Rice milling and storage

Most of the villages around Ambalantota are dependent upon paddy cultivation (rice growing). All sell their product to privately owned rice mills, located on the outskirts of the town. These mills process the rice, process it and sell it to local shops and traders before the next harvest. Their efficiency, along with the local market price for rice, ultimately determines the price that the farmers get for their produce.

Profit is largely determined by the sales price. When market prices are high profits are 4 times greater than a bad year, so millers watch the prices carefully. The biggest risk is that prices rise too high, leading the government to buy rice from overseas and reduce prices.

Rice mills are often criticized for the large margin between buying price and sales price, and for insufficiently investing in storage so spoiling a large proportion of the product. At least to some extent this is a response to the price fluctuations. Margins reflect the risk premium. Underinvestment is a consequence of concerns over repayment ability.

Nilantha's Rice Mill & Storage

Current business

Mr Nilantha buys paddy from about 1000 villagers around Ambalantota. His business is stable: it has been running for 10 years, always operating out of the same 600ft2 shed and mostly using the same machinery - only his polishing machine needs regular replacement. He employs 2 workers, although he can manage by himself for most of the year. His turnover is growing slowly, especially when there is a good harvest.

Although the last few years have been good, Mr Nilantha would like more security in pricing - perhaps by buying some form of insurance against price fluctuation. This would allow him to plan his future. But no one offers this type of insurance in Sri Lanka.

Paddy cultivation is not profitable - farmers get Rs 15-17/kg (15-17c/kg) so there is very little income for the farmer, especially once they repay their loans. Although different rice mills complete for trade, Mr Nilantha tries to give a better price for poor farmers. He explains that although he is running a commercial business and needs to make money, he is also part of the local community and needs to maintain his position in the community. He says that customers want to come to him as he is well known and respected in the community.

Plans for future business

Mr Nilantha has a plan to expand his shed - it is currently too small and can fill-up at the end of the season. To finance this, he would take out a loan from the bank, which he is confident he could get. He has a good relationship with the bank and has collateral.

However, he is wary of taking out a loan as, if he has a bad year, he may not be able to repay. So these are not urgent plans - he can work without the new shed and is happy to continue in a safe environment.

After 10 years, Mr Nilantha is confident he understands his business and how to maintain his machinery. The only external assistance he would like is more information on pricing, and some mechanism to reduce fluctuations.

Sunil Jayanthe's Rice Mill & Storage

Current business

Mr Jayanthe's business is located about 1 kilometer away from Mr Nilantha's, and is strikingly similar. While he has been in operation about 20 years, his revenues are about the same, he has the same machinery and same size shed. He also takes great pride in his position in the community.

Price fluctuation is also Mr Jayanthe's main concern. To reduce his exposure, he has started selling building materials (concrete, piping, etc.) "a good, steady business". He also would like more information on market pricing, and could pay for some form of insurance to reduce price fluctuation risk.

Plans for future business

Mr Jayanthe wants to buy a truck, to allow him to travel to villages and to deliver rice to stores. He has approached a bank to buy the truck on a lease, and also has collateral if that is required. But, like Mr Nilantha, he is worried that if he has a bad year, he may not be able to make repayments. As he says "prices are not in my control - if they go against me, what can I do?"

Social investing

Lending and risk reduction

While there are clearly some opportunities for lending, the entrepreneurs we met were justifiably worried about their ability to repay loans if prices fell. A loan with a repayment schedule based on market price for rice would be more attractive. There is also demand for an on-going risk reduction mechanism, perhaps insurance or a derivative. Reducing risk should ultimately increase farm-gate prices for farmers. Partnership between a risk mitigation specialist and a local bank could be the best mechanism.

Consolidation fund

There are (at least) three mill & storage enterprises within a kilometer of each other outside Ambalantota. Yet all appear to be sub-scale. Machinery and trucks are not well utilized, storage space is not consolidated. There would be efficiency gains from merging. For example, rather than Mr Nilantha taking out a loan to buy more storage space and Mr Jayanthe leasing a truck, perhaps they should merge - Mr Nilantha has a truck and Mr Jayanthe has spare storage. But neither owner is likely to get funding for a merger. A consolidation fund managed through a local bank, coupled with advice on pricing and how to manage a merger, could lead to improved efficiency. There are many other mills in the area so monopoly pricing should not be possible. Indeed, with additional scale, one mill may be able to offer higher prices, allowing it to build volume and hence increase profitability. This could start a price war that ultimately would favour the larger mills and create a more efficient market structure.

Funding support

Pricing information

Both entrepreneurs asked for assistance in pricing information. Better information would lead to less fluctuation in the price of rice, the staple diet of the poor. This could be simply provided through a local message board, local communications centres or a local bank.