Deeply rooted: A bulwark of the economy, the sector has the strength to withstand external challenges

Spanning 65,000 sq km and with a moderate climate, fertile soil and an abundant supply of groundwater, Sri Lanka has long benefitted from favourable agricultural conditions. The sector remains an economic mainstay and primary national employer. As manufacturing and industrial activities have expanded, agriculture’s position as the primary economic engine has been eroded in recent years, although it remains a major strength, with high-value tea, rubber, coconut and spice production contributing significantly to export earnings. This is despite falling global commodities prices and reduced production hitting export crops in recent years.

The sector has struggled to maintain staple crop production, and cereal imports have been identified by the government as a major impediment to economic growth and improved food security, particularly in light of rising concern about climate change and low productivity. Nonetheless, with production and export earnings rising, and the government moving to attract new investment, the sector is expected to record positive growth again in 2016.

Favourable weather conditions have afforded agricultural production a considerable amount of diversification in Sri Lanka. Although tea production remains the greatest agricultural strength, accounting for 13% of total exports in 2015, the country is also the world’s leading exporter of cinnamon and coconut fibre, while its abundance of natural rubber allowed rubber export earnings to peak at over $1bn in 2011. The sector also produces high-quality horticultural exports, notably tropical fruits and fresh-cut flowers. Its two largest cereal crops – rice and maize – meet the bulk of domestic demand, but Sri Lanka is not food self-sufficient, and relies on imports of wheat, rice and maize to meet domestic demand.

FIELD CROPS & PADDY PRODUCTION: The Ministry of Agriculture (MoA) is the primary government body overseeing non-plantation agriculture in Sri Lanka. The MoA is responsible for overarching policy development in the cereal crop, field crop and horticultural segments, food and nutrition security, ensuring stable prices for agricultural products, coordinating rice paddy purchasing and marketing, improving production and distributing donor funding to the various agricultural subsectors.

Operating under the MoA, the Department of Agriculture (DoA) is one of the largest government departments, and focuses on production, enhancing incomes for farmers and maintaining affordable food prices within the country.

The DoA’s main functions include research, seed production and planting, and upholding regulatory standards for plants, soil and pesticides. Three research institutes operate under the DoA: the Rice Research and Development Institute, the Field Crops Research and Development Institute, and the Horticultural Crops Research and Development Institute.

The DoA also oversees six technical services centres focusing on seed certification and plant protection, seed and planting material development, extension and training, socio-economic development and planning, natural resource management, and progress monitoring and evaluation.

PLANTATIONS & SPICES: The Ministry of Plantation Industries, meanwhile, overseas development of the country’s high-value tea and rubber crops grown on plantations, operating under the country’s Mahinda Chintana 10-year plan, which was formulated in 2005 and launched in 2010, and aims to improve plantations’ productivity, increase tea and rubber replanting activities, promote new plantations in non-traditional areas, conduct research and development (R&D) activities, and improve value addition, environmental protection and conservation.

A number of smaller public agencies are responsible for overseeing sector-specific development. In the coconut segment, for example, the Coconut Development Authority, Coconut Cultivation Board and Coconut Research Institute are involved in production improvements, supply and development, and research, while rubber is overseen by the Department of Rubber Development.

Spice and cashew production are overseen by the Ministry of Minor Export Crop Promotion, which was established in November 2010 and is tasked with overseeing the Department of Export Agriculture (DEA) and the Cashew Corporation. The DEA is responsible for R&D activities aimed at improving productivity and quality in perennial export crops including cinnamon, pepper, cardamom, clove, nutmeg, coffee, cocoa and vanilla.

RECENT PRODUCTION GROWTH: According to the Department of Census and Statistics (DCS), agriculture’s total value-added production grew by 5.5% in 2015 to LKR676.9bn ($4.9bn), contributing 7.9% of GDP, with production recording five years of consecutive growth, increasing by 4.6% in 2011 to hit LKR570bn ($4.1bn), 3.9% in 2012 to LKR592.4bn ($4.3bn), 3.2% in 2013 to LKR611.7bn ($4.4bn) and 4.9% in 2014 to LKR641.5bn ($4.6bn).

Agricultural exports also saw a robust rise in recent years, from LKR297.7bn ($2.14bn) in 2012 to LKR333.9bn ($2.4bn) in 2013 and LKR364.7bn ($2.63bn) in 2014, before dropping to LKR337bn ($2.43bn) in 2015, according to Central Bank of Sri Lanka data. Nonetheless, the sector’s total contribution to GDP has fallen from an estimated 30% in 1971 to 21% in 2001 and less than 10% today.

Export growth is also lagging, and the Institute of Policy Studies reported in 2015 that while export earnings have been rising in recent years until the drop in that year, they have not kept pace with overall GDP growth as a result of supply constraints, particularly in rubber, coconut and spice. “Productivity increases and expansion of cultivated area are needed to achieve higher exports in agriculture. A severe constraint is that the government is not releasing large extents of uncultivated lands for cultivation of coconut, palmyrah, cashew, orchards and vegetables, especially in the north and east, for cultivation of crops on a large scale for export,” read the report, “Sri Lanka State of the Economy 2014.”

CLIMATE: Climate volatility is perhaps the biggest challenge to the country’s long-term food security, with the Asian Development Bank (ADB) forecasting that temperatures in Sri Lanka could rise by 3°C by the year 2100, drastically increasing rice and tea crops’ vulnerability to drought. Paddy production, for example, could fall by one-third in the 2080s, while every 100-mm drop in annual rainfall reduces tea production by up to 80 kg per ha per year. The ADB suggests using drought-, flood- and saline-resistant crop varieties, developing an integrated coastal zone management plan, increasing efficiency in the energy sector and protecting groundwater resources through improved usage of recycled water.

In a bid to address these challenges, the government announced in March 2015 that it plans to reform the sector through the establishment of a new National Agriculture Policy (NAP), which aims to improve productivity and technological uptake in a bid to expand yields and offset potential climate impacts. The NAP will be supported by three pillars: food security, environmental sustainability and economic opportunities within the sector. The government is targeting improvements across the value chain, including to competitiveness for both domestic and export crops, safeguarding the environment through green production practices, land and natural resource management, and creation of new employment opportunities. Specific policy interventions include promotion of production, improvements to seed and planting materials, increased use of fertilisers, pesticide reduction, enhanced mechanisation, improved irrigation and water management, wider access to credit, expansion of insurance, improvements to post-harvest technology, and expansion of research and education (see analysis).

CEREAL CROPS: Rice is grown over the Maha season, from September to March, and the secondary Yala season, which stretches from May to the end of August. The DCS estimates that there are 708,000 ha of land under paddy production at present, although the DoA reports an estimated 560,000 ha are cultivated during Maha, and 310,000 during Yala. Roughly 1.8m farmers are employed in paddy cultivation, and rice remains the country’s most important staple crop, occupying 34% of total cultivated area on the island, and providing 45% of total caloric intake and 40% of total protein consumption for Sri Lankans.

Maize is the second-largest crop in terms of area cultivated, with the country producing approximately 200,000 tonnes annually according to the DoA. Maize imports are estimated to cost the country LKR1.17bn ($8.4m) annually, and Sri Lanka also relies on imports of oil, starch and flour to meet domestic demand.

PRODUCTION FLUCTUATIONS: Rice production was hit hard by drought in 2014, falling to 3.38m tonnes according to the DCS, from an annual average of 4m tonnes between 2010 and 2014. However, maize had a bumper year in 2015, with total production rising to 241,000 tonnes, from an average of 203,000 tonnes between 2010 and 2014.

Both maize and rice production continued improving in 2015, with the DCS reporting that rice production during the Maha season reached 2.88m tonnes, up from 2.24m tonnes in 2014, supported by improved supply of irrigation water. The Maha maize crop, harvested in mid-April, rose to 231,000 tonnes in 2015, up from 211,000 tonnes in 2014, according to the DCS. Aggregate annual maize production in 2015 was 261,000 tonnes, an 8% rise over 2014 driven by an expansion of land planted under maize, which compensated for decreased yields after the sector was hit by flooding in late 2014.

PLANTATIONS: Although cereal crops remain important to domestic food security and reducing the country’s overall import bill, tea, rubber, coconut, spices and horticulture play major roles in economic development, with agricultural exports accounting for nearly a quarter of export earnings in 2015, supporting growth in the manufacturing sector (see Industry chapter). Three of these critical cash crops — tea, rubber and coconut — are grown on plantations dating back to the mid-19th century, and many export crops are processed locally, further contributing to growth in agriculture and manufacturing.

Food and beverage exports comprised just 1.7% of total exports in 2015, according to the Export Development Board (EDB); however, earnings in the segment rose by some 21% in 2014 to reach $205.1m, then fell to $177m in 2015. Industry stakeholders continue to grapple with falling global commodities prices, which have had a significant impact on both production and revenues in recent years.

In addition, many of Sri Lanka’s crops are ageing, resulting in diminished yields. A wave of plantation privatisations in the 1990s has not fully solved the problem. “Most companies agreed following privatisation that they would replant 2% of their land each year, but there is no enforcement,” Vish Govindasamy, the managing director of Sunshine Holdings, told OBG. “It is expensive and the return doesn’t realise for 15 years, in tea’s case. There is replanting, but almost always in amounts less than 2%.”

TEA: Tea is by far the most important export crop in Sri Lanka, with the EDB estimating that the country produces 20% of global tea exports and is responsible for 5% of global production. Sri Lanka is the world’s largest exporter of “orthodox” black tea, as opposed to the cut-tear-curl method favoured in India, the third-largest global tea exporter by volume after Kenya and China and the fourth-largest overall producer of tea. This is largely owing to its high-quality Ceylon tea, cultivated in Sri Lanka since the 1860s, and praised globally for its flavour and colour. According to the public agency for the industry, the Sri Lanka Tea Board (SLTB), private smallholder plantations supplied some 57% of total tea production in the country in the first half of 2015, or 99m kg out of the 172.5 kg total, followed by regional plantation companies, with 66.2m kg, or 38.3%. Approximately 6.5m kg of tea are sold weekly at the Colombo Tea Auction, the world’s largest single-origin-tea auction. Tea exports reached a record $1.6bn in 2014, a 5% year-on-year (y-o-y) increase, with bulk comprising 49% of total exports.

Tea is grown and produced at both plantations and smallholder farms, and is split into three different classifications: low-grown, cultivated at elevations below 2000 feet; mid-grown (2000-4000 feet); and premium high-grown teas, grown above 4000 feet and offering a distinct golden colour and intense, powerful aroma. The majority of tea is grown below 2000 feet in low-grown areas. The country’s major competitive strength lies in its pure Ceylon tea, which is highly sought-after in global markets. Some industry stakeholders argue that blending Ceylon tea with imports in a bid to expand production, as has been suggested by several exporters in recent years, will impact both employment and the Ceylon brand.

PRICE PLUMMET: However, calls for blending Sri Lankan tea with foreign orthodox teas in a bid to improve exports are gradually growing louder, as a result of falling global commodities prices, which have also impacted food commodities, including tea. There is a fear that foreign orthodox tea will be blended with Ceylon tea for re-export, which would diminish the value of the brand. The SLTB reported that global food commodity prices had fallen by 20% since 2011 up to the second quarter of 2015. This trend continued into 2016. Tea exports were down 17% in 2015, earning $1.32bn, and by January 2016 earnings had fallen to a six-year low in dollar terms. Average auction prices have declined to what the SLTB describes as a “danger level”, well below the cost of production, with production falling by 6m kg y-o-y in the second quarter as a result. Exacerbating the problem for tea factories and exporters, the government set the recommend minimum price for one kg of green leaf tea at LKR80 ($0.58) in April 2015, a level considered unprofitably low by tea smallholders. However, in a bid to help producers the government provided subsidies to help meet the shortfall. As a result the industry did not have to pay a higher price for the leaf.

RUBBER: Another colonial legacy, natural rubber production, which involves tapping rubber trees for latex over their 30-year economic lifespan, has become a major export earner, with rubber and rubber-based products accounting for 7.7% of total export earnings in 2015 to hit $787m. However, much like the tea industry, rubber has been dramatically impacted by falling global commodities prices. In 2015 the central bank reported that rubber production had declined for the fourth consecutive year as a result of weak international demand and adverse weather. Production fell by 24% in 2014 to 98,573 tonnes, from 130,420 tonnes in 2013, as a result of drought during the first half of the year and heavy rains affecting latex tapping during the third quarter. As a result, production of sheet rubber, which accounts for nearly 50% of total production, fell by 23%, while production of latex crepe, which comprises 12% of the total, fell by 23%. Depressed global crude oil prices have simultaneously led to rising demand for cheaper synthetic rubber, with natural rubber prices falling from $2795 globally in 2013 to $1956 in 2014, a 30% decline. At the Colombo Rubber Auction, prices for ribbed smoked sheet 1 rubber, latex crepe 1X and scrap crepe fell by 24.2%, 22% and 22.4%, respectively, in 2014. The Central Bank of Sri Lanka reported that a number of smallholder farmers in major producing countries have shifted their attention to other crops in the wake of the low prices.

COCONUT: Coconut is the third-largest plantation crop, accounting for 12% of agricultural production and 5% of total export earnings in 2015. It is cultivated on 350,000 ha across the island, with an estimated 2.5bn nuts grown annually, according to the EDB. Sri Lanka is a major provider of desiccated coconut (DC) – which comprised around 60% of coconut kernel export earnings in 2015 – and coconut fibre, or coir, products. It is the world’s top exporter of coconut fibre and the fourth-largest exporter of kernel products, with farmers using the drum system to extract long, pure fibres sought by the brush industry.

The EDB reports that export earnings from DC jumped by 113% in 2014, while the volume of exported DC rose by 73%. Total coconut exports hit $522.7m in 2015. DC exports dominated growth in coconut products, with the board reporting a 6172% increase in copra exports, while oil and nut earnings rose by 241% and 203%, respectively.

SPICES: The government is increasingly targeting outside investment in export sectors other than rubber, coconut and tea (see analysis), such as spice and horticulture. With the EDB reporting that 3.65% of agricultural exports consist of spices, allied products and essential oils, Sri Lanka’s spice industry remains a major strength, despite struggling to maintain earnings and exports in recent years. Cinnamon, pepper, cloves, cardamom, nutmeg, mace and vanilla grow in abundance. Spice export earnings fell by 29% in 2014 to $260m, from $352.7m in 2013. However, 2015 was a strong year, rising 42% to $373m.

HORTICULTURE: Although the horticultural sector’s export earnings have fluctuated over the past 10 years, growth has remained on an upwards trajectory for much of the decade, with earnings rising from $18.2m in 2005 to $19.8m in 2006, $32.5m in 2010 and $48.8m in 2013. The EDB reports that earnings from fruit and vegetables soared by 41% in 2014 to a record $69.1m, and maintained momentum in 2015, hitting $36.2m between January and August. Fruit exports rose by 54% in 2014 to reach $44.3m, while vegetable exports rose by 26% to $24.8m. According to the EDB, earnings from Sri Lanka’s largest fruit export markets recorded double-digit – and in some cases triple-digit – growth in 2014. Exports to the UAE rose by 73%, to Saudi Arabia by 54%, to Qatar by 138%, to the Maldives by 46% and to Germany by 40%. Vegetable earnings from the Maldives, the UAE and the UK rose by 28%, 50% and 32%, respectively. In floriculture, cut flowers and foliage earnings rose by 5% to $14.9m, largely as a result of a 9% increase in exports to Japan and a 48% rise in exports to the UK.

OUTLOOK: Though depressed commodities prices and weakening global demand for high-value exports will continue to affect the agricultural sector into 2016, Sri Lanka’s many competitive advantages, including powerhouse plantation crops and a burgeoning horticultural sector, will help the industry remain resilient in the wake of near-term external challenges. More significant for the sector is the long-term threat of climate volatility, which will likely require considerable investment in new technology, including seeds, inputs and R&D activities. This will ultimately benefit the sector, however, and in addition to its high-potential fruit, vegetable, flower and spice segments, the industry continues to offer many opportunities for foreign investment in the development of next-generation agricultural technology.