 50 50

12 Interest on FC** 48 42 51 54 65 36

13 Depreciation 490 510 530 510 523 80

14 Sub total 5588 6102 7431 7614 8638 3466

15 Total cost (A+B) 29288 36919 33001 31799 35661 25640

16 Average yield (Kg) 2195 2087 2267 2148 2200 1126

17 Producer price 13.00 13.00 12.00 13.50 14.00 12.00
(Rs/Kg)
18 Gross revenue 28535 27131 27204 28998 30800 13512

19 B–C ratio (18/15) 0.97 0.73 0.82 0.91 0.86 0.52

Note: * - 12% per annum & **- 18% per annum

 2.5 Melon Leafy vegetable

2 Banana

Chilli
1.5
B-C Ratio

Maize Soya Bean B-C ratio

B-c ratio
Rice Rice
1 Rice Rice
Rice

Rice
0.5

0
A’pura P’naruwa M’weli K’gala Walawe Kalutara
Districts

Fig. 4.8: B-C ratio of rice and competitive crops

Table 4.31: Cost and return of cultivation of competing crops with rice in 2005

SN Particulars Value in Rupees per Acre

Maize Chilli Melon Soya Banana* Leafveg.
District A’pura P’naruwa M’weli K’gala Walawe Kalutara
A.Variable cost
1 Labour 12300 70700 38400 14100 43242 175000

2 Seed 880 1287 500 1000 6600 14322

3 Fertilizers 1392 11480 14480 900 49361 9034

4 PPC 1223 13215 5000 2360 4294 8215

5 Machine power 1800 4800 4000 2500 4000 4500

6 Interest on 424 3762 2273 765 19701 8044

**
Working capital
7 Others 150 800 350 250 1148 1800

8 Subtotal 18169 106544 64503 21875 128316 220915

B. Fixed cost
9 Rent on Land 5000 6000 7000 6000 42000 5000

10 Land revenue 50 50 50 50 132 50

12 Interest on FC*** 462 486 695 705 1081 80

13 Depreciation 568 612 725 705 1842 652

14 Sub total 6080 7148 8470 7160 45055 5782

15 Total cost (A+B) 24249 113692 72973 29035 173371 226697

16 Average yield (Kg) 1843 2600g 21712 950 23103 175900
838d
17 Producer price 17.00 30.00g 8.00 40.00 15.00 3.00
d
(Rs/Kg) 110.00
g
18 Gross revenue 31331 78000 173696 38000 331094 527700
d
92180
19 B–C ratio (18/15) 1.29 1.50 2.38 1.31 1.91 2.33
Note: * Discounted costs and returns at 15 per cent, crop duration is three years.
** - 12% per annum & ***- 18% per annum,
g – Green chillie, d – Dried chillie
4.7 IMPACT ON CROP DIVERSIFICATION ON AGRARIAN
ECONOMY

Historically, in Sri Lanka four phases are distinctly important for crop diversification
activities in rice fields. In the 1960s, cultivation of other field crops (OFCs) was introduced in
rice fields for the first time in the Elahera irrigation scheme. However, this was not successful
due to the lack of understanding of complexities of the system. In the mid 1970s under the
International Development Research Center (IDRC) Cropping System Project an attempt was
made to increase the productivity of rice lands under minor tanks in the dry zone through the
effective use of rainfall using early maturing rice varieties and cultivation of less-water
demanding OFCs, thus increasing the cropping intensity from 100 to 250 percent. In mid 1980
a massive crop diversification program was lunched in the rice fields of Mahaweli H during
Yala season and early 1990s in Walawe area with banana. Over 3000 hectares of rice fields
are now occupied with banana. Since the late 1990s crop diversification in rice fields in the
wet zone started without supports from the government due to non-profitability of growing
rice. Impact of crop diversification on farm income and rural employment is described in this
section.

4.7.1 Impact on household income

Table 4.32 presents gross and net income of rice and selected competing crops in
Yala season in 2005. It can be seen from this Table that both gross and net income is the
lowest for rice compared to other crops; even maize and soybeans had higher incomes than
rice. Leafy vegetable grown in wet zone where rice had negative net return had the highest
return of Rs.351800 per acre.

A study done by the University of Rajarata in 2003 in Mahaweli H area was found
similar results as shown in Table 4.33. In this study income was analyzed under three cost
categories: including family labour and fixed inputs, excluding family labour and fixed costs.
Results indicated negative returns from rice when family and fixed inputs were included to the
total cost. Even fixed cost was excluded rice had negative return indicating income did not
compensate the variable costs. When family labour was not included to the total cost positive
return was found but low compared to the other crops. As shown in Table 4.33 horticultural
crops had higher return than that of others.

4.7.2 Impact on employment

Crop diversification in rice field has big impact on employment generation as shown
in Table 4.34. Labour requirement for rice cultivation was 38 man days per acre whereas it
was 500 man days for leafy-vegetable, 202 man days for chillie and 128 man days for melon.
The last column of this table shows that family labour use in competing crops is higher than
that of rice. Though rice is relatively less labour intensive, hired labour usage is higher than
that of competing crops because of unequally distribution of labour use. Bulk of the labour
requires for land preparation and harvesting. Development of non-rice crops provides job
opportunities for female because female labour is widely used in activities such as crop raring
and harvesting.

Since the labour has the highest factor share, household income could be increased
substantially by promoting non-rice crop in the rice field. This has severe impact on reduction
of poverty in the rural economy. In Sri Lanka, rural poverty is severe. Around 90 per cent of
the poor are living in rural areas and majority of them engage in agriculture.

As shown in Table 4.35, this result is consistence with the previous study done by the
University of Rajarata during Yala season 2003 in Mahaweli H where crop diversification
takes place in larger scale in rice fields. Horticultural crops are highly labour incentives and
family labour is largely occupied. For instance labour requirement for cultivation of capsicum
and bitter gourd was found to be 229 and 161 man-days per acre per season respectively.
Table 4.32 : Income from rice and competing crops during Yala season in 2005

SN Crop Gross Income, Rs/acre Net Income Rs/acre

1 Rice 28533 4800
2 Maize 31331 7082
3 Chillie 170180 56488
4 Melon 173696 100723
5 Soybeans 38000 8965
6 Leafy vegetable 263850 175900

Table 4.33: Per acre net income from rice and competing crops grown in Mahaweli H area
during yala season in 2003

SN Crop Including family Excluding family Excluding Fixed

labour & fixed inputs labour cost
1 Rice - 2868 2515 - 1028
2 Chillie 136016 172951 140443
3 Maize 13517 23303 19169
4 Capsicum 10152 100721 15582
5 Bitter gourd 24563 63899 37863
6 Big Onions 1878 30887 7637
7 Soybeans 218 7649 3676
8 Luffa 11913 40722 16349
*
9 Banana 34186 78379 43253
10 Papaya* 150080 234948 203602
* - First year of the crop
Source: An assessment of profitability in production of selected crops in the system
of Mahaweli, 2003

Table 4.34: Labour use in cultivation of rice and competing crops during Yala season, 2005

SN Crop Family Hired Labour Total % of family

Labour labour
1 Rice 16 22 38 42.11

2 Maize 31 10 41 75.61

3 Chillie 112 90 202 55.45

4 Melon 80 48 128 62.50

5 Soybeans 27 20 47 57.47

6 Leafy vegetable 280 220 500 56.00

Table 4.35: Labour use in rice and competing crops grown in Mahaweli H area during Yala
seaon 2003

SN Crop Familly Labour Hired Labour Total % of Family

labour
1 Rice 18.67 22.18 40.85 45.70

2 Chillie 146.89 69.91 216.80 67.75

3 Maize 36.25 14.66 50.91 71.20

4 Capsicum 175.23 53.43 228.66 76.63

5 Bitter gourd 135.30 25.73 161.03 84.02

6 Big Onions 107.19 82.20 189.39 56.60

7 Soybeans 25.08 22.17 47.25 53.08

8 Luffa 112.19 17.66 129.85 86.39

9 Banana* 164.12 22.56 186.68 87.91

10 Papaya* 107.34 33.06 146.40 73.32

* - First year of the crop

Source: An assessment of profitability in production of selected crops in the system
of Mahaweli, 2003

Table 4.36: Monthly per capita consumption (Grams)

1 2
Year Rice Vegetable Fruit Milk powder Chicken
1978/79 7512 982 4.38 70 10

1981/82 8436 745 6.95 65 13

1986/87 8638 1034 3.40 108 30

1996/97 8845 1046 5.92 287 68

2003/2004 8851 1183 12.34 309 182

Note: 1 – Major five vegetables, 2 – Major three fruits

Source: Consumer Finances and Socio-economic Surveys, Central Bank of Sri Lanka
Table 4.37: Production and imports of selected food crops, (average of 2000-2004), Mt.

Items Production Import Total % of imports

Rice 1,917,056 99,146 2,016,202 4.98

Wheat 0 911,948 911,948 100.00

Maize 30,214 132,117 162,331 81.39

Dhal 0 91,544 91,544 100.00

Chillies 12,670 26,510 39,180 67.66

Onion 34,959 126,509 161,468 78.35

Potato 69,612 58,647 128,259 45.73

Green gram 10,106 12,450 22,556 55.20

Sugar 1,959 113,106 130,065 86.96

Milk 51,000 497,000 548,000 90.69

In addition to those actively engaged in diversified cropping, others also benefit from
crop diversification owing to linkage effects or vertical expansion. The best example is
development of Udawalawe area after shifting rice into banana. Presently over 3000 hectares
of rice land have been converted into banana. Employment generation through handling,
processing, expansion of input and output markets could be observed in the area. Officials
from the local government authority mentioned that its tax incomes increased ten fold within a
decade 1995-2005 due to development banana cultivation. There is a separate weekly fair
specified for banana managed by the local authority

4.7.3 Impact on consumption

It can also be argued that the increased availability of a variety of food crops would
improve the general living standards of the large number of consumers. Per capita income is
now exceeding U$ 1000 and Sri Lanka is ranked as middle low-income country. Rising
incomes, particularly in lower and middle-income households where the marginal propensity
to spend on food is high are having important impacts on food demand in Sri Lanka. Middle
and upper-income consumers as well as urban consumers are upgrading and diversifying
their diets and changing the pattern of growth in food consumption. Growth in demand for
staple food of rice, which has been the focus of agricultural development policy, is now
slowing. By Contrast, demands for other foods, including fruits, vegetables and livestock
products are now showing relatively high, even accelerating growth (Table 4.36).

As shown in Table 4.36 demand for non-rice products are increasing but domestic
supply is inadequate to meet the prevailing demand although crop diversification is taking
place over two decades. Hence, demand is met by imports as shown in Table 4.37. Real
prices of most of the non-rice crops are increasing showing supply is inadequate to fulfill the
demand even imports are made. It clearly indicates the need of diversification of rice lands
partially (one season) or totally (both season) to meet the growing market demand. This will
serve the square resource of foreign exchange as well as consumers especially, low-income
category make use of variety food ensuring nutritional food security, which is given less
attention. In general, crop diversification provides foods of higher nutritive value. The quantity
of proteins in legumes is generally superior to that of rice. For example, soybean contains 45
per cent of proteins with higher levels of methionine.
4.7.4 Impact on agricultural GDP

Table 4.38 describes the composition of agricultural GDP in 2004. Tea, rubber
coconut and paddy are the major commodities and others mainly include grains other than
paddy, pulses, vegetables, fruits and spices. As a single crop the highest contribution
(15.44%) came from rice in 2004 but it occupied the highest land extent of the total
agricultural lands in the country (41.29%). In contrast, other filed crops contributed 66.34 per
cent to the agricultural GDP by using 22.16 per cent of the total agricultural land area. The
other filed crops give the highest value to the scare resource of land.
Due to limited attention on crop diversification, the growth of agricultural GDP after
liberalization is less than 2 per cent per year, which is less than half of the overall growth rate
of 5.5 per cent per year. During the pre-liberalized period (1951-1977) agricultural growth rate
was 3.00 per cent per annum as compared to growth of 3.8 per cent in GDP. In this period
government has paid special attention to develop non- rice crops to serve foreign exchange.
In fact imports of many food crops such as dhal, potatoes, chilles were banned for longer
period.

It is obvious from the above table that a rapid agricultural transformation cannot be
realized on the basis of rice monoculture alone. Even traditional exports crops such as tea,
rubber and coconut do no give high return compared to other crops. International demand for
fruits, vegetables, flowers and medicinal plants are increasing. One of the advantage
cultivation of horticultural crops is that value to the land is high as compared to the product
price.

Table: 4.38 Composition of Agricultural GDP in 2004

SN Crop Area % Production % Value

(000’Ha) Rs. Ml Rs/Ha
1 Tea 180 8.47 15551 9.05 86,000

2 Rubber 158 7.43 2506 1.46 15,000

3 Coconut 439 20.65 13249 7.71 30,000

4 Paddy 878 41.29 26545 15.44 30,000

5 Others 471 22.16 114027 66.34 242,000

6 Total 2126 100.00 171878 100.00 80,000

Source. Annual report 2004, Central Bank of Sri Lanka

 V. DISCUSSION
The findings of the study, which were presented in the previously, are discussed in
this chapter under the following major headings.
5.1 Market intervention policies
5.2 Growth performance of rice
5.3 Price behaviour of rice
5.4 Export competitiveness of rice
5.5 Resource use efficiency in rice farming
5.6 Competitive profitability of rice via competing crops
5.7 Impact of crop diversification on agrarian economy
5.8
5.1 MARKET INTERVENTION POLICIES

During the pre-liberalization era government market intervention focused on increasing

farm income in order to achieve the rice self-sufficiency and equitable distribution of rice to the
consumers. Therefore, major policy instruments such as guaranteed price scheme and rice
rationing scheme directed to this end. However, after liberalization policy goals changed
towards food security and market intervention policies focused on this direction. Although
government policy documents emphasized the rice self-sufficiency till today, policies did not
focus on this direction and in fact anti-self-sufficiency polices such as reduction of fertilizer
subsidy (fertilizer subsidy was removed from 1989 to 1993), liberalization of rice imports, closing
down Paddy Marketing Board were implemented during post liberalizing period. In this section,
outcomes of the government intervention policies on rice marketing in pre and post-liberalization
period are discussed with a view to identify policy issues that should be addressed in the
present day context.

5.1.1 Procurement policy

Government purchased rice (rough) under guaranteed price scheme (GPS) from
1942 to 1997 and since then government intervention limits to purchase rice when public
makes a big noise. In fact, it is an ad hoc intervention. During pre-liberalized period the
objective of GPS were: a) to assure the producers fair prices and ready market for their
produce, b) to stimulate the production of food crops consumed in the country and c) to
replace food imports by locally produced food with the long term goal of food self-sufficiency.
To achieve the first objective government fixed the GP for rice above the world market price
and did not reduce the GP when market prices dropped. Implementation was also successful
as indicated by the market price above the GP except few cases. The government purchase
was over 50 per cent of the production till 1966 and since then, it was declined because
farmers kept more rice for home consumption due to reduction of ration rice by 50 per cent.
Gunawardana and Quilkey (1993) found that government rice purchases reduced with high
rice purchase from the concession markets by consumers. Due to success of the GPS real
prices of producer price of rice increased throughout the per-liberalized period as found in the
growth analysis. This resulted in increased the purchasing power of the rice producers and
investing more on development of rice sector by applying more fertilizer and using quality
seed.

Many studies have shown that GPS helped increase paddy production (Jeevika,
2004; Nakamura et al., 1997; Gunawardena & Quilkey, 1993; Bogahawatte, 1983). Nakamura
et al., concluded that the GPS can be considered as a factor which contributed to the
evolution of paddy farming from a subsistence crop to a market-oriented crop and helped
encouraging the farmers to adopt new cultivation techniques. Bogahawatte also found that
increasing in guaranteed price by 10 per cent resulted in 47 percent growth in the long run
paddy production.

After liberalization of the economy the purpose of the procurement policy changed and
more emphasis was put on the private sector. As a result, the GPS became a flow price until it
was terminated in 1997. As a flow price, GPS was effective because market price remained the
above or just below the GPS except for few cases. In harvesting time, private traders purchased
rice at farm gate at a price below the GP because farmers needed to transport rice to the
collecting centers to sell at the guaranteed price bearing transport cost. In such cases price
difference was more or less equal to the transport cost. One of the major reasons to decline
PMB purchase to one per cent at its closing time was due to higher/attractive open market
prices.

After closing down the PMB, the government commences direct purchase through
Cooperative Wholesale Establishment (CWE) and Cooperatives Societies but on ad-hoc basis.
This ad-hoc intervention was not successful because of lack of proper arrangements and
coordination among the agencies involved in procurement. It clearly indicates that during the
month of March, i.e., harvesting period of paddy, farmers’ shares dropped to below 60 percent
of the consumer price. Due to inadequate government intervention, there is no competitive
market situation during harvest time and buyers control the market. Often millers purchase
paddy at low prices at harvest time and hold stocks. This practice is now not in an operation in a
big way due to ad hoc import policy. This caused reduction of prices further due to weak
speculative demand.

5.1.2 Distribution policy

The purpose of government intervention through public distribution was to distribute

rice to the consumers at affordable price. Therefore rice was distributed all the citizens above
one year all in equal amount till 1974 since independence and in 1974 income tax payers was
removed. All others received the same amount until food stamp programme was introduced in
1979. Due to universal rice rationing scheme, rice consumption has increased considerably.
On per capita basis, it went up to 107 kg per year in 1960 and remained above 105 kg during
the period 1960-1970.

The country has never reached the amount of 107 kg per person per year after 1960
and it now stabilizes around 100 kg. This was mainly due to removal of rationed rice, which
was highly subsidized. The ration proportion was more than 70 per cent of the total rice
consumption until the ration was reduced by 50 per cent in 1966. After removal of rice
rationing scheme the per capita rice consumption declined to 91 kg in 1979. Accordingly in Sri
Lanka rice rationing appears to have produced significant substitution effects in low-income
households leading to more modest increases in calorie consumption. John (1993) found that
the incremental real income obtained from rice rationing helped low- income consumers to
diversify and qualitatively improve their diets and to spend more on housing and clothing.

However, cost of operating of rice rationing scheme was huge due to non- targeted
and very low issue price. According to FAO study in 1960 the consumer price of rice in Sri
Lanka was the lowest in the world (Bansil, 1971). Cost of food subsidy was 15 per cent of the
government expenditure or 5 per cent of the GDP by the time of termination of rice rationing
scheme in 1979. At these levels, subsidy expenditure had adverse impact on government
spending for capital investment requirements.

As a result, rice-rationing programme was replaced to food stamp program, which

was targeted only to the poor. Operationally, the change has resulted in the elimination of all
rationing and price subsidies on food and introduction of income transfer programme through
issuance of food stamp intended to protect the really needy. Food stamp holders should
purchase rice and other specified items from the cooperatives or authorized shops at
prevailing market price. Thus dual pricing policy abolished with food stamp programme. The
new programme had advantages to both low-income consumers and to the government.
When cashing the coupons, consumers can chose from about 10 major food commodities as
opposed to one or two under the previous rationing programme. They can also deposit
unused food coupons in a post-office savings account – an option. By limiting the number of
beneficiaries, the government was able to reduce its subsidy expenditure by some 40 per
cent from Rs.2450 million to Rs.1450 million in the year 1980. In 1982 food subsidy had fallen
to five per cent of the total government expenditure and two per cent of the GDP.
 Food- coupon programmes are essentially a form of income supplementation and it is
frequently asked why cash cannot be substituted for coupons. There are two arguments in favour
of the coupon approach. First, cash transfers have proved difficult politically and are generally not
supported by the taxpayers. Second, food coupons tend to increase food consumption to a higher
degree than cash transfers. The US food coupon participants spend 50 cents of each dollar of
subsidy on food in contrast a direct income transfer is estimated to provide to only 20 cents worth
of food consumption for every dollar (John, 1993).

The major bottlenecks of this programme are targeting, implementing and monitoring.
Similarly, the exit process is ineffective. At the end of 2002, despite efforts to reduce the cost
of programme, around 1.9 million households (41%) continued to receive food stamps. A
significant share of non-poor families receives food stamps while some of the deserving poor
are excluded in the program (Annual report, 2002, Central bank of Sri Lanka).

Also, the effect of the policy change on the nutritional welfare of low-income
households was severe. The value of the food stamps did not increase with inflation and
hence purchasing power of the value of the stamps has declined over the years. This impact
was considerable on consumption because prices increased substantially as a result of
exchange rate devaluation under the open economic policy package. According to the Socio-
economic and Consumer Finance Survey 1981/82 the nutritional position of the poorest two
deciles had deteriorated significantly by 1981/82. The decline registered was 122 calories per
day or eight per cent of the level maintained in 1978/79, during the previous survey period.
Income flows to the bottom deciles have not been able to sufficiently mitigate the adverse
effects of price increase. The same survey revealed that the Gini-Coefficient based on the
monthly income of income receivers increased from 0.49 in 1978/79 to 0.52 in 1981/82,
widening the income disparity. The food stamp scheme has led to abandonment of the major
element in welfare policy that aimed at broad nutritional welfare through food subsidy.

5.1.3 Trade policy

Sri Lanka’s trade policy shifted from import monopoly to import liberalization during
the post liberalization regime. The major reason for import liberalization in 1996 was to
maintain food security. A committee chaired by the Prime Minister recommended liberalizing
in importation of essential food items such as rice, dhal, chilie and potato to reduce the
market price in order to bring the cost of living down. Accordingly import liberalization of
essential food items including rice was implemented in 1996. Since then this policy continues
till today. In principal government liberalized rice imports but rice import is managed by
flexible tariff policy that is higher tariff at high domestic supply period and lower tariff at lean
supply period.

Due to absence of effective crop monitoring programme even to date, this flexible rice
policy destroyed the domestic market. Even with the supply shortage in 1997 this
unpredictable policy environment prevented private sector importers from importing rice. Only
for the fourth quarter of 1997, duty wavier was granted for a short period enabling more rice
imports. In 1997, the rice trade experienced a considerable degree of uncertainty and prices
varied excessively during the year as trade policy relating to rice remained unpredictable
(Annual Report, Central Bank of Sri Lanka, 1998). In some instances, cheaper imported rice
arrived the market when private stocks were available in the market or just before the harvest.
Of the total imports of 168,000 metric tons in 1998, 75 per cent reached the country during
the month of January when Maha crop commenced in harvesting. Similarly, rice imports
increased to 214 thousand metric tons in 1999 due to reduction of tariff from 35 to 10 per
cent despite the country rice production increased to 2868 thousand metric tons, which was
the highest production achieved until then. The result was incurring losses those who had
stocks mainly rice millers. According to the report of the Task Force appointed in 2003 to look
into the performance of rice sector, over 200 millers were thrown out of business due to heavy
losses incurred by them as a result of market distortions created by ad-hoc changes in
government tariff policy in 1999. Due to high price risk resulting ad hoc imports at cheaper
rate, traders tend to purchase rice from farmers at lower price by keeping a bigger margin
because they cannot predict the rice market situation at wholesale or retail level with imports.
Similarly, imported rice was available at low price at harvest time even in the producing areas.
This had serious impact on farm income by lowering prices even below the cost. Epaarachchi
et at (2003) argued that ad-hoc nature of tariff policies resulted in serious implications for the
welfare of consumers, producers and the government itself in terms of reduced tax revenues.

Another disadvantage of ad hoc tariff policy is reduction of private sector investment

in rice trading due to high-risk area of investment. Even commercial banks are reluctant to
provide credits to this sector. This has become a serious bottleneck for the development of
rice sector by applying modern technology especially processing sector. A recent survey
conducted by the Institute of Post Harvest Technology revealed that 60 per cent of the rice
miles ranked into the custom mills characterized by the traditional huller type. The rice
produced in traditional rice mills is of poor quality with a high degree of grain breakage,
discoloration and impurities. Millers repeatedly say that return from processing is not
attractive for further improvement of quality of rice. Nevertheless, consumer preference now
tends to move towards quality.

5.1.4 Buffer stock policy

The aim of buffer is to prevent scarcities in the market whereby ensuring price
stability. Three main policy instruments were employed since independence to date to prevent
market scarcities: 1) Government monopoly -buffer stock maintained by the Food
Commissioner’s department (1948 – 1993), II) private sector monopoly (1993 – 1996), and
(III) Variable tariff policy (1996 –to date). In the period with the government monopoly,
consumers frequently complained of the quality of rice and instances of scarcity were
common. During the period 1987 –1989 domestic production dropped by 20 percent due to
civil disturbances (ethnic problem). Food Department was unable to stabilize the prices in the
market. As a result, price instability increased considerably. In 1988 the coefficient of variation
went up to 21 percent, first time in the history. Similarly, maintaining buffer incurred a huge
cost to the government, costing Rs 200 million annually on average.

In the period of private sector monopoly, the price stabilization programme was
known as bondsmen scheme where authorized importers were responsible in keeping buffer
and they were allowed to store rice in the Food Department stores with payment of rent,
which was subsidized. This system worked well and both producer and retail markets were
stabilized at reasonable level. This was due to close coordination between public and private
sector. Food commissioner regularly monitored the stock position and fixed the price of the
imported rice having study of cost of production, world market situation and consultation of
the bondsmen. Due to success of this program price increase due to dropped in domestic
production by 27 per cent in 1996 was able to control. The coefficient of variation in that year
increased only to 10 per cent.

After liberalization of rice imports in 1996 the buffer stock policy is stabilization prices
through private sector imports. In implementing this programme government adopts flexible
tariff policy that is increasing tariff or imposing licenses or both at the time of high domestic
supply and low world market prices and reducing or removing tariff at the time of domestic
supply is low or world market prices are high. This programme is successful in terms of price
stabilization at retail market but not at producer level as with the bondmen scheme. Due to
tariff adjustment on ad hoc basis market uncertainty increased and holding stocks have
become a high risk. Hence, traders pay low prices to the producers. Imports enhance
national food security by adding to total supply, benefiting consumers by helping to lowering
consumer prices. These benefits to consumers, however, came at a cost to producers in
terms lower farm gate prices and reduced incomes.

Attempt to stabilize prices using government agencies have been extremely costs in
terms of both the government’s budget and the efficient operation of the economy. Once
established, these agencies frequently adopt or impose pricing policies that include many
goals other than price stabilization causing various distortions of economic incentives. Given
their importance in the economy, these agencies are the national focus for pressure groups
seeking to manipulate pricing policies for political ends. The experiences of most countries
indicate that for stabilization of the prices of traded goods variable tariff represents effective
and generally less costly alternative to marketing agencies (Knudsen & Nash, 1998). In Sri
Lanka the major problem links with the level of price stabilization. Government stabilized
price of rice at retail well below the long run average market determined price. This caused
paddy production unprofitable and increased price risk.

5.1.5 Credit policy

There is no specific credit policy for marketing. At the time of operation of GPS
government provided credit to the implementing agency to purchase rice through state banks
at subsidized rate under the Treasury guarantee. In addition, government directly provides
credit to the government procurement agencies to purchase paddy through Treasury since
1997. Since there is no policy on marketing credit it took time between taking decision and
releasing funds. In many instance funds were not provided timely. The major problem is
recovery of credit, which was less than 25 per cent on average. Another weakness is that
government did not provide subsidized credit to the private sector. Many small businessmen
such as collectors and retailers borrow money from moneylenders at a high interest rate of
10–15 per cent per month. Also there is no credit programmes for development of
infrastructure such as storage, processing and transport. Although cultivation loans are
available for farmers but there is no credit program for farmers as in Thailand to storage rice
till market price goes up.

5.1.6 Institutional policy

The establishment of a market monitoring system is a remarkable achievement in this

regard. The system has been in operation reasonably well since its inception in 1978 by
establishing good working relationship among the government agencies involved in rice
production and marketing. Nevertheless, absence of private sector participation to the
monitoring system is the major weakness in the system and hence stock monitoring is
lacking. The presence of the private sector is imperative because over 95 per cent of the rice
market is managed by the private sector right now. One of the reasons for taking wrong
decisions on imports is absence of private sector participation in decision marking.

As regard to institutional development, absence of think-tank institution for agricultural

marketing has become a problem. Even in the Ministry of Agriculture there is no marketing
section. Due to absence of a responsible agency for marketing, marketing activities perform
various other agencies but their performance is not as expected because these agencies
have their own priorities. The best example is implementation of marketing information
system by the Agrarian Research and Training Institute, which is a socioeconomic research
institute in the country. Although the system was intensified under the FAO Market
Intelligence and Food Information project through providing computers for data transmission
and analysis and motorcycles for filed staff in 1993, the system is not in operation as
envisaged. The filed staff is expected to carry out market watching, marketing extension,
market development through forward and backward linkages but only price collection is doing
presently. Further, under the FAO project Food Information Bulletin was introduced to
disseminate food supply satiation to the users but it is not published regularly.

5.1.7 Market regulations

Regulation of trading is essential to protect public interest. Marketing cannot evolve

efficiency under the “Law of jungle” (Brason & Douglass, 1983). Stakeholders in the
marketing system have conflict objectives. Farmers want the marketing system to provide the
maximum share in the consumer’s price. Consumers are interested in a marketing system
that can provide food and other items in the quantity and of the quality required by them at the
lowest possible price. Traders are interested in marketing system, which provides them a
steady and increasing income for the purchase and sale of commodities. The objectives and
expectations of all the three groups of society are conflict with one another. All the three
groups are indispensable to society. The government has to act as a watch-dog to safeguard
the interests of all the groups associated in marketing. It tries to provide the maximum share
to the producer in the consumer price, food as the required quantity to consumer as the
lowest possible price and enough margin to market middlemen so that they may retain in the
trade and not thinking going out of trade and jeopardize the whole marketing mechanism. In
this contest, there is need for regulation of competition and some basic laws against
fraudulent trading. In the open economic system one of the task of the government in relation
to marketing is enacting rules and regulations required for fair and healthy completion.

Sri Lanka imposed a number of regulations, such as fair trading act and consumer
protection act after liberalization. These regulations have benefited to develop food-marketing
system, especially at retailing. Anti marketing activities such as adulteration, hording stocks
and under scaling are hardly found in rice trading (Personal communication with Officials of
Fair Trading Commission).

5.2 GROWTH PERFORMANCE OF RICE ECONOMY

Production and marketing performance during pre and post-liberalized regime are
discussed in this section based on the results of the compound growth rate analysis. Such an
analysis is useful for comparison of performance of rice sector between two periods and for
future planning because strengths, weaknesses, threats and opportunities facing in the rice
sector can be identified in this exercise. Behaviour of area, yield, production and prices are
examined.

5.2.1 Production

Production recorded a moderate growth (1.02%) per year for the entire study period,
1960 – 2004. The production increased from 9 lack metric tons in 1960 to 26 lack metric tons
in 2004, registering a nearly three fold increase within four and half decades. The growth in
production depends on area under cultivation and yield of the crop Yield has contributed more
(1.84%) than area, which increased only 0.73 per cent per year. The yield increased more
than two fold from 1.9 Mt/Ha to 4.1 Mt/Ha during the entire period. Area under rice increased
from 5.9 lack hectares to 7.8 lack hectares during overal period. Nevertheless, the increase
in area and yield contributed almost equally (1.68%) towards the increase in production of rice
during the pre-liberalized period. Area increased from 5.9 lack hectares to 8.2 lack hectares
during 1960 to 1977 and yield increased from 1.8 Mt to 2.5 Mt per hectare during that period.
As a result production had a significant growth (3.89%) in that period from 8.9 lack metric
tones in 1960 to 17.5 lack metric tones in 1977.

However, situation changed during the post-liberalized regime registering a less than
one percent growth rate in production from 19.2 million metric tones in 1978 to 26.1 metric
tones in 2004. There is no growth in area under rice cultivation and it fluctuated over time in
the range of 7.1 lack hectares in 1991 to 9.9 lack hectares in 1984. Kendaragama and
Bandara (2003) found that extents under rice in major season have come to plateau while in
minor season it tends to decrease gradually since 1983/84. The yield improvement played a
significant role in increasing production with 1.21 percent growth rate per year. The decline in
area was more than compensated by increase in productivity and hence the production
registered a positive growth in the period. Overall, it could be concluded that yield has much
more positive contribution towards production of rice in Sri Lanka. Sanderatne (2003) found
the similar results. He reported that rice production and yields showed an impressive
performance till the 1970s, after which production increase and yield improvement have been
tardy. Samaratunga et al (2003) found that rice productivity has increased rapidly until the mid
1980s and since then it has been stagnant around 3.5 metric ton per hectare while the sown
area showed declining trend. Ranaweera et al (1995) found that yield improvements
contributed 46.1 per cent while area expansion contributed 41.3 per cent to the production
growth before 1977 and after that contribution of yield to the production was noticed.

The best performance in rice production in period–I was due to impact of green
revolution. By mid 1970s 30 per cent of the total area cultivated with rice was under New High
Yielding varieties. Also, increased use of chemical fertilizer was attributed to yield increase.
The quantity of fertilizer use in rice sector increased from 42,000 Mt in 1966 to 81,000 Mt in
1977, almost two-fold increase within a decade. Area under rice cultivation expanded due to
the development of physical infrastructure facilities in the Dry Zone. The rehabilitation of
major and minor irrigation scheme and distribution of uncultivated land in the Dry Zone to
farmers were among them. A number of factors contributed poor performance in rice
production after liberalization of the economy. Area cultivation fluctuated during this period
without any growth was mainly due to diversification of rice land with non-rice crops,
especially dry (Yala) season when prices were attractive to the farmers. It is also true some
rice lands kept in idle during the consequent season when farmer fetches a low price and
once again such land brought under cultivation when prices rise following the a well-known
cobweb theorem. Jayawardena (2003) reported an increasing trend in abandoning rice lands
or diversifying for other uses due to declining profitability. However, studies conducted by
Amarasinghe and Mahendrarajah (1975) and Amarasinghe (1976) concluded that rice
production in Sri Lanka was not responsive to prices in both the short and long run during the
pre-liberalized period.

Sing and Chandara (2003) found the similar situation in India. The overall growth
rate (compound) of area under rice in India was only 0.47 per cent during the period 1975 to
1998 but yield increased by 2.58 per cent per annum. Studies conducted by Vatta and
Aggarwal (2000) in Punjab and Suu and Kombairaju (2001) in Tamil Nadu also found that
growth rate in productivity of rice and area under rice cultivation declined since 1980s. Vitta
and Aggarwal in their study pointed out that compound growth rate of yield in rice cultivation
in Punjab declined from 3.55 per cent in period 1970 – 1984 to 0.71 per cent per annum in
period 1985-1998. Similarly growth rate in area under rice cultivation declined from 11.48 to a
2.64 per cent per annum during the period concerned. Suu and Kombairaju conducted their
study in Tamil Nadu and found that area under rice was about 26 lack hectares during the
1970s and it has come down to about 22 lack hectares during 1990s. The estimated
compound growth rare for area was negative (0.84%) during the period 1966-1998.

5.2.2 Marketing

The marketing performance of rice was evaluated using exponential growth model
fitted for producer price and retail price. In nominal terms, both producer and retail prices
registered a positive growth rate throughout the period, 1960-2004 but rate of growth in retail
price was little higher than that of producer price. This indicates that marketing margins has
been rising in nominal terms. The same pattern was observed during pre and post-liberalized
periods.

However, the same was not true in case of real prices. Both farm and retail prices
increased in pre-liberalized era in real terms whereas they decreased post-liberalized period
.It is clearly indicates that increase in nominal prices in latter period was due to general
inflationary pressure. As obvious, during pre-liberalized period supply was inadequate to meet
the demand in the context of controlled imports and hence retail prices increased in real
terms. The higher guaranteed price of paddy (rough rice) led to increase in producer price in
real terms. The decrease in retail prices in real terms indicates increasing purchasing power
of the consumers. On the other hand the decrease in producer price in real terms curtails the
purchasing power of the producer. This impact was considerable for both parties because rice
is the highest expenditure item among food items and is the major income source of the
majority of the farmers. This means that producer was better off during the pre-liberalized
period at the expenses of consumer and consumer was better off during the post-liberalized
period at the expenses of producer. These results are in conformity with the study conducted
by Jeevika et al., (2002). They also found that producer price in real terms increased before
1977 and decreased after 1977 in rice trading.

5.2.3 Costs and returns

Since increasing cost of production of rice farming is a major issue raised after
liberalization, compound growth rates for major cost items were worked out for the period
1979 -2004. There is no time series data per-liberalized period to compare the both periods.
Growth rate analysis of cost and return after liberalization reveals that wage rate has
increased at a higher rate than other cost items such as fertilizer and machinery costs.
Increasing labour has a severe impact on total cost because labour constitutes the largest
share (46%) and use of hired labour in high potential areas is as high as 70 per cent.
Increasing job opportunities for low-income households after economic liberalization created
high rate of labour.

The total cost registered a higher growth rate (10.76%) than that of producer price
(8.32%) As a result gross income increased by 8.79 per cent and net income by 4.93 per cent
per year during the period 1979-2004. This result confirms the argument of low profitability of
rice farming. In fact in this analysis all the cost was not taken into account. Only variable costs
excluding interest on working capital includes in the total cost of production surveys
conducted by the Department of Agriculture. Samaratunga et al., (2003) also reported that
profitability in rice has declined mainly due to reduced price of paddy (rough rice) and
increasing wage rate. Epaarachchi et al., (2003) fount that rice farming in Sri Lanka has
become an unviable and unprofitable enterprise over the years due to the rise in the cost of
production without a corresponding rise in the domestic price of paddy. During the post
liberalization more emphasis was given to stabilize retail price of rice at low level through
cheep imports while no special treatments were given to the producers. In fact reverse has
been in operation such as reduction of subsidy and removal of guaranteed price scheme.
Govindarajan et al., (2003) found in India that the cost of production of paddy in Tamil Nadu
increased 8.46 per cent per year during the period 1981-1998 as compared to 9.81 per cent
increase of price of sugarcane.

5.3 PRICE BEHAVIOUR

Rice prices affect overall growth of the economy via their impact on production of rice,
production of non-rice crops, consumption and distribution of incomes. As such, rice prices
attracted a great deal of attention especially, after economic liberalization. There has been
increasing recognition of the need to keep a watch on price movement of rice. Price
movement can be studied by examining the time series data on prices. Mainly, four time
period elements viz. trend, cyclical, seasonal and irregular are associated with the changes in
prices. Since cyclical and irregular components are not important in food prices trend and
seasonal movements were examined in this study.

5.3.1 Trend in annual prices

The linear trend equations for producer price, guaranteed price, retail price, gross
marketing margin and farmer’ share in consumer price were fitted and results were presented
in Table 4.11. Results reveal that the rate of increase in producer price was little higher than
that of guaranteed price. This implied that traders used guaranteed price as a base price to
determine their purchasing price. The rate of increase in retail price was higher than producer
price in both periods but the rate of increase was higher in the former period. This was due to
increasing trend in gross marketing margin, which is clearly indicated in the growth rate. The
trend in gross marketing margin was considerably high (18%) in closed economic period due
to market distortions in the light of inadequate domestic supply and controlled imports. This is
one of the reasons for increasing retail price of rice in real terms during pre-liberalization.
During the liberalized period the rate of gross marketing margins curtailed to 12 per cent per
annum mainly due to increase in competition in the market and liberalization of rice imports.
This was benefited by both consumers and producers. Hathurusinge and Ravichandra (2002)
also found lower marketing margin for rice after liberalization and the given reason was rice
imports.

5.3.2 Seasonal movements in prices

The seasonal (temporal or intra-year) price variations are up and down swings in
prices that occur with some regularity during the year. The seasonal price variations resemble
a cycle occupying a period of 12 months or less. The estimates of adjusted monthly seasonal
price indices and extent of intra-year changes in them have been analyzed separately for
producer and retail price in relation to the two time periods. This type of analysis is important
for supply management programmes such as production planning and development of
storage facilities.
 It can be observed from the Table 4.12 retail prices of rice were above the average
level (100) only for four months, November to February in pre and post liberalization periods.
Nevertheless, producer price behaved differently. The seasonal price index of producer price
was lowest in the post-harvest months of February, March and April (major season) and
either August or September or both (minor season) in a year. There is no change overtime in
the pattern of seasonality. In both periods the seasonal price indices were lowest during post-
harvest season and highest during the pre-harvest season. Hathurusinge & Ravichandra
(2002) and Dharmaratne (2000) found the similar results. Dharmaratne reported that price of
producer price fluctuated 13 per cent below and 11 per cent up in the year during the period
1995 – 1999. The reason for prices stabilized during the period May to September is disposal
of stocks gradually by millers. The usual practice is releasing the entire Maha stocks when
Yala harvest comes in order to store Yala crop. In Sri Lanka, paddy (rough rice) is stored not
the rice because of low keeping quality of rice. Since the country has not produced excess
rice yet prices are high during the latter part of the year and the beginning of the next year.
Violent seasonal price fluctuation reduced producer’s income as the major portion of the
produce was soled during post- harvest months. Farmers can get good returns if they are
able to sell rice between November and February period since the prices are considerably
high due to low supply.

The coefficient of average seasonal price variation (ASPV) as well as price difference
between minimum and maximum were significantly lower in post-liberalized period indicating
during more price stability in both farm and retail market in post liberalized period over pre-
liberalized period. Thus, it indicated some positive impact on reducing seasonal fluctuation
during post-liberalization period. This also provides the evidence to support the argument that
public sector organizations are inefficient in stabilizing prices by way of purchasing at harvest
time and releasing the purchases at lean supply period to stabilize the prices.

It is also evident from the both indices of producer and retail prices that farm market
was more volatile than retail market during the both period. The reason is farmers’ inability to
control the supply in the farm market due to urgency of cash needs, lack of storage facilities,
uncertain government policies on procurement and imports and lack of entrepreneur skills
whereas traders mainly millers who supply rice to wholesale/retail market have ability to
regulate the market supply. Also, government price policy was biased to towards the
stabilization of rice prices in retail market by allowing private sector to import rice at reduced
duty or even without duty during the post liberalized period. As shown in the analysis of
seasonal price indices price difference between minimum and maximum was only 8.88 per
cent for retail price during the period 1998-2004 as against to 20.99 per cent for producer
price for the same period. Absence of public- private partnership is also attributed to increase
seasonal price spread in the farm market. Government makes import decisions without
consultation of the private sector. As mentioned earlier, the private sector does not represent
in the food security committee where recommendations relating to domestic procurement and
rice imports are made for submission to the Cabinet for approval.

5.3.3 Spatial price movement (market integration)

The issue of food market integration has been a subject of extensive empirical
research. Many developing economics including Sri Lanka have been implementing structural
adjustment and market reform programmes since 1980s. An important component of the
programme is liberalization of food markets. It has been argued that such liberalization is
required for achieving allocative efficiency and long-term growth in agriculture. It has also
been argued that food market integration is pre-condition for the success of such
liberalization. Unless food markets are specially integrated, producers and consumers will not
realize the gains from liberalization. If food markets are not integrated, the correct price
signals will not be transmitted through the marketing channels whereby farmers will not be
able to specialize according to long-term comparative advantage and the gains from trade will
not be realized. Spatial market integration refers to a situation in which prices of a commodity
in spatially separated markets move together and price signals and information are
transmitted smoothly across the markets. Hence, spatial market performance could be
evaluated in terms of the relationship between the prices of spatially separated markets and
special price behavior in regional markets could be used as a measure of overall market
performance. The understanding the degree of market integration is crucial to appropriate
formation of food security programmes and policies.

In the present study an attempt was made to study the extent of market price
integration between the selected wholesale markets of Sri Lanka, namely, Colombo,
Gampaha, Kurunegala, Kandy and Polonnaruwa for the period of 1996 – 2004. There is no
database in relation to pre-liberalized period for comparison. In this study, several techniques
for testing market integration, namely, correlation method, Ravallion model and Distributive
lag model were employed. The latter two models are able to extract more information about
integration rather than static correlation method. However, overall results are compatible with
one another.

The results of the correlation method in Table 4.12 revealed high correlation among
the selected markets. The estimated values of correlation coefficients are over 0.90. Agarawal
(1986) considered a correlation coefficient of 0.90 or more as a high degree of inter-market
price relationship. Dharmaratne (2000) and Hathurusinghe & Ravichandra 2002) investigated
market integration using correlation coefficient approach and found high correlation in both
wholesale and retail market of rice. It is widely believed that wholesale price in the Colombo
market influences the determination of prices in rest of the wholesale markets in the country.
This hypothesis was examined by using the market integration model given by Ravallion
(1986). Results clearly show the importance of Colombo market for price formation of rice in
all the selected markets and high degree of short run market integration. These results are
further confirmed by the findings of the distribution lag model developed by Koyck. Additional
advantage of Koyck’s distributed lag model is ability to estimate long run price adjustment in
addition to the short-run adjustment. In the long run over 80 per cent of the central market
price changes absorbed by the local markets studied. The short run price adjustment was
quick for only Gampaha market, which absorbed 82 per cent of price changes in the Colombo
market (central market). Results further revealed that 90 percent of long run price adjustment
took place within a month varying from 14 to 22 days for different markets concerned.

It can be concluded that the rice markets in Sri Lanka are well integrated with one
another due to availability of good communication facility and road network along with
availability of trucks after liberalization. Telephone density (telephones per 100 persons)
increased from 0.62 in 1989 to 3.05 in 1999 and the number of trucks increased to 131,844 in
1996 from 37727 in 1971. Joson (2002) also concluded that good communication facilities
and better infrastructure result in highly integrated markets.

Due to better communication and infrastructure facilities the results of the market
integration analyses do not show the decline in degree of integration with the increase in
distance between markets as Singh et al., found in Orissa in India for rice (2004).
Madhusudan (2000) found that regional rice markets are spatially linked within and across the
state in India and concluded the success of price policy and market liberalization programmes
undertaken in India. There is no regional shortage in rice supply in Sri Lanka after economic
liberalization as experienced in pre-liberalization indicating efficiency in rice distribution
through market forces after liberalization.

5.3.4 Variability in prices and marketing margin

One of the key objectives of price policy is stabilization of prices in order to minimize
the fluctuation in farm income and reduce the price risk. Fluctuation in marketing margins is
an indicator to show market uncertainty. Both coefficient of variation among the mean and
among the trend were worked out to test the stability over the years in prices and marketing
margins. Results showed that during the per-liberalized period instability in both producer and
retail prices were much higher than post-liberalized period. Annual variation in production was
mainly contributed this situation because only 35 per cent of the rice land was under major
irrigation in 1977 at the time of introducing open economic policies and the figure was nearly
60 per cent by the year 2004. Kahlon and Tyagi (1989) highlighted annual variation in
production as a factor that affects the instability in the prices of agricultural commodities.
 Unlike prices, marketing margins varied considerably during post liberalization period
as compared to pre- liberalization period. This is due to uncertainty in government trade
policies. During pre-liberalization period rice imports were under licensing and tariff was fixed
at 25 per cent. In 1996 rice imports were liberalized and managed by adjusting tariff even
making zero duty when more imports were required which was done on ad hoc manner. This
collapsed the rice market by importing rice when local stocks were available and imports
reached the market at harvest time. In 1998 the country produced 2692 thousand metric tons
of rice and imported 168 thousand metric tons of rice whereas in 1999 rice imports increased
to 214 thousand metric tons when paddy production increased to 2868 thousand metric tons
that was a record with the highest achieved till then.

5.3.5 Relationship of open market producer price with guaranteed price and
rice price

Open market producer price of rice was regressed with guaranteed price and open
market rice price at retail level. Although the guaranteed price was stopped in 1997,
procurement price was announced since then, these prices were used after 1997 to 2004 in
the analysis. Results showed that both guaranteed price and rice price positively influenced
in determining open market producer price in pre-liberalized period but only rice price had
impact on producer price during post-liberalized period and overall period. The reason was
that guaranteed price was not fixed systematically and remained constant for some times
after liberalization. Also the government did not provide adequate credit facilities to the
purchasing agencies to purchase rice at the procurement price. In these circumstances,
guaranteed price of rice was not in operation properly latter part of the economic liberalization
and consequently guaranteed price had no direct impact on open market paddy prices as did
in the pre-liberalized period.

In this analysis showed that guaranteed price and rice price are two variables that
government can be use to intervene in producer market. Both instruments were used in favor
of framers during the pre-liberalized period. The Guaranteed price was fixed at higher level
and at the same time rice prices remained at high level in the open market because supply is
inadequate to meet the demand. As a result open market producer price of rice increased in
real terms during the per-liberalized period. However, the situation changed after
liberalization. The government did not use any instrument either guaranteed price or rice
prices in favor of farmers and rice prices were stabilized at low level for the benefit of
consumers, which resulted in lowering producer price of rice. This caused the decline in rice
price in real term after liberalization. It is important to understand what level price should be
stabilized. If it is too low farmers are suffering and if it is too high consumers are suffering.
There should be a balanced between two.

5.3.6 Parity price

The prices of both input and output have their impact on profitability of the crop. The
changing ratio of input-output prices for the crops overtime has made the farmers more price
conscious in taking of decisions in the allocation of productive resources among various crop
enterprises. It is vital important to study the input-output price ratio for different inputs used in
rice farming because inputs are widely used after green revolution and input prices are on the
increase with higher demand. It is argued that cost of inputs increase rapidly making down
farm income during post green revolution period.

Results of the parity ratios of the price of producer price to the input and to the
consumer commodity prices showed a sharp declined during the post-liberalization era
compared to the pre-liberalized era. This indicates that terms of trade is not favorable to rice
farming. On the other hand purchasing power of the rice farmers has deteriorated in post
liberalized period and the trend is increasing. This is due to the fact that successive
governments after liberalization attempted to maintain low rice prices by importing rice at
cheaper rate as a staple food but did not raise the guaranteed price in line with increase in
general price level in the economy. This created a huge imbalance between rice sector and
other sectors in the economy.
5.3.7 Relationship of farmer’s share with price movements

The study of marketing margins and costs is important as they reveal many facts of
marketing and the price structure as well as efficiency of the system. The magnitude of the
marketing margin relative to the price of the product indicates the efficiency of the marketing
system. It refers to the efficiency of the intermediaries between the producer and the
consumer in respect of the services rendered and the remuneration received by them. The
estimate of marketing margins helps in finding the total cost incurred on the marketing
process in relation to the price received by the producer and the price paid by the consumer.
The larger is the value of the margins, the greater is the inefficiency in the system and vice-
versa.

The change in farmer’ share with price movements could be studied by analyzing
monthly-wise farmer’s share of the consumer rupee. Seasonal variation of producer’s share
in consumer’ rupee has been found that during the harvesting season farmers’ share declines
and increases in lean supply months showing an inverse relationship between market supply
and farmer’s share. Declining farmer’ share at harvest time means increasing marketing
margins which indicates traders keep bigger margins at that time. This is possible because
supply exceeds the demand creating buyer’s market at harvest time. This analysis warrants
the need of supply management policies to enhance farmer’ share of the consumer rupee.
Dharmaratne (2000) found that millers retained a bigger margin during the harvest time. Visva
(2001) also fund monthly variation of producer’s share in consumer rupee in case of rice in
West Bengal in India.

5.4 EXPORT COMPETITIVENESS IN RICE

Trade competitiveness basically depends upon the level of domestic prices relative to
international prices. In its simplest form trade competitiveness, for say exports, can be
measured by comparing domestic prices with international prices expressed in domestic
prices net of freight, transport and related costs involved in taking produce from exporting
country to the importing country. If domestic price of any commodity is lower than the net
export price then the commodity is export competitive otherwise it is not export competitive.
Similarly, under importable scenario, if domestic price is lower than international price plus
transportation, freight, insurance and others costs involved in taking produce from foreign
market to domestic then domestic price is import competitive otherwise it is not import
competitive. It should be intuitively clear that any commodity that is export competitive is
always imports competitive and a commodity that is not import competitive cannot be export
completive.

There are two kinds of measures, which have been widely used to reveal trade
competitiveness, viz., Nominal Protective Coefficient (NPC) and Domestic Resource Cost
(DRC). These measures are generally used to find the level of protection/disprotection and
level of government intervention in different commodities. DRC has been generally used to
measure efficiency and comparative advantage in production vis-à-vis export/import of
various commodities. Based on these measures one can find how resources should be re-
allocated among different uses to improve their efficiency and to increase return to these
resources. These measures have also been used to reveal competitiveness for export and
import.

In the present study an attempt was made to ascertain whether Sri Lankan rice is
competitive as an exportable commodity by computing NPC under import scenario for raw
rice and parboiled rice. The analysis showed non-competitiveness for export of rice to other
countries as evident from NPC of more than unity. In other words, lower prices of rice in the
international market than the domestic price showed no comparative price advantage in favor
of Sri Lanka. Similarly, NPC with grater than one under importable hypothesis means that
domestic price received by farmers was above the international price and rice farmers in Sri
Lanka were protected to some extent compared to the free trade situation at the expense of
consumers who should have paid less if imports were made. These results are in conformity
with the findings of Epaarachechi et al., (2003), Sanderatne (2003) and Samaratunga et al.,
(2003). Epaarachechi et al., calculated NPC annually for the period 1995 to 2000, which
varied from 1.34 in 1995 to 1.25 in 2000 with a maximum of 1.58 in 1997. Sanderatne found
that costs of rice production are higher than the international prices of equivalent rice varieties
and there is a declining trend in rice price in the world market. Smaratunga et al., reported
that the domestic cost of production should be brought down by 25-30 per cent to be price
competitive in the international market.

5.5 RESOURCE USE EFFICIENCY

There has been unanimity among economists for many decades to accept the
theoretical description of production function explaining the maximum amount of output
obtainable from a given input bundle with fixed production technologies. The maximum output
obtainable from a given bundle of inputs gives rise to production frontier. Its introduction
provides finer aspects of a given production process from a practical point of view,
compared to the production function (Kautala, 1993). The productivity of farms can be
considered from the point of view of economic efficiency. Economic efficiency (EE) has two
components, namely technical efficiency (TE) and allocative (price) efficiency (AE). TE
measures actual farm output as percentage of potential output obtainable from the same level
inputs with best practice of technology and AE measures the actual farm profits as a
percentage of the optimum profit obtainable if the farm used inputs to the point of equating
marginal value product with the marginal cost of the respective input.

Technical efficiency would be relevant when comparisons are made among the peer
group and similar growing conditions. The farms in a particular location are evaluated for their
efficiency by comparing with the best in the location. This is done by shifting the intercept of
the average CD production function upward to coincide with the most efficient farm and rest of
the farms in the location are compared with this both in terms of input used and output
obtained.

The results of the Timmer measures of technical efficiency revealed that majority of
the farmers were operating in medium level efficiency in rice in all three districts studied.
However, the degree of efficiency level under rain-fed conditions lowered than that of
irrigation conditions as shown in the results that number of farmers with medium efficiency in
Kalutara was 64.15 per cent as compared to 86.27 in Polonnaruwa and 76.00 per cent in
Kurunegala district. The findings of the study are in line with Aheeyar et al., (2003). In their
study mean technically efficiency was 0.83 for major irrigation and 0.47 for rain-fed condition.

The reason for lack of high level of efficiency is mainly due to inadequacy of
technical-know how about improved package of inputs and poor managerial skills. Of the total
land under rice over 95 per cent is under new improved varieties and hence knowledge on
technology requirements on rice cultivation such as land preparation, irrigation, choice of
plating materials, post-establishment management, harvesting operations and processing is a
must to maintain high level efficiency in rice farming. Rama Rao et al., (2003) found that
education influenced technical efficiency significantly in rice cultivation in Andhara Pradesh
and suggested that formal and informal education be strengthened. In this context Sri Lanka
needs an efficient extension service to educate farmers but it is lacking today. In 1993, the
conversion of extension officers (Krushi Vyapthi Niladharis) to the village headmen (Grama
Sevakas) has created a serious vacuum in extension division of the Department of
Agriculture. Farmers are now at a loss when it comes to finding out a suitable person to
obtain agricultural information. In 1995, with the provincial councils taking over agricultural
administration, non-availability of funds to carry out development and extension activities
hinders the extension programmes severely. This clearly indicates that there is vacuum to
improve the operation of farmers and move in to highly technical efficiency level by adopting
suitable cultivation practices.

In order to study the efficiency in the allocation of resources, the marginal value
product (MVP) of each input was compared with the marginal factor cost (MEC). If the ratio of
MVP to MFC is less than unity, it implies that the particular input is overused (more than
economic optimum) and if the ratio is more than unity it implies that the input is under utilized
(below the optimum) The results indicate that seed had the profitability ratio (MVP/MFC)
above unity in all three district studied indicating that profit can be increased by investing
more in seeds. Mettananda et al., (1995) found that many farmers continuously use old seeds
instead of certified seed, which results poor germination. Their findings showed that the lack
of capital, non-availability of citified seed in required quantities and unawareness of the
importance of the seed quality are major reasons for the use of poor quality seed by farmers.
The present study also found that profitability ratios for labour and fertilizer were less than
unity, which highlight that the additional expenditure would reduce the revenue. The analysis
clearly showed that high cost inputs such as labour and fertilizer were over use above
economic optimum causing in reduction of profit. This findings support the widely held belief
that farmers in developing economies are likely to use excessive family labour and operate
inefficiency. Over use of family labour is a result of lack of off-farm employment opportunities.
Krishna (2001) found the similar results in the study of sustainability and economic efficiency
of rice farming in Kerala state of India.

Attempt was made here to compare findings of the present study with the findings of
the study done by Abeysekara in 1976 based on the data 1972/73 using the same model of
Cobb Douglass type production function. Findings of the Abeysekara’ s study indicated that
labour and fertilizer were under utilized. The ratio of MVP to MFC for fertilizer was Rs 3.89.
These results indicated the pre-liberalized period but the situation is completely different in
post-liberalized period as found this study. Both fertilizer and labour were over utilized after
liberalization. Under utilization fertilizer before liberalization was due to lack of credit facilities
and inadequate availability on time due to government monopoly. During post-liberalization
period accessibility and availability of fertilizer are not the problem due to increased credit
facility and liberalization of fertilizer imports. Under utilization of labour in rice farming in pre-
liberalization era was due to extensive cultivation of non-rice crops such as chillies, potatoes,
grren gram, which are highly labour intensive. Cultivation of non-rice food crops increased
considerably during the period 1970 1977 due to attractive prices as a result of banning of
many food crops in the face of a problem of foreign exchange scarcity. After import
liberalization in 1996, cultivation of non-rice crops declined considerably due to cheap
imports. Similarly, industries developed in urban areas and most of them are not labour
incentives as well. Therefore labour migration from rural to urban is slow in Sri Lanka.

5.6 COMPETITIVE PROFITABILITY OF RICE WITH

COMPETING CROPS.

Profitability aspects of rice cultivation were analyzed by computing per acre costs and
returns for rice and its competing crops, namely, maize, chilli, melon, soybeans, banana and
leaf vegetable (Centella asiatica). One competing crop was selected for each district after
consultation of the district agricultural officers. However, the crop selected can be grown in
many of the other districts under study. The analysis revealed that returns from rice farming
do not adequate to recover the costs incurred in all the districts concerned when all the costs
both fixed and variable costs were taken into account. Consequently B-C ratios were less
than one indicating un-profitability situation. The values of the B-C ratios varied from 0.52
(Kalutara) to 0.97 (Anuradhapura). The lowest B–C ratio was reported Kalutara district under
rain-fed condition. In case of Polonnaruwa district where five farmers committed suicide in
the same season (2005 Yala) due to unable to repay the loans, the returns did not adequate
to cover the variable costs. Upasena and Wickramasinghe (2003) found the similar results in
their study carried out in the Mahaweli ‘H’area of Sri Lanka. They studied the profitability
under four scenario; including family labour and fixed inputs, excluding family labour,
excluding fixed inputs and excluding family labour and Fixed inputs. Out of these four, rice
cultivation was only profitable under the scenario of excluding family labour. Cost of
production surveys conducted by the Department of Agriculture do not show the real situation
because of exclusion of fixed cost and interest on working capital.

Analysis of costs and returns for competing crops with rice showed higher B-C ratios
with grater than one for all the crops in all districts. They varied from 1.29 for maize to 2.33 for
leaf vegetable. The B-C ratio of leaf vegetable was the highest in Kalutara district where the
lowest B-C ratio was observed for rice. The higher B-C ratios were recorded for horticultural
crops such as melon, banana and vegetables. These findings are in conformity with those of
Upsena and Wickramasinghe (2003), and Wijayaratna (1996). Abeysiriwardena (2003)
reported that studies done since the turn of the 20th century show rice cultivation as the least
profitable of all farming activities in Sri Lanka. Now the situation has further deteriorated as
rice cultivation started giving negative returns as shown in this study.

The study also found that higher B-C ratios were associated with higher cost of
production. This is mainly due to high input requirements such as fertilizer and chemicals and
high labour requirements of high value crops. The other reason is that the costs of inputs
required for high-value crops such as seed and chemicals are higher than the cost of inputs
required for rice. This indicates need of credit and assured markets to popularize competing
crops in rice fields

5.7 IMPACT OF CROP DIVERSIFICATION ON AGRARIAN

ECONOMY

Present study clearly showed that competing crops provide increasing rural
employment-opportunities, family incomes and increasing stranded of living to the consumers.
Similar results were observed by Jayawardena (1996) and Abeyratne (1993). As found in the
study, rice faming is not profitable when all costs are taken into account. Even in
Polonnaruwa where paddy farmers are committed suicide, returns from rice farming do not
adequate to cover the variable cost. B-C ratio for all the competing crops studied including
maize and soybeans were above unity.

In Sri Lanka rural poverty is acute and directly links with agriculture. According to the
Household Income and Expenditure survey conducted by the Department of Census and
Statistics in 2002, rural people living below the poverty line was 26.4 as compared to 7.9 per
cent of the urban poor. The vast majority of the poor resides in the rural areas and involved in
agriculture and allied activities. Sri Lanka Integrated survey in 1999/2000 found that 42 per
cent of the household in the lowest 20 percent of the income groups is employed agriculture.
This survey further reported that due to decreasing returns from agricultural activities about
50 of the poorest agricultural households are engaged in non-farm activities to meet
household consumption needs. A large share of them are employed as low paying, insecure,
causal non-agricultural wage labour. As an occupational group most of the paddy farmers are
among those who earn the lowest household income in the country. Since rice is a low value
crop grown in smallholdings and decline in the real price of rice, increasing paddy production
does not help rural household escape poverty.

This study also showed that return to land resource was low from rice cultivation and
hence it is required to diversify some rice lands into high values crops to increase agricultural
growth rate, which has been remained below two percent for last two decades. Several
studies and experiences around the world proved that crop diversification promotes
sustainable economic growth. Punjab and Haryana maintained a 4.00 to 4.50 per cent rate of
growth in net State Domestic Product of Agriculture during last two decades mainly due to
diversified crop sector while states like Bihar, Assam, Jambu Kashmir, Tamil Nadu, Orissa
and Himachal Pradesh experienced low degree of agricultural growth mainly due to low
degree of agricultural diversification (Rajeswar, 2003). Mellor (1997) found that practically all
developing countries could achieve 4 to 6 per cent growth rates in agriculture because of the
major potentially in the production of high-value agricultural commodities.

In this context shifting from rice to high value crops is an important instrument for
economic growth in general and for reduction of rural poverty in particular. Nevertheless, due
to number of factors such as lack of water supply, assured markets, credit facilities, technical
know-how and quality seeds, crop diversification is taking place slowly. All these constraints
are linked with the government policy. Although Sri Lanka implemented open economic
policies four decades back the government priority still is self-sufficiency in rice, which is
coming from the closed economic period. Hence, government policies have also tried to
confine the farmers to paddy cultivation. There are complicated Laws and regulations that
virtually prevent them from switching land to a more remunerative crop such as fruits and
vegetables. The best example is the Agrarian Services Development Act No. 46 in 2000. The
Act states that
“(1) Paddy lands which have been identified by the Commissioner General as
paddy lands from which the maximum production can be obtained by the
cultivation of paddy shall be cultivated with paddy during every season in
which paddy can be cultivated thereon; (2) Where paddy cannot be
cultivated during any season in an extent of paddy land, which has been
identified above, due to a natural and other cause an agricultural crop which
is not perennial crop may be cultivated on such paddy lands after obtaining
the written permission of the Commissioner-General; and (3) In the case of
paddy lands from which satisfactory production can be obtained by the
cultivation of any crop other than paddy, such paddy land may be cultivated
with half yearly crops other than paddy after obtaining the written permission
of the Commissioner General. For the purpose of cultivation long-term crops
in such paddy lands, the written permission of the Commissioner General
shall be obtained prior to the commencement of such cultivation ” (pp.25).
Although the government allowed the cultivation other crops on paddy land in 2000,
requiring every farmer to seek approval from the Commissioner of Agrarian Services prior to
doing so, is a major impediment. It raises the transaction costs of farmers who would like to
shift to non-paddy cultivation. Many countries being rice staple such as Malaysia, China,
Bangladesh and Thailand have being diversified their rice lands due to a variety of reasons
such as water scarcity, diversified food habits, declined profitability by reducing their self-
sufficiency level. For instance, Malaysia the target of the rice- self-sufficiency policy was
lowered from 80 – 85 per cent to 60-65 per cent as long as 1980s (Sardar, 1988).

For the successful crop diversification public – private partnership is required

because it helps to develop linkages input supply, production and marketing. Past evidence
showed that crop diversification failed due to lack of market facilities. In early 1990s the
government promotes cultivation of soybeans on rice lands but farmers had difficulties in
selling the product.
 VI SUMMARY AND POLICY IMPLICATIONS
Rice is the largest single crop grown in Sri Lanka and accounts for 9 lakh hectares or
45 per cent of the total agricultural land area in the country. It accounts for nearly 3 percent to
the GDP and 15 per cent to the agricultural GDP in 2005. About half of the agricultural labour
force employ in the rice sector. Rise is the staple food for the nation and the dominant source
of energy registering 44 percent of the daily total calorie intake. An average consumer spends
24 per cent of total food expenditure on rice. The average per capita consumption of rice is in
the region of 100 kg per annum.

Rice is grown in almost all the districts but 5 districts contribute more than 60 per cent
of the total rice production. Rice cultivation takes place largely on small- holdings. Also, over
50 per cent of the rice lands are cultivated by owner-himself. The irrigated rice fields occupy
nearly 75 per cent of the rice lands and 90 per cent of the total irrigated area in the country.

Rice is cultivated during two seasons of the year namely, Yala and Maha.
Approximately 65 percent of the production is derived from the Maha crop (October to March).
Almost all farmers in Sri Lanka use high yielding rice varieties (HYVs). Rice yield has been
stagnated at around 3.5 Mt/Ha at national level since 1985 to 1995 and since then it has
increased to 4.00 Mt/Ha right now. Rice production in the country increased to 2.7 million
metric tons in 2004 from 1.7 million metric tons in 1970. Sri Lanka is now self-sufficiency in
rice.

One of the major issues affecting the profitability and sustainability of the rice sector
is the steady increase in the cost of production. This is due to increasing cost of labour, farm
power (machinery), fertilizer and agrochemicals. Expenditure shares with respect to major
categories of inputs indicate that labour constitutes the largest share in cost of production.
Due to increasing cost of production at a higher rate than paddy (rough rice) prices, net
returns from rice farming continue to decline. Farmers are faced with a very serious cost-price
squeeze. The majority of farmers are finding rice cultivation uneconomic in the sense that
incomes derived are inadequate for their basic living.

Before economy was liberalized in 1977, government played a key role in rice
purchasing, storing, processing, distribution and imports. With these policy changes
government intervention in rice marketing gradually curtailed and today it is entirely in the
hand of private sector. The buying and collection of paddy from farmers are mainly handled
by the millers and assembly traders called as collectors. Collectors in turn sell the stocks to
the millers. Some collectors hold stocks for future sale. However, millers are the major
stockholders. A very few farmers keep stocks for sale later. There is no even single
established market for paddy in the country like regulated markets in India. Farmers sell
paddy at the filed, in the house or transporting to the collecting centers or to the rice mills. The
selling procedure varies by location.

Millers deliver rice to the established wholesale markets such as Colombo and
Kandy, and to the individual wholesalers. Distribution of rice by millers directly to the
individual wholesalers in towns by passing wholesale markets is on the increase because of
advantage of reduction of marketing costs which benefits both buyers and sellers, finally
consumers too. In addition, big millers distribute packed rice to the retailers and some have
their own retail outlets in cities.

The above discussion shows that rice industry has undergone significant structural
changes during last four decades with merits and demerits. The great achievement was self-
sufficiency with the beginning of 21st century. Although the country has proud on this, rice
farming is in crisis now. Farmers started committing suicide due to unable to settle their
cultivation loans. In 2005 during Yala season five farmers committed suicide in Polonnaruwa
district and the subsequent season two farmers committed suicide in the same district. It was
also found that the youth do not wish to be employed in rice faming though unemployment in
rural sector is high. Abandant rice lands are on the increasing due to family labour shortage
as a result of younger generations’ reluctance to get involved in rice farming. The number of
rice farmers below poverty line is also increasing. Despite this situation in the ground there is
considerable talk about the country exporting rice.

The role of the private sector in rice marketing is often criticized and put all ill effects
to the private traders. Paddy farmers complain about low prices at harvest time, which go
below the cost of production in many instances. On the other hand, consumers complain
about high prices especially during the off-season. Under these circumstances, government
intervention has been recommended once again. However, the private sector complains to
the government on ad hoc policy on imports, which allow importing and dumping rice to the
market. This destroyed the market leaving many traders and millers out of the business.

The situation appearing today is more severe than ever since and problems have
become so complicated. The end result would be lack of farmers to continue rice farming. All
these happened due to lack of proper understanding of the root causes of the problems. The
present study directed to this end and attempted to carry out a comprehensive analysis of
performance of the rice marketing system during pre and post- liberalization period. In
addition to marketing, some production aspects such as efficiency in rice farming and
profitability of rice and its competing crops were also examined because marketing issues
cannot be discussed without looking at the production side. Overall, the present study
discussed the past performance, present situation and future direction in rice marketing in
particular and rice sector in general in Sri Lanka.

Objectives of the study

In view of the above situation, the study was undertaken with the following objectives.
1. To document the policy changes in rice marketing/ distribution in Sri Lanka,
2. To study growth performance of rice production and marketing in the country,
3. To analyze the price behaviour of rice in pre and post liberalized period,
4. To analyze the competitive profitability of rice production with competitive crops,
5. To ascertain the technical and allocative efficiency in rice farming,
6. To study competitiveness of rice export from Sri Lanka in the context of free trade,
7. To ascertain the impact of crop diversification on Sri Lanka’s agrarian economy, and
8. To suggest appropriate policy measures for management of rice marketing in Sri Lanka

Methodology
The study was mainly based on the secondary data and primary data collection was
limited to fill the data gap. Secondary data such as area, production, yield, collected from the
Department of Census and Statistics, prices from the Agrarian Research and training institute
and cost of cultivation data from the Department of Agriculture. Primary data such as land
rent, depreciation cost, and import cost of rice were collected through key personnel
interviews. Production data was analyzed at national level, price data at market level and cost
and return on district level. Analyses were carried out for the period 1960-2004 which was
divided into two before and after 1977 to represent the pre and post liberalization.

The following analytical techniques were used in the study.

1. The exponential function was used to estimate the growth in area, production,
productivity, and price of rice and farmer’s share of the consumer price of rice.
2. The linear regression analysis was employed to estimate trend in prices and cost of
inputs in rice farming.
3. Time series technique (TSCI) was employed to analyze the seasonal pattern in price
of rice.
4. Correlation coefficient, Ravallion model and Koyck model were used to analyze the
level of integration among the rice wholesale markets.
5. Coefficient of variation among the mean and among the trend was applied to study
instability of rice prices.
6. Multiple regression analysis was conducted to study the determinants of open market
producer price of rice.
7. Price spread was calculated to study market margins of rice.
 8. Parity ratios of producer price with respect to input prices and consumer product
prices were computed to study terms of trade in rice farming.
9. Cobb-Douglas and frontier production functions were used to ascertain production
efficiency in rice farming.
10. National Protection Coefficient (NPC) technique was used to study the export
competitiveness of rice.
11. Benefit cost (B –C) ratio was computed to examine the profitability of rice and its
competing crops.
12. Employment and income variables were used as impact indicators to measure the
impact of crop diversification on rural agrarian economy in Sri Lanka.
Major findings
1. Policy review indicates that government intervention shifted from direct intervention to
indirect intervention in marketing during the post liberalization period. Paddy
Marketing Board (PMB) was closed down and government direct purchasing from
farmers operates on ad hoc basis. Hence, rice trading is entirely in the hand of private
sector. The government promotes private sector purchasing through forward trading.
The universal rice-rationing scheme was replaced by the targeted food stamp
scheme. Rice import was liberalized. The buffer stock maintained by the Food
Department was stopped and price is being stabilized through variable tariff. Market
regulation policies such as fair trading Act, Consumer protection Act and food
standards were imposed to enhance healthy competitive environment. The
government set up a monitoring system for market operation by establishing the Food
Security Committee, which functions as a monitoring body.

2. Policy review further showed that inconsistency in tariff policy increased the market
uncertainty. The government never consulted the private scoter when tariff was
revised in order to stabilize the market price at retail level. The government
attempted to stabilize rice prices at very low level discouraging stockholding.

3. It is also found that institutional mechanism for rice marketing is weak both at national
and divisional level. There is no “think tank” institute for marketing in Sri Lanka. This
has been a major bottleneck in shifting from subsistence into commercial farming for
which conducive polices are required. The public–private, and farmer- private
partnerships are almost lacking.

4. Area under rice showed a positive growth rate before liberalization and no growth
was observed after liberalization. Nevertheless, yield registered a positive growth in
both periods but the rate of increase lowered in the post-liberalization period. Rice
production had a considerable growth rate in pre-liberalization period as compared to
slow growth observed in post-liberalization period. The yield contributed more in
increasing rice production than that of area during the entire period, 1960-2004.

5. Both producer and retail price of rice increased in real terms during the pre-
liberalization period while both prices decreased during post-liberalization period.
Accordingly, producers were better off at the expense of consumers in pre-
liberalization era and vice versa in post-liberalization era.

6. The growth analysis of item wise costs of cultivation of rice in Polonnaruwa district
showed that labour cost increased at a higher rate than that of other inputs during the
post- liberalization period. This impact on total cost was severe because labour
constituted the highest cost among the cost items. Total cost of production increased
at a higher rate than that of gross income from rice. Time series data on cost of
cultivation of rice was not available during the pre liberalization for compression.

7. Trend analysis showed that open market producer price increased at a higher rate
than that of guaranteed price of paddy during the both period indicating that
 guaranteed price worked as a base price. Retail price increased at a higher rate than
producer price, which showed that price increase in retail market did not pass to the
producers fully. Farmers’ share in the consumer rupee has shown a declining trend in
both periods.

8. The seasonal indices of price of rice showed seasonality in behaviour of prices.

Prices decreased immediately in the post harvest period. A comparison of producer
and retail price indices indicated that producer price was more volatile than that of
retail price. It clearly shows that rice farmers rushed their produce for sale
immediately after harvest without adopting storage practices. The study also found
that seasonal price fluctuation reduced during the post-liberalization regime as
compared to the pre-liberalization regime. This is due to expansion of private trade.
Private traders, especially, millers purchase paddy at low price at harvest time and
hold stocks to release at off-season.

9. Market integration analysis of rice market in Sri Lanka revealed that all the wholesale
markets studied were integrated with one another although the degree of integration
was different for each market depending on the availability of communication facilities
and associated transportation infrastructure like roads and trucks. Results of the
Ravallion market integration model showed that Colombo market prices have
influence in price formation in other wholesale market. Results of the Koyack
distributed lag model revealed that wholesale markets are integrated both in short
and long run.

10. Instability analysis showed that rice prices were more stabilized after liberalization than
before. These results proved the failure of government intervention in price stabilization
through state run organizations. In case of marketing margins, the variation was higher
in post-liberalization period than pre- liberalization period. This indicated the business
uncertainty created by ad hoc tariff changes on rice imports.

11. Analysis of price variability in producer, wholesale and retail prices within a year
clearly indicated that retail market was more stable than wholesale and farm market
during post-liberalized period. It further shows more stability of retail prices after 2000
as evident by 6 percent of value of co-efficient of variation.

12. It was observed from the study that both guaranteed price and retail price of rice
influenced in determining producer price of rice in pre-liberalized period but only retail rice
price had impact on producer price during post-liberalized period and overall period.
Therefore special attention needs to pay on level of stabilization in retail price. If the price
is stabilized at low level it has adverse impact on producer price.

13. During the pre-liberalized period parity ratios had increased but it has continuously
declined in post-liberalized period. The significant fall in parity ratios of rice was due to the
rise in input and commodity prices at much higher rates than producer price of rice. The
declined parity ratios during the post- liberalized period eroded the profitability in growing
of rice in one hand and reduced the purchasing power of the rice farmers on the other
hand. The end result is declining rice farmer’s well being.

14. Export competitive analysis indicated that Sri Lanka does not have comparative
advantage in exporting rice as evident by over unity of Nominal Protection Coefficient
(NPC). The NPC above unity also implies that domestic prices received by farmers were
above the international prices and rice farmers were protected to some extent in the free
trade situation. On the other hand, the price paid by the Sri Lankan consumers for rice
was 15 percent and 12 per cent higher than what they would pay for parboiled and raw
rice respectively in the absence of trade protection.
 15. Production function analysis showed that seed has positively related with production
while increase in fertilizer and labour has no impact on production in all the three
districts under study. Ratio of value of marginal productivity to marginal cost was
above unity for seed in all locations indicating that investment in seed yields higher
profit and reduction of expenditure on labour and fertilizer increases profit from rice
farming. It was also found that majority of the farmers were operating in medium level
efficiency in all the locations under study as per the Timmer measures of technical
efficiency. Farmers can increase their profit by improving management practices
adopted by the best farmers in their locality.

16. The B-C ratio for rice cultivation in all the districts studied was less than one
indicating unprofitable situation. In case of Polonnaruwa and Kalutara districts, return
does not cover even the variable cost. However, the B-C ratios are over unity for all
the alternative crops such as maize, chillie, watermelon, banana and leafy vegetable.
Cultivation of horticultural crops was found to be highly profitable though cost of
cultivation was substantially high as compared to rice. As with rice, labour cost was
the highest among the cost items. Nevertheless, family labour is widely used in
cultivation of non-rice crops.

17. Diversification of rice field into non-rice crops has big impact on development of rural
agrarian economy by creating employment opportunities, increasing household
income and diversifying food consumption. Further, crop diversification maximizes the
use of square resources like land and water in rural sector, which ensures the higher
growth in agriculture.

Policy implications

Based on the findings of the study some policy guidelines and recommendations are
made in this section towards the development in rice sector in particular and agricultural
sector in general. After liberalization, government policy on rice has been more emphasized
on increasing the productivity and stabilizing the prices than ensuring a high income to the
farmers. This policy direction has not been altered yet though country embarked on liberal
economic polices as far back as 1977. This supply driven government policy needs to be
changed into demand driven in order to transform rice sector into a self-sustaining, profit
making, viable business activity in the new economic environment. In this regard, “plus policy”
is recommended in the present study. The plus policy has three dimensions as explained
below.
1. Optimization of rice production instead of maximization – Policy strategy is rice plus
high value crops. This refers as “FARM POLICY”.
2. Optimization of self-sufficiency level instead of maximization – Policy strategy is
domestic production plus imports. This refers as “TRADE POLICY”.
3. Optimization of government intervention instead of maximization – Policy strategy is
public sector plus private sector and private sector plus farm sector. This refers as
“MARKETING POLICY”.

The goal of plus policy is search for optimization instead of maximization. The policy
stresses that the agricultural progress should be measured by the growth rate in farmer’s
income and not just by production figures. This whole process can be called as “paradise
shift” in rice industry. The following recommendations on these three policy areas are made
based on the findings derived from the present study.

Farm policy

1. Resource use efficiency analysis indicated excess and under use of resources in rice
production. Inefficiency is suggestive of non-judicious and irrational use of critical
inputs such as seeds, fertilizer, agrochemicals and labour. Seed is not used
adequately both in irrigated and rain-fed conditions while fertilizer and labour are over
 used under irrigation condition in the study area. Over use of fertilizer may be due to
fertilizer subsidy which was over 50 per cent. The present government increased the
subsidy level further up to 75 per cent. It is required to limit the quantity issued at
subsidized price in order to avoid the over use.

2. Resource use efficiency analysis further revealed that by improving the management
practices of average farmers to that of the best farmers, about 15 per cent of the
production of irrigated rice and 50 per cent of the rain-fed rice could be increased
under the existing technology without adding any cost to the production process. This
would decrease the unit cost of production, which is imperative in the context of
increasing cost of production at a higher rate than output price. The farm policy on
extension should focus on improvement productivity through management
(management plus productivity). Empirical evidence shows that in-efficiency could be
reduced through educating farmers. It further reveals that farmers who have contact
with extension staff are more efficient than other farmers.

Therefore, there is need for strengthening existing extension service to

enable farmers to follow the resource use pattern of the more efficient farmers.
Today, there is a vacuum in the extension system after transferring village level
extension officers to administrative officers in 1989. Training of Agricultural Research
and Development Assistants (ARDPs) stationed at village level as farm science
managers and establishing farm schools in the fields of outstanding growers are
suggested for consideration as solutions to fill this vacuum.

3. Profitability analysis showed that return from rice farming is negative and competing
crops have higher returns. Hence, there is need to develop alternative sustainable
and profitable cropping system. Crop diversification not only focuses on home market
but also on international markets in order to gain from globalization. Diversifying land
from rice to high value crops will mean that Sri Lanka has to import rice. But the
country imports rice while exporting high value crops. This strategy is successfully
implementing countries like Chile, Israel and Italy, which export farm products (fruits,
wine, seeds and import food). Another advantage is that since most of the high value
crops are labour intensive, exporting high value crops to the developed world
indirectly means exporting labour to the developed countries, which they are not
allowed directly. In this regard, four diversification strategies could be suggested for
consideration.

a) Seasonal diversification - changing crops by season instead of mono cropping of

rice. The rice farming has reached a stage where it is characterized by the
stagnating productivity, rising cost of production, falling profits, degradation of soil
and water resources due to intensive mono-cropping of rice (Bhullar, et al (2005).
The present study found that maize, chilli, soya and watermelon are profitable
crops that can be grown during the Yala season on rice fields.

b) Crop diversification - shifting rice into high value crops such as fruits, vegetables,
flowers and medicinal plants. The present study found that banana and leafy
vegetables are profitable crops. Sri Lankan agriculture is going through a major
crisis of over dependence on rice farming, which yields low returns to land and
consumes more water. Any strategy of rural development must focus on the
conservation of two major resources viz., land water (One India, One people,
August 2005). The country need to move from rice based agriculture to high-value
and high-tech agriculture for its survival.

c) Income diversification – diversifying income sources such as rice, plus livestock

and rice plus off-farm employment (part time farming), and

d) Regional diversification – Limiting rice faming in areas where country has

competitive advantage (e.g., Granary area development in Malaysia)
Trade policy

1. Marketing policy analysis found that price stabilization through trade is superior than
maintaining the buffer stock. Price stabilization schemes in general are costly and
the more price is stabilized, it becomes more costly. The present study found that a
buffer stock maintained by the private traders (bondsman scheme) was highly
successful. One option is allowing prices to fluctuate at maximum possible thereby
encouraging private storage. The target stabilization price should approximate the
long-run average market price (Knudsen & Nash, 1998).

2. It was also found that ad hoc changes in tariff on rice increase the uncertainty in the
rice market and it led to keep higher margins to traders by offering lower prices to the
farmers. Such interventions must take account of the productive roles played by
marketing agents. If the private sector is not carrying out marketing functions
efficiently the government must understand why and how to intervene to improve
maters. Simply, attacking or supplanting the middleman will almost never be the
answer (Timmer et al, 1998). Private sector participation in high level policy decision
meeting such as food security committee is a must because marketing is almost in
the hand of the private sector. There should be a public-private partnership for
improving agricultural marketing, based on win-win model.

3. Study findings showed non-competitiveness of rice export from Sri Lanka. Instead of
exporting rice the government can think of exporting fruits, vegetables and flowers by
shifting some rice lands into these crops, which have growing demand in the
international market. This program could be promoted with the help of private sector
by offering intensives to the sector such as tax holidays, duty free imports of raw
materials, financing for participation of trade fairs and provision of subsidized credits
until the fruit and vegetable export sector get developed.

Marketing policy
1. The market integration study showed that the major wholesale markets in rice trading
in Sri Lanka have a high degree of integration in the short run and long run. However,
as shown in the results, there exists a scope for further increasing the extent of
integration both in short and long run. Therefore further improvements of
communication facilities, transportation, and dissemination of market information
need to be done. Telecasting wholesale prices on Television is one option for rapid
transformation of price information to the wider audience. It is also required to
improve the marketing facilities and infrastructure in the market to improve the
marketing efficiency. The study found that Colombo wholesale market influences the
price formation in other wholesale market in the country. Therefore, it is required to
establish a new market in Colombo because the existing market is old and highly
congested.

2. Analysis of seasonal price variation showed wide fluctuation in producer prices and
farmer’s share. Seasonal fluctuations can be reduced considerably if the post harvest
sales tendency is restricted among the farmers. Instead of direct purchase by the
government, supply management policies such as provision of marketing credits and
development of on-farm storage need to implement to control market supply.
Thailand is successfully implementing “paddy Pledging Scheme”, which permits
farmers and traders access to credit with security provided by crops deposited in
bonded warehouses.

3. It was found that government procurement of rice (rough) is based on ad hoc manner
and it has created a lot of problems. Procurement price is fixed arbitrary. It is
recommended to implement a target price policy. Target price is the minimum price
that farmers should receive for their product. This price should be decided after
consultation of the private sector and there should be a formula for it, i.e., cost +
 profit. In working out a formula, attention needs to pay on parity between input price
and output price and output price and other commodity prices to safeguard the
interest of the rice farmers. The target price needs to be announced at the beginning
of each season and efforts should be made not to fall the market price below the
target price. Farmers should be encouraged not to sell below the target price.
Similarly, traders should be encouraged to purchase at least the target price at
harvest time. Government can provide incentives/motives such as assured markets
and subsidized credits to traders.

4. Agricultural policy analysis revealed that the forward marketing programme is

operating reasonably well. This programme should be strengthened further.
Relationship between farmers and traders should be enhanced to reduce the
tendency to break the agreement. Self-help farmer group should be established to
develop closer relation ship with traders. Success of contract farming depends on a
responsive legal framework and institutional support (Mukesh and Deepali, 2004).
Hence legal procedure to solve the dispute between two parties should be
accelerated in order to avoid unnecessary delay.

5. It was found that there is no strong institutional mechanism to promote agribusiness

in Sri Lanka .It is worthwhile to consider for setting up a separate organization for
agribusiness promotion. The new organization should be responsible for building up
a body of knowledge of the marketing of agricultural commodities and suggesting
measures for the promotion of orderly and efficient marketing system for farm
products. Agrarian Service Centers located at divisional level should act as
agribusiness development centers. These centers were established mainly to
distribute inputs to the farmers during the closed economic period and they do not
have such function now because the private sector efficiently handles input
distribution. Efficient marketing is a pre-requisite in the development process of any
economy (Acharya and Agsrwal, 2003).

Further Research
Issues identified during the course of the study that should be researched further are
presented in this section.

1. The present study found that rice farming is technically and allocatively inefficient.
Factors affecting inefficiency need to be studied. Further research needs to be
concentrate on developing a frontier model that encompasses all components of the
whole farming system including quality and time variation components. Non-
parametric efficiency models like linear programming and data envelopment analysis
could be promising directions for further research.

2. Market integration analysis did not consider the analysis of primary, i.e., village level
market where the producers have direct connection with the traders. It is also
worthwhile analyzing market integration at different levels, i.e., producer and
wholesale to ascertain the integration as a system.

3. Price spread analysis based on the time series data showed that gross marketing
margin for rice is 40 per cent of the consumer price on average. Items- wise cost
analysis is necessary to find out the degree of operational efficiency of post-
production activities such as handling, transporting and processing and trader’s net
margin. This requires collection of primary data through a marketing margin survey,
which covers the whole marketing chain from production to consumption with different
routes.

4. This study found that Sri Lanka does not have in comparative advantage exporting
rice. Alternatively, non-rice crops for export market can be promoted on rice lands as
suggested in this study. The country should harness the export potential of
 agricultural commodities. In this regard, it is required to study export competitiveness
for different crops to identify export potential commodities.

5. It was found that diversification of rice land into non-rice crop creates employment
opportunities and enhance farm income. These findings should be substantiated with
case studies. Improvement in living standards of the farm families who diversified
their rice fields could be measured through variables such as education, assets of
durable products and repayment ability of loans.
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Annexure I: Trend in analysis of rice, 1960 - 1977
SN Particulars Trend equation R2 value T value CGR % F value
Log Y= log a + log b X
**
1 Area (ha) 5.7668 + 0.0072X 0.7498 6.9255 1.6733 47.9620
**
2 Production (000’t) 2.9254 + 0.0166X 0.7124 6.6769 3.8895 44.5814

3 Productivity (Kg/ha) 3.2663 + 0.0073X** 0.5301 4.2500 1.6899 18.0627

**
4 Farm price (Rs/Kg) - 0.4338 + 0.0341X 0.7953 6.7270 8.1683 45.2534
(Nominal)
5 Retail price (Rs/Kg) - 0.2758 + 0.0426X** 0.7954 7.8856 10.3062 62.1823
(Nominal)
**
6 Farm price (Rs/Kg) 0.3848 + 0.0151X 0.4588 3.6830 3.5273 13.5645
(Real)
7 Retail price (Rs/Kg) - 0.1693 + 0.0248X** 0.7038 6.1669 5.8851 38.0306
(Real)

Note: ** - Significant at 1 per cent level

** - Significant at 5 per cent level
NS – Not significant
Annexure II: Trend analysis of rice, 1978 - 2004
SN Particulars Trend equation R2 value T value CGR % F value
Log Y= log a + log b X
NS
1 Area (ha) 5.9354 – 0.0004X 0.0070 0.4195 - 0.0921 0.17599
**
2 Production (000’t) 3.2591 + 0.0041X 0.3726 3.6970 0.9578 13.6682

3 Productivity (Kg/ha) 3.3682 + 0.0052X** 0.7433 8.5090 1.2107 72.4029

**
4 Farm price (Rs/Kg) - 0.3215 + 0.0345X 0.9480 21.3491 8.2679 455.7825
(Nominal)
5 Retail price (Rs/Kg) - 0.0929 + 0.0380X** 0.9581 23.9052 9.1440 571.4562
(Nominal)
**
6 Farm price (Rs/Kg) 0.1257 – 0.0113X 0.7850 9.5541 - 2.6430 91.2812
(Real)
7 Retail price (Rs/Kg) 0.4357- 0.0099** 0.7599 8.8953 - 2.3057 79.1268
(Real)

Note: ** - Significant at 1 per cent level

* - Significant at 5 per cent level
NS – Not significant
Annexure III: Trend in analysis of rice, 1960 - 2004
SN Particulars Trend equation R2 value T value CGR % F value
LogY= log a + log b X
**
1 Area (ha) 5.8148+0.0032X 0.4963 6.511 0.7328 42.3871
**
2 Production (000’t) 2.9810 + 0.0119X 0.8350 14.7541 1.0278 217.6829

3 Productivity (Kg/ha) 3.2719 + 0.0079X** 0.8972 19.3707 1.8469 375.2254

**
4 Farm price (Rs/Kg) -0.4529 + 0.0382X 0.9695 36.9685 9.1943 1366.6660
(Nominal)
5 Retail price (Rs/Kg) -0.2577 + 0.0428X** 0.99734 39.7223 10.3573 1577.859
(Nominal)
NS
6 Farm price (Rs/Kg) -0.2083 – 0.0013X 0.0261 -1.0730 -0.3034 1.1514
(Real)
7 Retail price (Rs/Kg) 0.0720 - 0.0010XNS 0.0142 0.8063 0.3268 0.6501
(Real)

Note: ** - Significant at 1 per cent level

* - Significant at 5 per cent level
NS – Not significant
Annex IV: Estimates of compound growth rate in costs and returns of rice in Maha season, 1979 - 2004
SN Particulars Trend equation R2 t value Compound F value
logY = loga + logbX growth rate %
1 Wage rate (Rs/manday) Y = 1.235 + 0.0497X 0.96 24.930** 13.16 621.50**
** **
2 Labour cost (Rs/acre) Y = 3.048 + 0.0381X 0095 21.490 12.12 461.829

3 Material cost (Rs/acre) Y = 2.670 + 0.0449X 0.93 17.316** 10.64 299.839**

** **
4 Machinery cost (Rs/acre) Y = 2.618+ 0.0439X 0.95 21.623 11.51 467.552

5 Total cost (Rs/acre) Y = 3.305 + 0.0410X 0.97 28.588** 9.90 817.266**

** **
8 Gross income (Rs/acre) Y= 3.496 + 0.0366X 0.96 22.728 8.79 516.580
* *
9 Net income (Rs/acre) Y = 3.027 + 0.021X 0.18 2.318 4.93 5.374

Note: ** - Significant at 1 per cent level

* - Significant at 5 per cent level
Annex V: Allocative efficiency of irrigated rice farming in Polonnaruwa district, 2005 Yala
season

Annex VI: Allocative efficiency of irrigated rice farming in Kurunegala district, 2005 Yala seaon
Annex VII: Allocative efficiency of irrigated rice farming in Kalutara district, 2005 Yala Season

Annex VIII: Allocative efficiency of irrigated rice farming in Polonaruwa & Kurunegala district,
2005 Yala seaon
Annex IX: Cost and return of banana cultivation, in 2005
 COMPARATIVE ANALYSIS OF RICE MARKETING
SYSTEM IN SRI LANKA: PRE AND POST
LIBERALIZATION PERIOD

L. P. RUPASENA 2006 H S VIJAYAKUMAR

ABSTRACT

This study examined the structural changes in rice marketing after economic
liberalization in 1977 to compare the performance between pre and post liberalization period.
Since marketing links with the production, efficiency in rice cultivation and profitability via
competing crops were also studied during post liberalization era. Major policy changes on
marketing during post liberalization period were closing down of Paddy Marketing Board
along with guaranteed price scheme, replacement of rice rationing scheme into the food
stamp scheme, liberalization of rice imports, price stabilization through variable tariff and
establishment of a food supply monitoring system. The growth analysis showed that area
under rice showed a positive growth before liberalization and no growth after liberalization.
Nevertheless, yield registered a positive growth in both periods but the growth rate lowered in
the post liberalization period. Production function analysis depicted that rice faming was
technically and allocatively inefficient in post period; labour and fertilizer were over used and
seed was under used. The B-C ratios were less than one for rice in all the districts studied
indicating un-profitability in production but over unity for all alternative crops studied. Producer
and retail price of rice increased in real terms during pre liberalization era and declined in post
liberalization period. Seasonal price fluctuation reduced during post liberalization regime over
pre liberalization regime due to deregulation of rice trade. Rice wholesale markets were well
integrated during the post liberalization period indicating a positive role played by market
liberalization policies. The value of Nominal Protection coefficient suggests that Sri Lankan
rice is uncompetitive in the international trade. The study stressed the need for a paradise
shift towards increasing farm income rather than increasing production to sustain rice farming
in the open economy. The policies governing rice economy should focus on developing
forward and backward linkages with private sector.