Monday, January 7, 2008

Sri Lanka should fund sustainable agri changes instead of subsidies

Sri Lanka's government should divert funds from agriculture subsidies to improving market linkages of rural farmers on the lines of successful models built by firms like Hayleys and MAS Tropical Food Processors, a new study said.

The island has much potential to develop its spices sector mainly consisting of over 200,000 small farmers using pro-poor agribusiness models to revive smallholder spice cultivation, the Institute of Policy Studies said.

Some 70 percent of production of spices like cinnamon, pepper, cloves, cardamoms, nutmeg and mace comes from smallholder farms of less than one hectare of land.

"Increasing competitiveness and strengthening their linkages with agri-business firms which ultimately improve the capacity for participating in modern supply mechanisms will be useful in creating a conducive production environment for small farmers," the IPS report on the state of the economy said.

Given the government's limited resources and competing demands, the best use funds allocated for agriculture development was "to improve technology, rural infrastructure and build market linkages rather than using them for economically insignificant subsidies which have no long-term development impact."

This year Sri Lanka is slated to spend 15 billion rupees on fertilizer subsidies after spending 10 billion last year to fulfill election promises. Critics say on the other hand, agriculture extension services get only a fraction of the amount.

The report highlighted what it called the innovative approach adopted by a few firms like listed conglomerate Hayleys and the unlisted MAS Tropical Food Processors.

Hayleys is Sri Lanka's sole exporter of gherkins to the international market today while employing thousands of people through its out-grower and subcontractor network.

The firm has set up hundreds of production centres in many parts of the country, mostly in rural areas.

"As a result, the company has been able to form an important link between Sri Lanka's rural hinterland and its global customer base, and has been able to penetrate and make use of the valuable resources that are available in the rural areas," IPS said.

Its factories in underdeveloped areas help increase the income generating capacity of people living in different parts of the country, creating employment opportunities for thousands of rural workers.

They also enhance the local value addition of manufactured goods due to the use of domestic raw materials and other inputs.

MAS serves food marketing companies like Nestle, Unilever and SriLankan Airlines, supermarket chains like Cargills and Keells, and export markets.

It provides better farmer training, supplies inputs to farmers and arranges for better storage, collection and transport of spices.

This supply chain model is significant in providing a source of livelihood and fighting poverty in rural farming communities, the IPS report said.

The government can help by providing necessary infrastructure like roads, and a suitable policy and legal environment especially in the areas of trade, land and labour.

"The main constraint from the side of small holder farmers is the poor market link between farmers and exporters," IPS said.

Middlemen buy farmers' produce at lower prices and sell them at higher prices creating a large gap between the price received by farmers and the auction or FOB price.