Economic View

On the potential for change in agri-business

How can the liberalisation of traditional industries impact Sri Lanka’s economy in the medium to long term?

KOEST: Economic liberalisation is a must going forward. Trade openness has created more advantages than disadvantages for Sri Lanka over the past few decades. Many local agricultural exports have reached the far corners of the world and earned competitive margins. 

However, the current low-cost model has come to an end, and competitiveness in the future will look totally different. First, the pace of liberalisation will need to accelerate if Sri Lanka is to move towards a more modern economy. Second, production efficiency and economies of scale will need to be achieved though mechanisation. Lastly, true value generation will only be reached through innovation and integration that involves the entire value chain.

The prevalence of small-scale farmers poses a structural challenge for the sector. A modern economy will reshape traditional industries by weeding out the weaker players. In order to achieve sustainable foreign income, traditional industries will have to embrace change – something that may pose a challenge for Sri Lankans. 

It what ways will agri-business help Sri Lanka reach its target of $20bn in export earnings by 2020?

KOEST: Agricultural exports have played a pivotal role in the past, but their share of total foreign earnings by value is expected to decrease. Other industries will be more beneficial to the economy, such as IT. Generating value by developing software, for example, is far more lucrative than selling rice. Unless it’s a specialty grain, rice will always be a cheap commodity. Agri-businesses need to look at specialised value chains. A Good Agriculture Practices (GAP) certification, for example, can help achieve higher profits for farmers and exporters. GAP-certified exports are capable of earning at least three times the local price because there is an added guarantee of freshness.

Rather than just exporting low-cost, unprocessed commodities, Sri Lanka needs to engage in further value addition through finished goods, manufacturing and branding. The difference can be seen in the amount charged for a branded tea bag compared to what is charged for the same amount of tea at auction. 

How can the public and private sector collaborate to mitigate the extreme weather conditions affecting plantations?

KOEST:  Climate change is real, and there are clear choices governments around the world need to make. Sadly, more often than not, climate comes second to economic growth and progress. Sri Lanka has published its climate change policy, climate change strategy and its National Adaptation Plan, which still does not include a commitment to reduce CO2 emissions. Clean energy and clean transportation would be a good place to start.

Where do you see potential room for agri-businesses to further integrate technology into their value chains?

KOEST: As mentioned earlier, most of our value chains are focused on raw, unprocessed goods. The best example is the rubber industry. For the longest time we have been focused on producing good-quality rubber, but we have never invested in producing high-value products, such as tyres. While we do produce a small quantity of tyres, most are imported to Sri Lanka. For agriculture, the integration of technology could enhance efficiencies and generate value at various stages. 

Agricultural efficiencies could be improved in seed development, planting methods, and fertiliser and pesticide application. Rather than importing the core components of agriculture, the cost of production should be reduced by developing local seeds, fertilisers and pesticides.
While machinery usage has increased over time, they are designed for commercial operations and remain too expensive for local farmers, especially as the majority of farms here are small-scale operations. Therefore, it is necessary that technological innovations are focused on local solutions. The same applies for planting methods, harvesting methods, and fertiliser and pesticide applications.

The lack of incentives for agri-businesses to embrace technology is also an issue. For example, in pepper, while machine processing delivers a higher-quality product than manual processing, it does not necessarily translate to higher profits. 

Overall, the single biggest opportunity for the future of agricultural is change, while the single-biggest risk is being reluctant to change. The entire sector must undergo a large-scale, radical transformation: from low to large-scale operations, from manual to mechanised, from raw material production to integrated, branded, high-value-added chains. Failing to do so means that agriculture will become a more marginal sector of the economy in the decades to come.