Monday, May 23, 2011

Food prices

People from overseas are often shocked at the price of food in Sri Lanka, visitors from as far away as England and Australia have been muttering darkly after a visit to the local supermarket. We usually reply that this due to inflation but think no more of it.

A friend of mine recently told me that the reasons for high prices are due to taxes and poor policy. Imported food is taxed (a lot of our food is imported) and this results in high prices in the local market. He gave me the example of coconut.

The Government has imposed heavy import duties on vegetable oils (soy, corn etc) thus driving up the prices of imported cooking oil. Local coconut producers thus find it more profitable to channel coconuts to oil production leading to a shortage of fresh nuts in the market resulting in coconut prices shooting up to Rs.60/- Will anybody with a coconut oil mill confirm this? The supermarket prices for coconut oil were between Rs.470-505 per litre (N'Joy and Cooks Joy) while vegetable oil ranged from Rs.425 upwards.

In the meantime, coconut producers seem to be doing fairly well, but not as spectacularly well as the nut prices suggest. One smallholder manages to still make a loss, but his holding (5 acres) is probably uneconomic and suffers from a high level of theft. Someone with a much larger holding (about 90 acres) says he is doing reasonably well, but I am not close enough to him to dig up detailed figures. again, anyone who can supply further information is welcome to do so.

Fish prices are supposed to be high due to tax imposed on canned Mackeral. The tax is supposed to be around Rs.100/- per can, a 450g can retails for Rs.215. People try to buy fresh fish instead and this pushes the fresh fish prices up. The customs website has some details of taxes, but is not detailed enough. Taxes on potatoes, onions and sugar have been revised a number of times.

The Gutterflower very kindly assisted me by compiling the prices of a few common foodstuffs in Delhi.

Indian Prices (converted to LKR @ 2.45 LKR = 1 INR)

Normal Rice 80.86
Long grain basmati 161.73
Yellow lentils 68.61
Red lentils 134.77
Potato 28.79
Tomatoes 54.64
Onion 30.63
Chicken (whole chicken, approx) 367.57
Bread 31.10 (780g sliced bread INR 22, converted to a 450g price to make comparison easier)

Local Prices

Red Raw rice 56
White Raw 58
Basmati 286
Mysore Dhal (small reddish grains) 168
Mysore Dhal (larger yellowish grains) 139
Potato 120
Tomatoes 70.7
Bombay onions 74
Small onions 173
Chicken] 350
Bread 102.75

In terms of basic cheap rice, currently local prices are lower, although there was a time a few months back when they shot up to around Rs.100/- a kilo. In almost every other item the Indian prices are far lower than in Sri Lanka. Why this should be so is the question to which I have yet to find an answer.

What is especially interesting are the prices of onions and bread. Locally produced red onions are more than double the price of imported Bombay onions. The price of bread, thrice the Indian level is inexplicable, unless wheat is heavily subsidised in India. India does indeed subsidise wheat, the extent of which on a per kg basis I need to try and work out.

Surprisingly enough chicken prices are comparable although production in Sri Lanka should be more inefficient. Chickens are fattened on grain, it takes roughly 3.5kg of feed to produce a kilo of chicken, since this country does not produce enough grain, the bulk of the feed ingredients are imported. Therefore a producer of grain such as India should have an inherent advantage that should translate to lower prices. Many years ago when someone checked on the possibility of imported frozen chicken from India, selling prices in India were around 60% of the local cost of production.

These are just a few thoughts and I would appreciate any feedback that could explain some of these questions.

Update 13-6-2011

LBO has an interesting article on the revenue raised by food taxes, see here.

23 comments:

Eargazzm said...

This is an really helpful post, who knew they tax 100 bucks a can of mackerel. I wonder how much they charge on a can of Red bull :S

Jack Point said...

Thanks Eargazzm.

I was told that the tax was in that region.

When I searched the web prices for a carton of canned mackerel was around US$13-15. At 24 cans per carton this works out to 54-62 US cents per can (Rs.59-68) plus shipping.

Lady divine said...

Very interesting post. and sad at the same time.

When I went to India last month, I did notice this. Food in definitely cheaper there and people there who had been to SL were telling me that our food prices are way too high. then it actually made me think.

Your comparison proves it. But is there anything that can/will ever be done about it? I wonder..

Jack Point said...

Thanks for the comment LD. If some food prices can be reduced by the reduction of taxes then we should advocate that.

In order for the government to cut taxes they need to cut expenditure, there is more than enough waste and corruption that can be cut down. All the commissions paid or money wasted (eg by keeping street lights on in day time) must be paid for by taxes.

Cut the waste, cut the corruption and the government will need less money. Taxes can then be reduced and with that lower food prices.

Risha said...

A Rs. 100 tax on tinned fish sounds abominably high.
I am not altogether sure about the US prices of tinned mackerel, but in Vancouver it retails at about CDN 2.50 a can. Of course taxes are on the higher end in Vancouver, so I am not sure it is the best comparison.
I recall a certain discussion with our friend the fascist theorist at which he told me that since Sri Lanka stopped devaluing the rupee, food prices were starting to reflect world market prices again. I have to say that I tested that theory when I returned to Vancouver and found it to be mostly true. In fact a lot of things are a little bit more pricey here, but like I said this tends to be a high tax province. Here are a few things I noted the prices of:
Chicken - 1 kilo - $ 5
Eggs - a dozen - $ 2.50
Butter - (1 pound) - $ 4
Basmathi Rice - 5 kilos - $11.95

Jack Point said...

Thanks for the input Risha.

The prices in Vancouver look very high, everything looks more expensive except the Basmati rice.

rajivmw said...

Great comparison. It's not actually as bad as I thought it would be. About a decade ago,I remember my Indian boss complaining that a cauliflower here was something like Rs80+ when it was apparently less than Rs10 in India.

I suspect the price discrepencies are mainly due to the following:

1. Our import duties and taxes as you have pointed out.

2. India has a much higher percentage of arable land than we do, so it actually has greater production capacity per person despite its enormous population.

http://en.wikipedia.org/wiki/File:Arable_land_percent_world.png

3. In addition, India has a variety of climatic conditions that enable it to grow crops that are difficult here (e.g. wheat).

4. Indian agriculture might be, on the whole, more efficient since landholdings are probably larger (at least in certain sectors), and labour is almost certainly cheaper.

The Indian upper and middle classes do enjoy substantially lower food costs than their Sri Lankan counterparts. But that may also offer some explanation as to why their rural masses are more impoverished than ours.

As an aside, there was this theory that the open economy ruined the onion and chillie growers in the North and this contributed to the frustrations that led to war. I don't know if this is true or not, but if I have to pay a little extra for chillies and onions to help Jaffna farmers live with dignity, then I'm happy to do it.

rajivmw said...

Great comparison with India. It's not actually as bad as I thought it would be. About a decade ago,I remember my Indian boss complaining that a cauliflower here was something like Rs80+ when it was apparently less than Rs10 in India.

I suspect the price discrepencies are mainly due to the following:

1. Our import duties and taxes as you have pointed out. Much of what we buy is imported. But even a lot of our local food products rely on imported inputs (like bread as you pointed out).

2. India has a much higher percentage of arable land than we do, so it actually has greater production capacity per person despite its enormous population.

http://en.wikipedia.org/wiki/File:Arable_land_percent_world.png

3. In addition, India has a variety of climatic conditions that enable it to grow crops that are difficult here (e.g. wheat).

4. Indian agriculture might be, on the whole, more efficient since landholdings are probably larger (at least in certain sectors), and labour is almost certainly cheaper.

The Indian upper and middle classes do enjoy substantially lower food costs than their Sri Lankan counterparts. But that may also offer some explanation as to why their rural masses are more impoverished than ours.

As an aside, there was this theory that the open economy ruined the onion and chillie growers in the North and this contributed to the frustrations that led to war. I don't know if this is true or not, but if I have to pay a little extra for chillies and onions to help Jaffna farmers live with dignity, then I'm happy to do it.

rajivmw said...

Just one more possibility, although I am not aware of the facts:

Markets may be more competitive in India. In SL, many commodities seem to be controlled by monopolists or cartels.

Again, I don't know enough to be sure.

niroshinie said...

Comparing the salaries vs living cost, I think SL is expensive against Australia. Although from what Risha says, it looks like Melbourne is more expensive than Vancouver !

For example some prices in Melbourne,

Onions 2Kg : $2.99
Canned Coconut cream 400mL : $0.90
Carrots 1kg : $2.28
Leek each : $2.40
Milk Full Cream 2L : $2
Eggs (12) : $2.71

The Puppeteer said...

I'm afraid I haven't got any input. Just wanted to say your post included something I needed for an econ assignment! Thanks! :D

duminda said...

Gov is doin the right thing..you can't just blame them without comming up with a solution..we haven't heared any stories about fameres getting suicide in recent times...importing stuff will be good in short terms...you just can't think about the short term benifits and come up with a post like this..come up with a proper analyse..that schould include the farmer death rates as well..and most importntly SL is a agricultural country...60% of the population are farmers..

Anonymous said...

There is an irony here. Paddy fertilizer is subsidised to the tune ofRs40B per annum, to help the inefficient farmer keep his cost down. Efficient farmers who farm over 5 acres DO NOT get this subsidy.

So tax on Sugar, Wheat, Canned Fish, Onions and Potato and Vegetable Oils amount to about the same.

If we remove the tax and remove the fertiizer subsidy what happens is bread becomes much cheaper, and rice more expensive.

Until we have more eficient rice farming units, by changing the land ownership laws we cannot hope to change the eqilibrium.

Jack Point said...

Thanks to everyone who has commented.

Rajivmw, I think you are quite right in your analysis of Indian farming. The factor which I am uncertain of is the extent of subsidies, I am trying to dig up a bit on this.

Niroshini, thanks a lot for that input, SL does look cheap compared to Melbourne. I think perhaps my friends had bought things like cornflakes, bottled fruit squash, apples etc which are more or less ready to eat. These are subject to particularly heavy taxes. In the last couple of years I have given up the following because of price:

1. Weetabix
2. Canned mackeral.
3. Apples
4. Bran crackers (locally produced, they went up from Rs.35 a pack to Rs.70).

Puppeteer, glad to be of service.

Duminda, this is a bit of a dilemma I have been grappling with. On the one hand there is a question as to whether the government should support the 2.5m people employed in agriculture, out of a total workforce of 7.7m. This includes tea and rubber which are both primarily export crops.

(Figs taken from the Central Bank report, link below)

http://www.cbsl.gov.lk/pics_n_docs/10_pub/_docs/efr/annual_report/AR2010/English/8_Chapter_04.pdf

Anon, thanks for that insightful comment.

Just discovered some stats from the International Rice Research Institute:

http://beta.irri.org/solutions/index.php?option=com_content&task=view&id=250

Rice yield in SL (3.93 mt/ha) are a bit below the Asian average (4.21mt/ha) in 2007 (according to CBSL in 2010 the figure was 4.54mt/ha), but better than India (3.21mt/ha) and Pakistan (3.19mt/ha).

Possibly cost of inputs are cheaper in those countries, perhaps they use less fertiliser?

Wasa Katha said...

Sri Lanka's lazy farmers who farm small plots of land are getting income transfers from the rest of the society who complain less.

For example a construction worker put is long hours, working overtime etc all throughout the year. This is back breaking work. The farmer plants stuff and waits for it to grow.

Factory workers also work all throughout the year. Sri Lanka's fish prices are high partly due to the problem with mackerel taxes.

Underemployed (landowning) farmers have more political pull everywhere because they have fixed abodes and votes they can sell in return for subsidies. Farmers prey on factory workers, construction workers etc who sweat more blood.

Farmers have always put in sob stories and robbed other sections of society in cahoots with rulers. Our farmers (and their vote grabbers) are among the worst in the world.

Our government give price support and fertilizer subsidies without putting money into extension services. This is just an income re-distribution scam practiced by politicians the world over. It will go on as long as society is willing to tolerate it. All domestic production, import substitution scammers do the same thing. They profit from the misery of the poor and the hardworking (rich are not affected, they lose a little more money that is all). When food prices are a higher proportion of a persons income goes to food.

Farmers are more efficient and harder working in other countries. Look at Thailand, Malaysia or Pakistan either at the quality of the rice or fruits that they produce or the price. Pampered farmers, plugged to the gills with fertilizer subsidies and their pockets flushed with high prices under a cloak of protection have no incentive to increase productivity or change to crops they are better at producing or the agro climatic conditions favour. Welcome to Api Wawamu, Rata Nagamu.

Jack Point said...

Thanks for dropping by Wasa Katha.

Would you like to elaborate a bit on this "Our government give price support and fertilizer subsidies without putting money into extension services."

Anonymous said...

It is possible what he means is that fertilizer subsidies DO NOT encourage efficiency, which is desperately needed for cost reduction. While price support in the form of taxes on imports so the domestic product is protected is also a means whereby inefficiency is ecouraged of at least tolerated.

By extension services I imagine it is technical assistance to improve efficiency which could include advice on soil, seed material to use, methods of cultivation to optimize harvest. Sparse use of pesticides and chemical fertilizer so no lasting damage is done to soil due to leaching and killing protective pests.

In short the Farmers are the least educated people in Sri Lanka and they must be the most educated if they are to actually earn a reasonable income without handouts.

As every Jhonny in a village thinks he is a farmer, the give aways are to get the votes of the Jhonnies. In actual fact only 10% of the Jhonnies are farmers, the others who have other sources of income just take the freebies that the politicians dole out, making a mockery of the whole process

Jack Point said...

Thanks Anon

Angel said...

Good post JP, and while I have little to add other than my horror at what the weekly veg-and-groceries cost. And I can just imagine how the poorer people of the country are hit by this.

One thing that has always worried me is the very high price of milk and milk products like cheese, compared to other countries. Any comments?

Jack Point said...

Thanks for the comment Angel.

Milk powder is taxed as well but high world market prices have contributed their share.

The Government recently reduced the duty on milk power from Rs.50 per kg to Rs.28.

http://www.lankabusinessonline.com/fullstory.php?nid=1547805076

However, Rs.28/kg is not the final tax, that is only the duty. Some of the following taxes will also apply:

Customs duty (Rs.28/kg)
Surcharge (if applicable - not sure)
PAL 5%
Cess Levy - not sure if applicable
VAT - 12%
Excise Duty - not applicable
RIDL - not sure
SRL - not sure
NBT - 3%

So at a guess a further 15% - 18% of the landed cost is added as duty.

I will see if I can get further information.

sbarrkum said...

Couple of Issues:

a) World prices does play a part and if prices are lower than in the world market the Govt tends to tax to bring them up to Sri Lankan prices so that the local farmer does not suffer.

b) Our real wholesale prices cant be all that low, given that there are multiple entities exporting vegetables and other other crops. Coconut used to have similar issue many years ago, when the mills started exporting as much dessicated coconut as they wished, sending coconut prices sky high. Then the govt stepped in and put a cap on export of dessicated coconut. Dont know current status. India stopped the export of rice to keep the prices down. Maybe also issues of distribution, transport etc of vegetables keeps the prices down in India.

c) Regards subsidies, the developed world provides huge incentives and subsidies to big Ag, i.e. the huge conglomerates like Archer Daniels. The 40% of the EU Budget is allocated for agriculture and fisheries. The US has about USD 20 billion in direct subsidies to agriculture. Read the wiki on Agriculture subsidies for the case as to why Big Ag subsidies in Industrialized countries hurt developing countries. To quote

Agriculture is one of the few areas where developing countries have a comparative advantage, but low crop prices encourage developing countries to be dependent buyers of food from wealthy countries. So local farmers, instead of improving the agricultural and economic self-sufficiency of their home country, are instead forced out of the market and perhaps even off their land. This occurs as a result of a process known as "international dumping" in which subsidized farmers are able to "dump" low-cost agricultural goods on foreign markets at costs that un-subsidized farmers

c) Big Ag versus small holdings. Had a post on this a few weeks back

My thoughts are that high food prices are here to stay. If you are paying high prices for local food, be happy that it is supporting the local economy. Yes, there are many who complain about high food prices while thinking nothing about spending LKR 200 or more on three wheel rides to and fro. This is not just the urban population but even those in villages.

Whom do you think is more productive, the three wheel driver or an inefficient farmer.

Anyways, if you think you are paying too much for locally grown veggies and fruits, you could grow them in you house or even apartment. I see houses with rows of ghastly (to quote Prince Phillip) Piyamiya and Red palms. Replace the Piyamiyas and grow an Amabarella tree or similar fruit tree. Get rid of the Red palm and have a Dwarf Coconut tree. Otherwise be willing to pay for the luxury of having totally unproductive plans in your garden.

Jack Point said...

Thanks for the comment Sbarrkum.

I do agree that high world market prices are partly to blame, although local taxes make the problem far worse.

Agricultural subsidies in the US and EU do distort markets and need to be phased out, I am quite in agreement there.

I have actually been thinking of growing a few vegetables at home, with current prices it certainly makes sense.

However I don't think it is wise to stop exports to control local prices, these are short-term solutions that will dissuade farmers from producing in the long term.

Protecting the farmer at the expense of the consumer is a zero sum game - one is better off while the other is worse off. Given that there are only around 2.5m people employed in agriculture (including tea and rubber) out of a workforce of 7m a minority would seem to benefit while a majority suffers.

Wasa Katha said...

Anon. Thanks, yes agricultural extension services, new practices, seeds and so on is what i meant.

food prices

As long the US Federal reserve prints money, food, oil, gold, copper, sugar, milk you name it will be high compared to paper money in which it is priced.

When the US credit bubble collapsed prices collapsed in 2008. Now with QE2 and what not the global economy is being inflated again.

Agricultural subsidies

Regarding western agricultural subsidies and 'dumping' there is little to say except that farmers in all countries have run this scam for years.

The US farming lobby was screaming for subsidies for a long time. They got it during the Great en Depression when agro prices collapsed with the collapse of the US credit bubble. The funny thing is they got subsidies while industrial unemployment was at record levels and people in other sectors were on the streets. Governments and other sectors have not been able to fully take out these subsidies still, though some inroads have been made.

However at least farmers in industrial countries are giving 'cheap' food to non farm sectors in return for their taxes paid as subsidies. In Sri Lanka they are pocketing the subsidies, selling high priced food to other people and if that wasn't enough the are blocking access to cheaper food through imports.

In the US farms below 1,000 acres are disappearing in many states.

However the recent weakness of the dollar has meant that Sri Lankan prices have caught up with world prices somewhat. However the high taxes means that our prices stay ahead.