Exploration of initiatives to reduce transaction costs to have a fair price for paddy producers: Insights from Ampara and Anuradhapura, Sri Lanka.

Abstract

The major debate in the paddy and rice industry is the unfair price for the producer during the harvesting period. The root causes of the issues in the industry seem to be related to opportunism, bounded rationality, and uncertainty which are discussed in Transaction Cost Economics. Therefore, the study examined the initiatives to reduce transaction costs incurred by the farmer to have better prices. Hence, to predict, describe, and empower population-specific knowledge, descriptive research with an epistemological perspective was conducted through focus group discussions with five subject specialists of the Paddy Marketing Board (PMB), representing policy formulation at the national level and implementation at the regional level. Further, interviews with the District United Framer Organization of Ampara and Anuradhapura were conducted. Accordingly, the study identified that the majority of producers do distress sales during the harvesting period causing a surplus in the market. The distress sale is to settle the loans obtained for the input supply and the immediate cash requirement as well as the absence of facilities for post-harvest operations. Therefore, farmers are compelled to sell their produce at lower prices due to lower demand. In addition, farmers can have lower market prices due to the farmer-specific and location-specific transaction costs. Other than purchasing paddy directly from farmers at a guaranteed price, PMB made effective initiatives to reduce transaction costs incurred by farmers. These initiatives include facilitating farmers' post-harvest operations through private mills at concessionary cost, bearing the transport cost by PMB, and providing empty bags to pack the paddy free of charge enabling farmers to have a better price. However, the study identified limitations in the funding capacity of PMB as a major challenge. The study proposed to legalize the exclusive powers of PMB to mandate purchasing only through authorized purchasers at the guaranteed price to minimize opportunistic actions, minimize the impact of bounded rationality issues faced by farmers, and strengthen the existing purchasing mechanism. This study provides new insights to key players on the requirements to address the issues in the industry through wider applicability in reducing transaction costs incurred by a farmer with a proper strategic approach.