Agri-foods Sector Profile1 - Colombo, Sri Lanka

May 2010

Produced by the Canadian Trade Commissioner Service

Contact:
Ms. Chiranthi Balapatabendi
Trade Commissioner
Colombo, Sri Lanka


1. Sector overview

Trade in Agri-foods

Sri Lanka has a range of agro-climatic zones where diverse commercial crops can be grown. However, a number of varieties of agri-food products are imported both to augment local production and to meet demand where local products are not available.

Imports

In 2009, Wheat and Lentils were the most important single items of agri-food imports into Sri Lanka. The import quantities were 814 million Kilograms for Wheat and 49,708 kilograms for lentils. The total imports of food and beverages accounted for 9.9% of total imports.

Rice is imported to meet shortfalls in local production. Dried red chillies and big onion along with potatoes are widely consumed items and are imported mainly from India or Pakistan in large quantities. The cost of production in Sri Lanka is often higher for such products than the sources of origin. Smaller quantities of fresh vegetables are also imported. Around 35,000 MT of fresh fruit is imported to Sri Lanka each year, mainly comprising orange, grapes, mandarin and apple. Average annual volumes of imports for these products are oranges (4,300 MT), fresh grapes (3,400 MT), mandarin (7,400 MT) and apples (20,138 MT). There is also poultry mainly chicken imported to overcome the shortfall.

Exports

The plantation crops (tea, rubber and coconut) form the largest category of agricultural exports, with a share of 16% of the value of total exports. Tea was the most significant export item in the agri-foods sector, with a total export value of US$ 738 million in 2009 (figures upto Aug 2009). The island has been slow to exploit the growing opportunities in global markets for fruits and vegetables. Exports of vegetables were around 19398 MT in 2008, with the main varieties being leeks, garlic, cucumber, beans and eggplant. The main destination is the Maldives mainly due to proximity, with smaller amounts being exported to Japan, South Korea, USA and Europe. The variety of fruit that is most widely exported is pineapple, accounting for around 2,500 MT per year. The main markets for fruit are the United Arab Emirates, Maldives and Germany.

Sri Lanka has been famous for spices throughout history. The total export volume for spices varies annually and is currently around 30,000 MT per year. Cinnamon, representing 40% of export volume, and pepper with around 25% of volume are the two leading export categories. This is followed by cloves and nutmeg.

Main Local Companies

  • Cargills Quality Foods (Pvt) Limited
  • Cargills Quality Dairies (Pvt) Limited
  • CPC Agrifoods Limited
  • Lanka Canneries Limited (www.lankacanneries.com)
  • CIC Agribusinessess

Main Foreign Companies

  • Prima Ceylon Limited
  • Fonterra Brands Lanka Limited
  • Nestle Lanka Limited

Employment in Agrifoods Sector

Around 2.3 million persons are involved in agricultural activities in Sri Lanka, with most engaged in non-commercial, subsistence agriculture. Agriculture accounts for 32.7 % of total employment. Another 100,000 persons are employed in agro-industrial and food processing industries.  The agro-industries where significant employment is generated are tobacco products, grain mill products, and bakery products. Following the traditional development path, the share of agriculture in the GDP has been diminishing over time.

Sector Maturity and Trends

Despite the rural sector accounting for 75% of the population of Sri Lanka, the primary agriculture sector has lagged behind in terms of growth and productivity. Most farmers have not been able to migrate to high value commercial agriculture. However, the agro-industrial sector is the fastest growing industrial category, with an average annual growth rate of around 5%. High economic growth in recent years, together with high income elasticities of demand for processed foods, has resulted in a buoyant demand for value added agricultural products in the domestic market. A growing middle class has increased consumer demand for quality fresh produce and processed convenience foods. Demand by processors and urban consumers have not effectively reached rural farmers due to weak supply chain linkages. Agricultural productivity is also low by global standards, serving as a disincentive for export growth.


2. Market and Sector Challenges (Strengths and Weaknesses)

Policy Issues

Ad hoc changes in agricultural tariffs are widely prevalent in the Sri Lankan trade environment, due to the government often being driven by the conflicting objectives of protecting both consumers and producers. Protection provided to farmers engaged in the cultivation of import substitution crops provides a bias against growing export crops with higher returns to the economy.

The import of a range of seeds and planting materials is restricted, limiting productivity and quality improvement of the produce. The phyto-sanitary regulations and unclear seed industry regulations are seen as barriers to entry of improved seed varieties into the sector. The Seed Act (2003) provides for the regulation of seed quality, labelling and packaging requirements and certification.  The Plant Protection Act (1999) provides safeguards on the entry of pests. The Seed Certification and Plant Protection Center is the implementing agency for both seed and pest regulation activities.

Sri Lanka is a signatory to the Bio-safety Protocol, which allows individual governments the right to stop imports of genetically engineered crops. Strict regulations have been imposed on GMO (Genetically Modified Organism) food imports. The regulations are a constituent part of the Food Act, and require GMO foods to be imported only after a risk assessment report has been evaluated by a technical evaluation committee. In practice, the clearance depends substantially on the exporter's documentation since analytical capability for this purpose in Sri Lanka is not well developed.

The mandate for the protection of consumers of agri-food products lies with the Consumer Affairs Authority, which is responsible for accurate labelling, checking for consistency of quality with standards and also for addressing consumers' grievances. Standards are governed by the Sri Lanka Standards Institution (SLSI), while the Sri Lanka Accreditation Board for Conformity Assessment (SLAB) grants accreditation to agencies and individuals to carry out conformity assessments.

Tax Incentives

A range of tax and other incentives are available for investment in the agri-foods sector. Under the Board of Investment (BOI) incentives, investors in agriculture or agro-processing can typically expect a 5 year tax holiday with a subsequent concessionary rate of 15%, and duty free imports of capital goods during establishment. Incentives are more attractive for larger investments and those that target disadvantaged regions in the country. Similar incentives are also offered for agricultural investment by the Department of Inland Revenue.

The agriculture sector receives a share of around 4% of total credit in the economy.  The availability of long-term credit is inadequate, and credit for agriculture is limited by the collateral requirements of banks. Credit for agricultural activities for small and medium enterprises can be obtained under several concessionary financing schemes available for small and medium enterprises.  Average interest rates are high in Sri Lanka at present, with the current rate being around 18-19%.


3. Sub-Sector Identification

Opportunities in the agri-foods sector in Sri Lanka arise mainly from the environment created by increasing per capita incomes in the country. Given below are some examples.

Trade in Supply Chain / Packaging Equipment 

The present system of distribution from the producer to the consumer of fruits and vegetables leads to very high post harvest losses due to poor storage and transport.  The level of losses is estimated at around 20% to 50%. Growing disposable incomes have seen the rapid growth of supermarket chains in Sri Lanka and consumers have become increasingly conscious of quality at the retail end of the supply chain. There are around 350 outlets linked to supermarket chains at present, which together with 175 single outlets account for around 8% - 12% of sales of fresh produce. This is a rapidly growing trend. The supermarket chains have introduced modern post harvest handling techniques and estimate their procurement losses to be around 3% to 5% which is a substantial improvement. This structural change in distribution will provide growing opportunities in the supply of equipment in post harvest handling of fresh fruits and vegetables, and other produce such as fish and meat. The opportunities lie in both supply to local enterprises and in direct investment in the areas of cold storage and warehouses, sorting/grading /packing centers, packaging and refrigerated transport.

Dairy Sector

Sri Lankan consumers have traditionally preferred imported milk powder for their dairy consumption, rather than locally produced fresh milk. This trend has been reinforced by the absence of refrigeration and cold chains in the rural sector, and a regime of subsidies and price controls that has contributed to imported milk powder being attractive to consumers. However, the price of milk powder in the world markets has more than doubled, reinforcing the need to increase the production of local fresh milk.

Around 233 million litres of milk are collected annually from around the country with Milco, a state sector enterprise, accounting for the largest share of 51%. Notable private sector participants are Nestle, Fonterra and Kotmale. Several programs have been launched by the government to increase the supply of fresh milk. The biggest constraint to the development of the dairy industry is the poor genetic quality of cattle. A key strategy in place by the government is to improve the quality of the national herd through genetic improvement, by means of subsidies for stud bulls or artificial insemination. The government has also proposed the setting up of commercial breeding farms, joint ventures in the form of turnkey projects and milk collection centres/ milk chilling facilities. They are also looking at Ultra heat treatment plants and processing facilities. Increasing of the herd is another area the ministry is focussed on. The utmost need currently is concentrated feed for the cattle.

Trade in Agri-Foods

Several food items that are widely consumed in Sri Lanka provide excellent opportunities to Canadian suppliers. Sri Lanka imports around a 8 million tonnes of wheat annually. Although rice is the staple food grain, per capita consumption of wheat and related products is relatively high at around 10.3 kg of flour and 20 kg of bread per month. Recent global price increases notwithstanding, wheat consumption in Sri Lanka is expected to remain high with increases in per capita incomes. Lentils are also widely consumed in Sri Lanka. Per capita consumption is around 3.8 kg per month, providing a total demand of around 2.7 million MT per year. Another widely consumed item is coriander, used as a spice as well as for medicinal purposes. Per capita consumption of coriander is around 200 grams per month. Chickpea, with a per capita consumption of 0.45 kg/year has an annual demand estimated at around 9,000 MT. Mustard, consumed at around 0.10 kg/year per capita, has a potential market of around 2000 MT per year. Another area of potential is the vegetable oils market. Although coconut oil is still predominant, Sri Lankans consume around 0.14 kg per person of other vegetable oils annually. All these categories offer opportunities to Canadian suppliers.

Value Addition of Agri-foods

Sri Lanka is a signatory to the South Asian Free Trade Agreement (SAFTA), which provides for a concessionary tariff regime in the South Asian region that includes the large markets in India, Pakistan and Bangladesh. This opportunity was taken up by investors who produced vanaspati oil for export to India. For Canadian investors, possibilities exist to mill canola in Sri Lanka for the South Asian Market and obtain the concessions available under the SAFTA agreements. Canola oil is gaining increasing consumer preference especially in India, due to perceived health benefits. Sri Lanka also has two special Free trade agreements signed with India and Pakistan.

High Value Fruits, Vegetables and Spices

Sri Lanka has not exploited the considerable potential the island has for the production of high value fruits and vegetables for both domestic and export markets. Current per capita consumption of fruit is low at around 9 kg per year, with the potential for further increases. Major companies have set up partnerships with foreign investors for the cultivation and export of fruits and vegetables, utilizing large scale farms. Opportunities exist for the cultivation and export of high value fruits and vegetables, also partly serving the domestic market. The fruits that can be commercially grown include pineapple, papaya, avocado, banana and strawberry. Vegetables with market potential include salad lettuce, capsicum, broccoli, cauliflower and cucumber.

Spices are dominated at present by small scale production, resulting in limited downstream processing and inadequate quantities of consistent quality. The formal plantation sector in Sri Lanka comprises around 20 private sector companies, with access to large tracts of land. The companies have the potential to engage in commercial scale cultivation and processing. The plantation companies are inhibited by lack of technical expertise in spices and uncertainty of markets, and will be willing partners to foreign investors who can provide this support.

Poultry

There is also a demand that has been seen in the Chicken MSM market and Canada has potential to export to Sri Lanka. Currently Sri Lanka imports from United States and Canada could provide competitor prices. However, there is red tape in the form of working with the department and relevant ministries to obtain the necessary approvals which are being looked at by the post currently.

Value Added Products

There also have been many requests made for processed food items and juice concentrates etc.etc. by the local supermarket chains and distributors who currently import these items from various sources. They are looking for quality products at a reasonable price which could compete with the current importer.


Canadian Government Contacts

Canadian High Commission in Sri Lanka
Contact: Sanjeeva Sellahewa, Trade Commissioner
Email: sanjeeva.sellahewa@international.gc.ca
Website: www.tradecommissioner.gc.ca

Agriculture and Agri-Food Canada (AAFC)
International Markets Bureau
Contact: Ann Kavanagh, Senior Agri-Food Trade Officer, Asia Pacific
Email: kavanagha@agr.gc.ca
Website: www.agr.gc.ca

Canadian Food Inspection Ageny (CFIA)
Email: cfiamaster@inspection.gc.ca
Website: www.inspection.gc.ca

Foreign Affairs and International Trade Canada
Website: www.tradecommissioner.gc.ca

Business Sectors Bureau (BMM)
Contact: Sadia Saeed, Trade Commissioner
Email: sadia.saeed@international.gc.ca
Website: www.tradecommissioner.gc.ca


Useful Internet Sites


[1] The Government of Canada has prepared this report based on primary and secondary sources of information. Readers should take note that the Government of Canada does not guarantee the accuracy of any of the information contained in this report, nor does it necessarily endorse the organizations listed herein. Readers should independently verify the accuracy and reliability of the information.