Sri Lanka resurfaces as major rice buyer as fertilizer import ban leads to output decline

Sri Lanka has returned to the international rice market for significant volumes in recent months as the government's ban on chemical fertilizer imports is due to result in a sharp decline in main crop output.

The government previously provided rice farmers with free, imported chemical fertilizers but was finding it increasingly difficult to finance the scheme due to a reduction in foreign exchange reserves. The reserves have been hit by two years of reduced tourism due to the COVID-19 pandemic and were estimated at $3.1 billion in December.

As a result, the government effectively banned imports of fertilizers and agrochemicals on May 6, 2021. It also cited concerns about the impact of agrochemical overuse on farmers' health as a reason for the ban.

Despite banning chemical fertilizer imports, the government neither increased the country's organic fertilizer production capabilities nor imported organic fertilizers to meet farmers' requirements. According to reports, around 94% of paddy farmers typically relied on chemical fertilizers for paddy production.

Although the government's fertilizer supplies were sufficient for the 2021 yala (off-season) crop, they were not for the 2022 maha (main) crop. This resulted in a reduction in maha crop planting during October-November 2021 and as a result, output from this crop is expected to be 50% less than the normal 3 million mt. However, chemical retention in the soil of paddy fields is expected to limit field yield declines for this maha season.

This, in addition to the country's reduced forex reserves and high global commodity prices, has resulted in Sri Lankan inflation rising at the quickest rate of all Asian countries to 6.9% in January, according to reports. Consumer prices in January were 14% higher year on year, with domestic rice prices expected to rise from Sri Lanka Rupees 100/kg currently to Rupees 180-200/kg in March and Rupees 300/kg in April.

Despite the forex concerns and the prospect of almost $7 billion of overseas debt due to be repaid this year, 10% of which is understood to be owed to China, the government has decided to finance government-to-government rice imports to address increasing unrest amongst its population. This includes imports of up to 100,000 mt of white rice from Myanmar, and 200,000 mt of parboiled rice and 100,000 mt of white rice from India in 20,000 mt lots via the State Trading (General) Corporation until May. The government is also considering the possibility of importing rice through the private sector.

Sri Lanka was the third-largest importer of Indian non-Basmati rice in December at 143,535 mt, data from India's Directorate General of Commercial Intelligence and Statistics showed, compared with the 1,052 mt of non-Basmati rice the country imported throughout all of 2020.

Indian exporters said they had started to receive inquiries for white and parboiled rice, adding that the varieties and quality sold would depend on price as the government will be price sensitive due to the forex concerns. One exporter also said they did not expect the increase in demand to have a significant effect on Indian prices, given that sales of 300,000 mt over a number of months are "normal when you consider that India exports 1 million mt/month."

The Sri Lankan government has received a $500 million loan from India for oil purchases and a $200 million loan from Pakistan for rice and cement purchases. It has also offered farmers compensation for failed crops.

Sri Lankan rice imports can vary significantly from year to year, depending on production levels, with the US Department of Agriculture estimating milled rice imports in the 2017-18 and 2020-21 (October-September) marketing years at 491,000 mt and 12,000 mt, respectively (see chart).