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by Dr. U. P. de S. Waidyanatha

The unprecedented coconut prices due to severe supply shortfalls have posed a serious problem for the new government striving to reduce the cost of living has also for the DC industry, which is rapidly losing its market share to other coconut producing countries where nut prices during comparable periods have remained around 50 - 60 per cent of those in Sri Lanka.

The DC mills in the last two months have been in operation just for about 4 days per month and exports were less than 50 per cent for comparable months during normal years of nut supply.

By contrast, the local coconut oil industry has performed relatively better being heavily protected through taxes on imported vegetable oils. Yet, only about half the oil mills have been in operation for just about two or three days per week. There were no oil exports due to high local prices ranging from Rs. 90,000 - 100,000 per MT., the world crude oil prices being around Rs. 33,000 per MT.

On account of the last year's drought, the production this year is forecasted to be about 2300 million nuts. This is based on the observations on annual productions following droughts in the last 25 years.

The worst recorded crop loss during that period was 22 per cent in 1977 compared to the 1976 crop and in several subsequent drought affected years, the crop losses have been of the order of 15 - 20 per cent compared to the respective crops of previous years.

The production in January and February is usually about 10 per cent of the total annual production according to which, the production for those two months of this year should be about 230 million nuts. At the estimated per capita fresh nut consumption of 94 per year; about 280 million nuts would be required for this period meaning that there is theoretically a shortfall even for household consumption, let alone for the processing industries.

Such exceptionally tight supply positions are always exploited by middlemen and retailers who have obtained unusually high margins for January this year compared to those for years of better production.

It is reasonable to expect for the coconut prices to come down in the coming months, but on account of the overall low production anticipated for this year, the prices will remain substantially higher than for comparable periods in the good years. The retail prices of course are also exacerbated by the demands for DC, oil and other ancillary industries.

Processing industries

At an estimated production of 2300 million nuts for this year and a household consumption of about 1800 million nuts, only some 500 million nuts should be available for the processing industries and for export as fresh nuts. Our share of the world DC market is around 60,000 MT, and if this total demand is to be met, all the 500 million nuts should be available to produce DC.

Given the degree of tax protection (Table 3) the coconut oil industry is currently enjoying, this cannot happen, and the oil mills will continue to siphon off a major portion of this share of the nuts, unless the surcharge is reduced. Producing the world's best quality DC, our DC industry has always had a competitive edge, over other producers, but over the last several years, because of supply shortfalls, Indonesia has been quick to cash in, capturing a share of our market.

The DC industry has, on the other and, always not acted prudently. For example a 38 per cent production in excess of our share of the world market in year 2000 led to a price plunge which naturally drastically affected the producer prices. The government was then too slow to stimulate the coconut oil industry through increased taxes on imported vegetables oils.

This led the DC millers to eventually overproduce consuming a part of the nut surfeit from the bumper harvest of that year which exceeded 3000 million nuts. The delay in levying the surcharge on vegetables oil imports benefited the growers only marginally in that although the farmgate price shot up to Rs. 10 - 12/nut in the last few months of 2001, the net sales average for that year was only about Rs. 6/nut. The surcharge which has been extended until the end March this year has, however, continued to benefit the grower and the coconut oil industry.

Manipulating equitable nut prices for the producer, consumer and the industry is no easy task for the government. The recent decision to allow immediately import of 20,000 MT of edible vegetables oils without the surcharge of Rs. 20,000/MT has already reduced nut prices by a few rupees, and should also divert a greater share of the nuts for the DC industry in the coming months.

The DC industry however yet remains in a quandary in not being able to commit on forward contracts in a higher speculative nut supply position.

The improving nut supply as the peak production season (April - July) approaches should also ease the prices and perhaps pave the way for production of about 40,000 MT of DC, yet a third short of our share in the world market. An alternative or additional strategy to stimulate DC production should be importation of quality (milling grade) copra to feed our local mills, and step up production of coconut oil to about 90,000 MT for this year.

Turning the mills will also have the added advantage of employment generation and poonac production. However, there is doubt whether quality copra would be available ex-stock in the world market in required quantities. Low grade copra, on the other hand is available ex-stock freely from the Philippines and Indonesia but the quality of oil produced demands refinement.

There is then the issue of local refinery capacity being inadequate at present. A further option that has been considered is importation of fresh nuts to meet the shortfall, but this carries the risk of introduction of new pests and diseases, and should desirably be avoided. The government is however doing its best to untie the Gordian knot.

Low productivity, high cost of production, weather-dependent supply volatilities and expansion of the palm oil industry have seen erosion of the coconut oils' market share which now comprises a meagre 3 - 4 per cent of the total world's vegetables oil market.

Local production costs and hence prices have always been at least 50 - 60 per cent higher than world coconut oil prices.

Hence exports are prohibitive except for small quantities to notch markets such as Bangladesh. Without substantial protection therefore, as it happens now, the local coconut oil market should theoretically collapse (Tables 2 & 3). However in reality adulteration of coconut oil with the cheaper imported palm oil and selling the mixture as coconut oil, and evasion of payment of GST & NSL by many in the informal sector (baby expeller owners) of the industry have stemmed the local coconut oil industry from a total collapse.

Grower

Whilst an equitable price for the grower is vital in the long term interests of the industry, the current prices they enjoy range 50 - 70% higher than prices elsewhere in the world, due largely to the high taxes on imported vegetable oils (Table 3). Given a cost of production of Rs. 4 - 5 per nut, the grower would naturally expect a farm gate price range of Rs. 7 - 9 across the year.

To achieve this, the government would be under pressure to manipulate prices through adjustments in taxes and import volumes of vegetable oils. However, with tariff barriers to be phased out in the future under WTO dispensations, how such a price mechanism could work in the long term is questionable.

The grower on the other hand should change his mindset on the coconut farm from one that produces only coconuts to one where coconut is merely a component in a production system integrating coconuts, intercrops and animals.

This will reduce his risk from commodity price vagaries giving him a more stable income. That many intercropping and animal production systems give returns per unit of land far in excess of that for coconut is well established, but such activities in coconut farms remain insignificant. Less than 20% of the coconut lands is intercropped, and the size and intensity of such operations remain small.

Irrigating coconut

The weather-dependent year to year variation of coconut production has been the bane of the industry making production planning impossible. The recent drought has taken a toll of some 700,000 palms, majority of them from the Hambantota district. Must we indiscriminately replant all drought stricken areas, or concentrate on replanting only in those areas which are less prone to drought to be identified using the coconut land suitability guidelines developed by the CRI and leaving the marginal areas for more drought tolerant crops such as cashew.

However growing coconuts in home gardens wherever possible should be encouraged. In order to mitigate production fluctuations, application of resources should be concentrated in the high potential areas. Irrigated coconut is fast becoming a reality and many enterprising growers are venturing into it. Some 1,500 acres of irrigated coconut in the Mahaweli has come into bearing under 3 years.

Such is the potential. The CRI together with the Water Resources Board have identified some 21,000 ha with high deep ground water potential (more than 100 litres/min) in the Puttalam district. Deep ground water prospecting in Kurunegala district's coconut lands has also been initiated.

Fifty thousand hectares of irrigated coconut should provide a more stable supply situation, and this is a matter that should be high in the industry's agenda. The national target should be a stable supply of three billion nuts per year to feed both the consumer and the industry.

The writer is Chairman, Coconut Research Board. The views expressed are personal and not necessarily government policy.

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Copyright 2001 The Associated Newspapers of Ceylon Ltd.
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