GOVERNMENTS need to display a soft touch when it comes to agriculture and markets.
Nowhere is this more evident than in Sri Lanka, where the unintended consequences of government intervention in markets are being played out in real-time.
The world is facing a food crisis in the poorest nations due largely to the Russian invasion of Ukraine.
Sri Lanka was on its way to a food crisis regardless because of decisions by its government.
The Sri Lankan government decided last year to force the entire island nation into organic farming by banning the use of synthetic fertilisers and pesticides.
Agriculture is a huge employer in Sri Lanka, with 8 million people, about 27 per cent of the population, engaged in production.
The main crop in Sri Lanka is rice. Switching to organic farming has resulted in reduced rice yields; the yield of rice dropped well below the 10-year average.
Similar drops in production were felt in tea, the country’s main export commodity.
Many countries around the world are facing rising food inflation. In Sri Lanka’s case, the country is hit with a double whammy of food inflation and low local production caused by government interference and the mandating of organic farming.
The purpose of this was to stem the volume of currency outflows and views that organic farming would reduce rising healthcare costs in the country.
It has been a disaster and one of the nails in the coffin of the Sri Lankan government.
Food in developing nations is essential, and rising costs have led to major protests around the island and the introduction of curfews.
The government of Sri Lanka is in crisis, with the cabinet ministers resigning en masse in early April.
Since March, the Sri Lankan rupee has been allowed to trade freely, resulting in a crash in its value against the US dollar.
This has caused difficulty for importers paying for goods.
The government has already flagged that it will default on debts and is approaching the IMF for debt.
Sri Lanka is an important market for Australian lentils and a small proportion of our wheat, having purchased a larger volume of wheat than normal during the past financial year.
This could be due to our lower pricing levels compared to the rest of the world and the higher requirement for imports to replace falling domestic production.
However, Sri Lanka’s crisis in food pricing has been exacerbated by the government’s decision to force organic farming.
It is a lesson to us all: small-touch government in agriculture is the most preferred.
The other lesson is that organic farming cannot feed the world.
The yield discount experienced between conventional and organic makes it unviable on a large scale.
Rich countries may be able to afford it due to our consumer demand and capacity to pay.
Organic crop production has roughly a 30 per cent reduced yield per acre.
Therefore, producing the same amount of food would require significantly larger areas to be planted.
Organic production is a choice for those willing to pay, but in reality, on a global scale, it is not a viable form of production to meet the requirements of a growing world population.
That is unless organic farming practices can bridge the gap in yields.
The situation in Sri Lanka is an extreme example and shows the impact of unintended consequences.
Sri Lanka has reduced its foreign income due to falling tea exports and increased the cost of food. Any policy regarding food must be very carefully considered.
- Andrew Whitelaw is a manager of commodity market insights at Thomas Elder Markets (TEM)
