Variation of Terms of Trade in Small farming Sector: with Special Reference to Paddy and Vegetables Cultivation in Sri Lanka

Abstract

Decline market prices of paddy and vegetables relative to prices of consumer food items and fertilizer inputs become a core factor of losing farm income of small farmers in Sri Lanka. Though the dropping farm income is a common problem in many agricultural countries, its impact is very crucial for a small country like Sri Lanka where nearly 30 percent of labour force is occupying in agricultural activities. Though all the successive governments in Sri Lanka have implemented various policies in this regard, still declining prices of food crops were greatly influenced to reduce farm income and subsequent it was affected for food security and public welfare of the country. Therefore, the main objective of the paper is to review factors influenced in changing TOT of small farming sector and assessing its impact on the economy. The paper was based on deductive method and used both primary and secondary sources of information. Price variations of farm products and consumer food items were measured by calculating parity ratios of respective commodities and accordingly it found that, values of Terms of trade (TOT)) of paddy and vegetable farming has been deteriorated continually in Sri Lanka, compared to imported food items and farm inputs. Thus farmers have to pay nearly 2 kilo of paddy for purchasing a one pound of bread in 2012 instead one kilo in 1984. Required paddy amount for receiving one kilo of sugar has fluctuated between 3.53 in 1999 and 3.57 in 2012. The required paddy amount for receiving one kilo of fertilizer has increased from 0.95 in 1984 to 1.65 in 2005. Similarly though farm gate prices of vegetables were also fluctuated throughout the year, the deterioration of TOT of vegetables farming is not significant as paddy farming since occasional price fluctuations were able to offset the price increases of consumer items and farm inputs. It shows that both demand and supply factors were influenced for deteriorating terms of trade of farm outputs. The demand factors were related to disposal income and substitute products while the supply factors were related with increase cost of production, matters related to crop planning, crop management and marketing. Finally it suggests some policy recommendations that required for protecting small producers in food crop sector.