SRI LANKA: RAIN HURTS RICE CROP; PRICES RISE

UNCLAS SECTION 01 OF 02 COLOMBO 000370

SIPDIS

SENSITIVE

SIPDIS

STATE FOR SCA/INS, SCA/RA, and EEB/TPP/MTA
DELHI PLEASE PASS TO FAS

E.O. 12958: N/A
TAGS: ECON EINV KCOR KMCA PGOV CE
SUBJECT: SRI LANKA: RAIN HURTS RICE CROP; PRICES RISE



1. (SBU) SUMMARY: Torrential rains are damaging paddy yields in
the main rice growing areas of Sri Lanka, with as many as 15,000
hectares lost. Domestic prices are up in wholesale markets and
sharp increases in retail prices have started and will continue
unless international supplies can be assured. The government has
temporarily lifted import tariffs for rice in response to the
shortage of domestic supply and is working to secure international
commitments for rice imports. Although farmers are expected to
benefit by high rice prices, the continued increase in cost for this
staple food product is negatively affecting the poor. End summary.

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A Weaker Harvest, in Quantity and Quality
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2. (SBU) Sri Lanka's rice production is suffering from too much
rain. Locally, rice is traditionally reaped twice a year. The
major ("maha") harvest season runs from February through April, with
a smaller crop brought in between October and December. The North
Central and Eastern regions fill the country's rice basket, with
Ampara in the east the highest rice producing district. (Note:
Northern and Eastern paddy crops have long been negatively affected
by the conflict.) Initial estimates by the GSL's Department of
Census and Statistics placed 2008 rice production at 2.1 million
tons. However the recent inclement weather will make this figure
unattainable. Sri Lanka consumes approximately 2.3 million tons of
rice per year.


3. (SBU) The Director General of Agriculture, Dr. C. Kudagamage,
told Econ FSN he estimates approximately 15 percent of this year's
"maha" crop will be lost. He acknowledges prices are rising due to
local shortages, and are expected to continue to rise as supply is
further curtailed.


4. (U) A drop in quality is also likely as farmers are unable to
thresh the paddy during significant rain. As a result the rice
remains in the paddy longer than is ideal, and quality suffers.
Officials of the Department of Agriculture's Office of Extension
Services estimate around 50,000 tons of harvested rice will be of
inferior quality.

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How Bad Is the Shortfall?
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5. (SBU) The extent of the rice shortfall is a common topic of
discussion as prices rice and families are forced to make hard
choices about how to spend their rupees. Theories concerning the
both the extent and reasons behind of the local shortage of rice
abound:

-- Dr. R. Ratnayake, the Secretary of the Ministry of Commerce,
believes the current shortage is primarily due to an inability to
mill harvested paddy as it cannot dry properly, and because a large
number of small millers are holding stock in anticipation of further
prices increases. He also notes that the drop in wheat flour
consumption over the past year -- as a result of high prices -- has
created additional demand for rice. He estimates that Sri Lanka
will require an additional 200,000 tons of rice (2.4 million tons
total) above last year's level to meet demand in 2008.

-- T. Pallianandy, the president of a commodity wholesale
association in Colombo, feels the situation is worse and asserts
that only 15 percent of the "maha" harvest has been collected to
date. To illustrate, he notes that in a normal "maha" season, 25-30
truckloads of rice are delivered to the wholesale market daily.
Currently, he says, only 3-4 trucks arrive each day. He adds that
the heavy rains have also flooded many small stores, causing a loss
of previously harvested rice. He also believes many millers and
traders are holding on to rice stocks, hoping for further price
hikes.

-- Managing Director of Cargills Ceylon Ltd Ranjith Page, whose
company operates more than 100 retail food outlets and accounts for
4 percent of total rice traded domestically, claims that 30 percent
of the rice crop has been destroyed. In addition, he says 20
percent of the harvest is afflicted by poor quality.

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COLOMBO 00000370 002 OF 002


Government Action
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6. (U) Expecting that prices will rise sharply in the next few
months, the government is taking action now to ensure a steady flow
of imported rice to ease local shortages and price escalations.
However, with global production scarcity and countries such a
Vietnam, Thailand, and India prohibiting rice exports in an effort
to cope with their own domestic needs, cheap imports are unlikely to
be widely available.


7. (U) The government has found at least one willing partner.
Following a plea from President Rajapaska, India agreed -- despite
its ban -- to export 100,000 tons of rice to Sri Lanka. (Note: In
2007, Sri Lanka imported just over 70,000 tons from India.)
However, concerns about the price at which it will be exported
remain, and it will not be enough to meet Sri Lanka's needs. As a
result, the GSL is also making appeals to Pakistan and Burma for
rice supplies. Trade Minister Bandula Gunewardene recently traveled
to Burma to plead for 100,000 tons of rice exports in 2008, and
discussions with Pakistan could add another 50,000 tons to Sri
Lanka's supply if successful. However, according to Pallianandy,
Pakistani rice varieties are not suitable for local consumption, and
its wholesale prices are too high.

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Prices and Impact on Farmers
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8. (SBU) Without assurances for international rice availability and
lacking a full picture of the extent of local damage, it is
difficult to predict how high rice prices could go. In December
2007, one kilo of rice sold for approximately 55 rupees ($0.53). At
present, the same kilo goes for 80 rupees ($0.77). Cargills MD Page
believes that prices could rise to as much as SR 140 ($1.30) in the
next few months. The burden on low income families will be
significant.


9. (U) Farmers are faring well, with many benefiting due to the
shortage. Those who held off on selling their harvest from late
2007, and/or those minimally affected by the rains are now fetching
high prices for their crop. Many also continue to hold on to stocks
in the hope that prices will rise even further. In some cases,
these high prices may more than make up for their "maha" loses.

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Comment: Weather is the Proximal Cause, but
Government Policies Exacerbate Problems
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10. (SBU) The current shortage is not yet a crisis, but it could
easily reach that level if the government is unsuccessful at
securing additional supplies. However, the government has itself
partly to blame for the current situation. Agriculture contributes
approximately 16% to Sri Lanka's GDP, and provides employment for
around 30% of the population. Unless the government and private
sector focus on better technologies to enhance production, Sri
Lanka's domestic production will continue to lag, with or without
additional inclement weather concerns. The government currently
spends millions of dollars annually on fertilizer subsidies with
negligible results. These funds could be better utilized to
transfer proper agricultural practices to farmers and to build
infrastructure and market linkages. Mismanagement and corruption
among government agencies also exacerbate problems. Recently, rice
imported to be distributed through the government's cooperative
system was discovered to be sold through private traders.
Unfortunately, despite these concerns, the government appears too
preoccupied with the conflict to address these issues. The high
rice prices will add to Sri Lanka's already high inflation,
resulting in continued difficult times for Sri Lanka's poor.

BLAKE