Learning from the Best Practices

Pepper smallholder sector of Sri Lanka


By Chatura Rodrigo

The Institute of Policy Studies of Sri Lanka (IPS) launched a research study to examine the value chain of the small scale pepper producers of Sri Lanka in order to answer the research questions "Are Sri Lanka small scale pepper producers being exploited by the market? And how can we make them winners by ensuring their successful engagement in the value chain?" The study concentrated on the Yatawatta and Matale Divisional Secretariat (DS) divisions of the Matale district. This article concentrates on a particular aspect of this study where the small scale pepper producer is compared under two different operation modalities: working individually versus working as a farmer group.

Small scale pepper farmer:
the dilemma

Ajith is a pepper farmer for the last two decades in the Yatawatta DS division of the Matale district. Ajith harvests pepper twice a year, despite the recommended annual harvest by the Department of Export Agriculture. Ajith has only an acre of land for cultivation. Even though he is willing to take up more land on lease basis, financial constraints and larger pepper traders from the urban areas would not allow him such opportunity. Ajith takes his harvest to Matale town, but hardly gets the price he is looking for. Most of the time his harvest is graded as poor, and he has less chances of bargaining over the price. Since the harvest does not provide enough income for him to survive, he is constantly looking for more and more credit facilities. Most banks do not favour giving him loans since he does not have much to offer as collateral, thus he is mostly drawn towards informal credit sources. Lack of financial strength has limited Ajith from introducing innovation to his business. Since he does not have the capacity to add value to his produce, he always sells the raw produce to the urban traders. There are many such farmers like Ajith in the Matale district who are small scale producers of pepper. Majority of them are price takers with little or no bargaining power over price. They are tied between formal and informal credit sources, and have not introduced innovation to their businesses and are caught up in the vicious cycle of poverty for a long time. Recently, Ajith was a member of an agriculture development programme implemented by a non-government organization (NGO). Ajith and the rest of his farmers failed to continue with the programme, leaving all the farmers with more debt.

Why we should consider this dilemma

Spice production in Sri Lanka mostly focuses on the export market. However, there is a considerable number of small scale producers like Ajith who caters to the local market. Smallholders play an important role in the spice sector in Sri Lanka; nearly 70% of spice production comes from units of less than 1 ha of land. The spice sector has a small farm orientation with approximately 400,000 smallholder farm units involved in spice cultivation. Nearly 50,000 smallholders depend on spices as their main family income Foreign exchange earnings through pepper exports (including pepper oil) accounted for 20.3 percent of the total Export Agriculture Crops (EAC) exports. Therefore, as an export agriculture crop as well as a major livelihood contributor, the pepper industry of Sri Lanka deserves considerable attention. There are many initiatives implemented by the Department of Export Agriculture to promote pepper industry in Sri Lanka, especially distributing planting materials, farming equipment and even loan facilities to prepare the farm lands. However, despite these initiatives small scale producers are struggling, many of them are moving out of the industry and some are diversifying the farm lands to other crops. In studying this dilemma, we can ask several important questions: (1) Why have small scale pepper farmers failed to benefit from farming? (2) Are there any successful operation modalities that these farmers can follow to overcome the failures? (3) What are the necessary policy level initiatives necessary to safeguard the welfare of these small scale pepper farmers? Rest of the article will look into these questions separately.

Why the small scale pepper farmers fail?

To begin with, these small scale farmers have little room to expand. Majority of small scale pepper producers fail since they lack capital for expansion, lack of process and product innovations and lack of bargaining power. A farmer who is lacking in any of these areas will have a higher probability of failing as a small scale producer. This research suggests that the small scale producers face such constraints mainly because they try to work individually rather than working as a group. This section of the article explains how such individual actions can lead to breakdown in the value chain and failures of the small scale pepper farmers.

Yatawatta DS division of Matale was exposed to many agriculture development programmes. The agriculture development programme that Ajith was involved is a unique one which is one of the case studies of this research. Recently, these farmers were given an opportunity to enter into an agreement with anNGOon producing pepper with a guarantee on buying back the produce, removing farmer concerns on buying costly inputs and selling the produce. However, the agreement was with individual farmers, there wasn’t any farmer groups formed and farmers dealt with the NGO individually. There were close to 30 farmers who decided to adopt this programme. They were given financial assistance through a formal financial institution but the NGO took a considerable portion of that, accounting for providing grinding and packaging machines and fertilizers. Farmers had to manage the plantation, harvest and package the produce with the loan they received. At the end, the NGO bought back the produce at a higher price than what farmers get otherwise and sold them for a much higher price elsewhere. However, still the farmers received little profits after paying back the installment of the loan, and therefore, the majority of them went back to the loan facility in the next season too. The process continued for several seasons and the NGO suddenly gave up its activities and moved away from Matale district. This led the poor farmers with produced pepper with no potential buyer and with no price guarantees and they had to sell their produce at a very lower price.

This example contains almost all the factors that drive small scale pepper farmers to failure. First, there were very promising motivators to start the business. Farmers never had the financial strength to start up a new business; therefore, the credit facilities were very attractive to them. They have been farming export agriculture crops for a long time without making significant financial progress, and they felt the need to innovate. This programme was an attractive option for them since it employs machinery on grinding and packaging, providing new training and awareness, and had a new marketing option, where they do not have to worry about finding customers. This programme also gave farmers the opportunity to employ product as well as process innovation, with a new packaged final product with a new marketing channel.

However, with all these motivators, this programme failed since farmers were never a collective group, rather they all dealt with the NGO individually. Hence, farmers failed to inquire about the organization they are working with, they never informed the agriculture instructor of the area about this programme, they never cared where the produce is being sold and at what price, they never bargained on the price they received, and they never realized and discussed the fact that the NGO is taking a significant portion of the money out of the loan as machinery and fertilizer costs. Therefore at the end of the day, loss of the one and only buyer collapsed the whole value chain and farmers ended up making losses and tied up with more debt. To this day, farmers are unclear as to where their pepper produce was ultimately sold at.

What could be the successful operation modality?

Now, let’s focus on a success story of Sugathadasa who lives in Matale DS division and has been a pepper farmer for more than two decades. He is a member of a farmer cooperative company named Cooperation for Industrial Development Lanka (COOPID) located in the Nalanda industrial estate of Matale. This organization is comprised of more than 200 farmers. The COOPID is a strong community farmer based organization that highly values their member farmers, adds value to small & medium agriculture produces in Sri Lanka to give the right price for their products, and improve quality while searching the potential market for them. Being a member of COOPID, Sugathadasa was able to get a guaranteed price for his produce, was able to attract formal financial support easily with COOPID recommendations, and was able to introduce innovation at process level as well as at product level. He started many years back with a land less than 1 acre but now he cultivates more than 10 acres of pepper. He started producing black pepper, but he now produces white pepper too, and with COOPID he now producers organic pepper, which has a huge demand in the world market. While Ajith from Yatawatta DS division struggles to go beyond his 1 acre land, sells his produce at Matale town area and fails to send his kids to private tuition classes, Sugathadasa is now a profit making export oriented farmer, who is in a position to provide informal loans to other less privileged farmers.

Reasons for this clear difference between the value chains that Ajith and Sugathadasa represent is the "collective action". Collective action allowed him to bargain on the price, find suitable markets, access financial sources easily, introduce innovation at product and process level and finally, become a successful entrepreneur. He is a part of a strong value chain, with many buyers who access him through COOPID. Therefore unlike Ajith, Sugathadasa knows where his buyers are and where his pepper will end up. When buyers come to visit COOPID, they always go and visit the farmers who supply the produce. Even though COOPID acts as the middleman extracting part of the profits, it connects farmers and buyers directly. Farmers do not complain of COOPID being the middleman since they receive the price they bargain for.

What are the necessary policy level initiatives?

It is clear that the small scale pepper producer is very much open for exploitation. An outside entity can easily persuade them to take part in programmes, by giving them the necessary motivation that was explained earlier, which Ajith and his fellow farmers received. One could argue that the agriculture instructors and extension officers should be more connected with the farmers, so that they are aware of what farmers are engaged with. However, this article argues otherwise.

All these small scale pepper producers are very good at cultivation, they know what pepper production needs, how to produce and how to extract the final product. As argued throughout this article, they fail since they try to maximize their profits by working individually. Now, a rational farmer is a person who tries to maximize his own profits, individually. However, in the case of small scale pepper production, external forces are way too strong for farmers to maximize profits individually. One who tries to maximize with no bargaining power over price, with not enough capital investments and with little physical resources such as machinery and land, would have a higher probability of being exploited by market forces.

There are enough policies to advocate and guide farmers on how to maximize production in the pepper industry, under the Department of Export Agriculture. Published documents exist to educate farmers on how to manage a pepper plantation, harvest and process. What the small scale pepper sector needs are policy actions to encourage farmers to work together, as a farmer group with more bargaining power. The best practices have shown that working together as a farmer group will open more doors for small scale pepper producers even to compete at the world market.

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