EuropeAid/138-539/DH/SER/LK Technical Assistance to the … · 2019-12-30 · Technical Assistance to the Modernisation of Agriculture Programme in Sri Lanka TAMAP Vegetable Value

Technical Assistance to the Modernisation of

Agriculture Programme in Sri Lanka

EuropeAid/138-539/DH/SER/LK Technical Assistance to the Modernisation of Agricultural Programme in Sri Lanka (TAMAP) VALUE CHAIN DEVELOPMENT STUDY - VEGETABLES April 2019

vice Contract No 2007 / 147-446 Submitted to

This project is implemented by a Consortium led by Ecorys Nederland , B.V



Technical Report: VALUE CHAIN DEVELOPMENT STUDY - VEGETABLES

Project title: Technical Assistance to the Modernisation of Agriculture Programme in Sri Lanka

Project number: ACA/2017/389-911

Country: Sri Lanka

Address: Ecorys Nederland B.V Watermanweg 44 3067 GG Rotterdam The Netherlands

Tel. number: T: +31 10 453 86 76

Fax number: F : +31 10 453 87 55

Contact person: Eleanor Harvie [email protected]

Date of report: 15 April 2019

VCD Studies Assignment period:

1 October 2018 – 31 December 2019

Disclaimer. The content of this report does not reflect the official opinion of the European Union. Responsibility for the information and views expressed lies entirely with the author(s) and the consortium led by Ecorys Nederland BV for the implementation of TAMAP



PROJECT SYNOPSIS

Project Title: Technical Assistance to the Modernisation of Agriculture Programme in Sri Lanka

Project Details: Project Ref. No:

EuropeAid/138-539/DH/SER/LK Programme Manager

Dr Olaf Heidelbach

Date of project start:

8 January 2018 Contracting Authority

Delegation of the European Union to Sri Lanka and the Maldives 389 Bauddhaloka Mawatha, Colombo 7, Sri Lanka

Contract Duration:

36 months Name of contact person (Contractor):

Project Manager: Eleanor Harvie Project Director: Nick Smart

Contract No:

ACA/2017/389-911

Contractor’s name, address, telephone numbers and e-mail address:

Ecorys Nederland B.V Watermanweg 44 3067 GG Rotterdam The Netherlands T +31 (0)10 453 88 00 [email protected] [email protected]

Total contracted amount:

EUR 4, 167, 000 Team Leader

Dr. Christof Batzlen Postal Address:Ministry of National Policies and Economic Affairs, Treasury Building, Lotus Road,

Colombo 01, Sri Lanka.

mailto:[email protected]



Technical Assistance to the Modernisation of Agriculture Programme in Sri Lanka

TAMAP Vegetable Value Chain Study April 2019 Page i

TAMAP VEGETABLE VALUE CHAIN STUDY

1 EXECUTIVE SUMMARY ............................................................................ 1

2 INTRODUCTION ......................................................................................... 6

2.1 Methodology of study .................................................................................. 6

2.2 Selection justification ................................................................................... 8

3 DEMAND ANALYSIS ............................................................................... 10

3.1 Typology ................................................................................................... 10 3.1.1 Size of local and export market ................................................................. 10 3.1.2 Size of the market for high-quality vegetables in Sri Lanka ....................... 11 3.1.3 Major export markets and prices ............................................................... 16

3.2 Competition ............................................................................................... 18 3.2.1 Major competitors ...................................................................................... 18 3.2.2 Unit prices of major competitors ................................................................ 20 3.2.3 Quality standard of major competitors ....................................................... 23

3.3 Environment .............................................................................................. 24 3.3.1 Export regulations of Sri Lanka ................................................................. 24 3.3.2 Trade and business infrastructure of Sri Lanka ......................................... 25

3.4 Projections ................................................................................................ 25 3.4.1 Strength of Sri Lanka in market ................................................................. 25 3.4.2 Weakness of Sri Lanka in market .............................................................. 25 3.4.3 Estimated demand over the 2017 to 2021 period ...................................... 26

4 BELL PEPPERS ....................................................................................... 27

4.1 Function description ................................................................................... 27 4.1.1 Description of the production and trade ..................................................... 27 4.1.2 Actors/stakeholders along the value chain ................................................ 30

4.2 Flows of Product ....................................................................................... 36 4.2.1 value chain network map ........................................................................... 36

4.3 Location of activities .................................................................................. 38 4.3.1 Areas of production and trade ................................................................... 38

4.4 Quantification ............................................................................................ 41 4.4.1 Value of trade and actors involved ............................................................ 41

5 BELL PEPPERS - VALUE CHAIN VALUE DISTRIBUTION ..................... 44

6 BELL PEPPERS - ECONOMIC AND FINANCIAL ANALYSIS ................. 47

6.1 Farm level economic analysis, international viability and competitiveness . 47 6.1.1 Gross Margin Analysis .............................................................................. 47 6.1.2 Viability VC in international economy ........................................................ 49 6.1.3 Competitiveness analysis .......................................................................... 52

7 BELL PEPPERS - SOCIAL ANALYSIS .................................................... 56

7.1 Working Conditions ................................................................................... 56

7.2 Gender equality ......................................................................................... 56

7.3 Distribution of social capital ....................................................................... 59


TAMAP Vegetable Value Chain Study April 2019 Page ii

8 BIG ONIONS ............................................................................................ 61

8.1 Function description .................................................................................. 61 8.1.1 Description of the production and trade ..................................................... 61 8.1.2 Actors/stakeholders along the value chain ................................................ 63

8.2 Flows of product ........................................................................................ 67 8.2.1 Value chain network map .......................................................................... 67

8.3 Location of activities .................................................................................. 70 8.3.1 Areas of production ................................................................................... 70

8.4 Quantification ............................................................................................ 72 8.4.1 Value of trade and actors involved ............................................................ 72 8.4.2 Value chain value distribution map ............................................................ 79

9 BIG ONIONS - ECONOMIC AND FINANCIAL ANALYSIS ....................... 82

9.1 Contribution of VC to the general and agriculture sector GDP ................... 82 9.1.1 Gross Margin Analysis .............................................................................. 82 9.1.2 Viability of VC in international economy .................................................... 83 9.1.3 Competitiveness analysis .......................................................................... 85

10 BIG ONIONS - SOCIAL ANALYSIS ......................................................... 90

10.1 Working Conditions ................................................................................... 90

10.2 Gender equality ......................................................................................... 92

10.3 Distribution of social capital ....................................................................... 94

11 BELL PEPPER AND BIG ONIONS- ENVIRONMENTAL ANALYSIS ....... 96

11.1 Impact of climate change .......................................................................... 96

12 TECHNOLOGICAL INNOVATION .......................................................... 101

12.1 Technologies used .................................................................................. 101

12.2 Modernization of technologies ................................................................. 103

12.3 Laboratories and quality control system .................................................. 108

12.4 Organic production and other opportunities for value addition ................. 113


TAMAP Vegetable Value Chain Study April 2019 Page iii

List of Annexes

Annex 1: Innovated value chain for vegetables

Annex 2: HACCP Chart

Annex 3: Dehydration – Cabinet tray drier

Annex 4: African bird’s eye chilli dried in tray drier. (Kigali, Rwanda)

Annex 5: Solar drier for chilli drying (Kigali, Rwanda)

Annex 6: Temporary storage facility for dried vegetables and spices. (Kigali, Rwanda)

Annex 7: Layout for food processing (Marshall Fowler Engineers) Kenya.

Annex 8: VACCUM TRAY DRIER

Annex 9: Layout of cold storage

Annex 10: Vegetable and fruit processing and canning line layout

List of Tables

Table 1: Sri Lanka - Export of vegetables ............................................................... 13

Table 2: Sri Lanka - Production of vegetables ......................................................... 15

Table 3 Sri Lankan exports in category HS0708 plus HS0709 Fresh Vegetables not elsewhere specified ................................................................................... 16

Table 4: Unit export prices of vegetables (FOB) in Colombo in USD per KG ........... 17

Table 5: Sri Lanka - Import of vegetables ................................................................ 19

Table 6: Import of high-quality vegetables in Sri Lanka (CIF Colombo) ................... 20

Table 7: Unit import prices of high-quality vegetables in Sri Lanka (CIF Colombo) in USD per kg ............................................................................................... 21

Table 8: Import of HS0708 & HS0709 in Middle East .............................................. 22

Table 9: Unit Import Prices of HS0708 & HS0709 in Middle East ............................ 23

Table 10: Estimated growth of the demand for high-quality vegetables in Sri Lanka (MTs) ........................................................................................................ 26

Table 11: Gross margin summary for bell pepper ..................................................... 49

Table 12: Bell pepper exporting countries from Sri Lanka, values and export share . 50

Table 13: Bell pepper importing countries to Sri Lanka, values and import share ...... 50

Table 14: Major bell pepper exporting countries in the world, value and export share .................................................................................................................. 51

Table 15: Margin break down and net margins in export value chain for bell pepper. 53

Table 16: Area and production of big onions ............................................................. 72

Table 17: Summary of the gross margin analysis for big onions ............................... 82


TAMAP Vegetable Value Chain Study April 2019 Page iv

Table 18: Leading export countries of onions, value of exports and the export share 84

Table 19: Net export deficit of onions (negative value) .............................................. 85

Table 20: Margins and price flow of locally produced big onions traded through the wholesale market ...................................................................................... 87

Table 21: Margins and price flow of imported big onions traded through the wholesale market ....................................................................................................... 89

Table 22: Male and female labour involvement in crop management stages............. 92

Table 23: Hazards in the cold chain for vegetables ................................................. 111

Table 24: Investment opportunities Sri Lanka cold chain: cold & freezer stores ...... 113

List of Figures

Figure 1: Stakeholders/Actors involved in different stages of the value chain ........... 33

Figure 2: Actors and respective activities in different stages of the value chain ........ 34

Figure 3: Intra trading between production and consumption ................................... 35

Figure 4: Value chain network for bell pepper .......................................................... 37

Figure 5: Product flow diagram for bell pepper ......................................................... 38

Figure 6: Location map for bell pepper ..................................................................... 40

Figure 7: Per day volume trade for bell pepper under different actors ...................... 41

Figure 8: Bell pepper prices ..................................................................................... 42

Figure 9: Bell pepper average monthly prices from 2014 to 2018 ............................. 43

Figure 10: Value chain value distribution of economic center value chain .................. 44

Figure 11: Value chain value distribution of supermarket value chain ........................ 45

Figure 12: Value chain value distribution of hotels and restaurants value chain ......... 45

Figure 13: Value chain value distribution of export value chain .................................. 46

Figure 14: Cost components as a percentage of TVC of bell pepper .......................... 48

Figure 15: Role of women in bell pepper value chain ................................................. 58

Figure 16: Stakeholders/actors involved in different stages of the value chain: Big onions ....................................................................................................... 65

Figure 17: Actors and respective activities in different stages of the value chain: Big onions ....................................................................................................... 66

Figure 18: Value chain network map for big onions .................................................... 69

Figure 19: Location map for big onions ...................................................................... 71

Figure 20: Area and production of big onions ............................................................. 73

Figure 21: Monthly quantity, value and CIF price of big onions for 2018..................... 73

Figure 22: Annual importer quantity, value and CIF for big onions from 1990-2018 ... 74

Figure 23: Wholesale prices of big onions at Dambulla dedicated economic centre ... 75


TAMAP Vegetable Value Chain Study April 2019 Page v

Figure 24: Wholesale prices of big onions at Dambulla dedicated economic center, .. 76

Figure 25: Retail prices of big onions in Dambulla area .............................................. 77

Figure 26: Retail prices of big onions in Dambulla area .............................................. 78

Figure 27: Price comparison for big onions between local production season and high import seasons .......................................................................................... 79

Figure 28: Price and commission structure at the wholesale market for big onions .... 80

Figure 29: Value share in economic center value chain for big onions ....................... 81

Figure 30: Value share in the import to economic center value chain for big onions ... 81

Figure 31: Cost components as a percentage of TVC for big onions .......................... 82

Figure 32: Involvement of women in the big onion value chain ................................... 93

List of Photos

Photo 1: Bell pepper cultivation under poly tunnels ................................................. 28

Photo 2: Bell pepper grades from 1-3. ..................................................................... 29

Photo 3: Bell pepper sorting areas and packing into crates and cold transport ........ 29

Photo 4: Special crate size to transport bell pepper from collection centre to supermarket .............................................................................................. 30

Photo 5: Bell pepper transport, normal and cold lorries ........................................... 52

Photo 6: Imported bell pepper process products ..................................................... 54

Photo 7: Women in bell pepper value chain............................................................. 58

Photo 8: Big onion cultivation in the field ................................................................. 61

Photo 9: Big onion grades ....................................................................................... 63

Photo 10: Big onion harvesting in the field ................................................................. 90

Photo 11: Big onion cutting and loading in the field and wholesale market ................ 91

Photo 12: Bagging big onions in the field ................................................................... 91

Photo 13: Women in big onion fields ......................................................................... 92

Photo 14: Big onion farmers protesting in Dambulla .................................................. 94

Photo 15: Big onions under drip irrigation .................................................................. 99

Photo 16: Drying house and cold store for vernalization for big onions .................... 100

Photo 17: Rain water harvesting and preventing water evaporation of bell pepper .. 100


TAMAP Vegetable Value Chain Study April 2019 Page vi

ACRONYMS

TAMAP Technical Assistance to the Modernisation of Agriculture Programme in

Sri Lanka

EU European Union

CIF Cost, Insurance & Freight

FOB Freight on Board

DS Divisional Secretariat

GAP Good Agriculture Practices

VCA4D Value Chain Analysis for Development

UNECE United Nations Economic Commission for Europe

EC European Commission

GSP General System of Preferences

DC Distribution Centres

VAT Value Added Tax

WTO World Trade Organization

SCL Special Commodity Levy

VC Value Chain

AGCO All Island Agriculture Cooperative Ltd.


TAMAP Vegetable Value Chain Study April 2019 1

1 E X E C U T I V E S U M M A R Y

The EU has adopted the methodological framework developed by Agriterra called Value Chain Analysis for Development (VCA4D) as its method to analyse value chains. The TAMAP studies follow this methodology and start with an analysis of the demand/market side for the whole sub-sector (in this report High Value Vegetables), then some dominant typical value chains within this sub-sector are comprehensively analysed (in this report Bell Peppers and Big Onions), and the study finalises with a review of the technological innovation and investment options, defining the scope for technical innovation of the sub-sector - High Value Vegetables. Vegetables were chosen as a value chain to study, as Sri Lanka may hold a comparative advantage in producing export quality produce for some vegetables, while for others there is an ongoing debate whether Sri Lanka can be competitive in the export marker. Bell Pepper is an example of the first type of products and Big Onion, an example of the second type of products.

The demand for High Value Vegetables in Sri Lanka originates from three market segments, i.e. supermarkets, the upmarket hotels and restaurants catering to international business, tourists and exports. Since solid statistical information related to the sales of high quality vegetables in these market segments is not available, we follow the logic of “educated guess.” Based on the “educated guess,” the largest demand for high quality fresh vegetables originates from the market segment of supermarkets (estimated at 42,000 MT), hotels and restaurants, which generate an estimated demand of 4,200 MT, while exports generate an estimated demand of 17,200 MT. So, there was a total estimated size of demand of 63,400 MT in 2017 absorbing about 7% of vegetable production in Sri Lanka. These exports have grown only marginally, both in volume and in value terms over the 2015 to 2017 period, from 15.900 MT to 17,200 MT with even a drop in 2016. Apart from the fresh produce, Sri Lanka is exporting 1,344 MT with a value of 1.62 million US dollars (2017) of processed vegetables. These exports have declined over the 2015 to 2017 period, both in terms of value and volume. The fresh exports are highly dominated by the categories HS0708 and HS0709, identified as “Fresh vegetables not elsewhere specified.” About 60% of the Sri Lankan vegetable exports in these dominant categories are oriented at the Maldives and the Middle East. This trend in export prices of Sri Lanka in these categories show a slow but steady improvement on average in US dollar per kg over the 2015 to 2017 period. Imports of fresh vegetable is much higher than exports and is constantly growing. The main products imported in this market segment are potatoes, onions, shallot, garlic, leek and other alliaceous vegetables Compared to Sri Lankan unit export prices, it is clear that Sri Lankan producers cannot compete against Indian, Pakistani or Chinese suppliers.

The Middle East is the most promising export market for Sri Lanka high quality vegetables. The UAE, Qatar and Saudi Arabia provide an import market in HS0708 and HS0709 “Fresh vegetables not elsewhere specified” of US dollars 336.2 million in 2016. The imports in 2016 are 10% higher than in 2015. The UAE is the major import market for this produce. However, Qatar is extending its share of the total import market in the Middle East from 10% in 2015 to 15% in 2016. Sri Lanka’s import share in the Middle East market is less than 1%, and India is its main competitor. India supplies similar products as Sri Lanka to the Middle East in the various seasons. Import prices from Sri Lanka in HS0708 & HS0709 “Fresh vegetables not elsewhere specified” are close to parity with the ones of India on the large UAE market. In the Qatar market, Sri Lankan import prices are very competitive as compared to the Indian ones. The Sri Lankan exports in processed vegetables are highly dominated by the export to Japan



of provisionally preserved vegetables. The UK was a good market for Sri Lankan frozen vegetables, but exports have declined sharply. Overall, Sri Lankan exports to Europe and the UAE of processed vegetables show a declining trend. Recently food safety certification has become more stringent in Europe, and competitors managed a sharp innovation in freezing technologies as well as cold chain logistics. Sri Lanka lags behind in such technologies and also faces problems in meeting the higher food safety standards.

Sri Lankan import duties and levies on agricultural products can add up to more than 100 percent of the CIF value for imported agricultural products. In addition, non-tariff measures further restrict imports. On the export side, many non-tariff measures restrict the import of high quality vegetables in the EU, USA and Japan. The main competitors of Sri Lanka, such as India and China, have developed stringent mechanisms to comply with international standards, mainly on a voluntary basis. However, Sri Lankan exporters have not managed to develop such a compliance system. Sri Lanka exports mainly to the Maldives as it has the lowest level of restrictions on imports of high-quality vegetables and its other dominant markets in the Middle East (UAE, Qatar and Saudi Arabia) are less restrictive. Both Maldives and the Middle East (UAE, Qatar and Saudi Arabia) have frequent daily flights with Sri Lanka and a large Sri Lankan community creating a good network for trade.

Strong points of the Sri Lanka high quality vegetable sub-sector are:

• Sri Lanka producers and exporters have developed a strong contractual network.

• Supply in value chains is increasingly better managed.

• Quality and quantity of high value supply has increased.

• The offered assortment of produce has increased with new products such as bell peppers entering the business.

Weak points of the Sri Lanka high quality vegetable sub-sector are:

• Sri Lanka is a high cost producer with low compliance with quality standards.

• Logistic and marketing conditions in the value chain are sub-optimal, as cooling facilities are limited and a real cold chain for the produce is lacking.

• Several exporters also mentioned constraints at the agro-input site (especially quality and hybrid seeds)

• The Sri Lankan regulations for import and export of high value vegetables are complicated, bureaucratic and change regularly.

Conservatively estimated (i.e., without any major breakthroughs in innovation), the demand for high quality vegetables in Sri Lanka is estimated to grow from the current level of 78,700 MT (2019) to 98,900 MT (2021). The main contributor to the current volume and growth is the supermarkets market segment.

The value chain of bell peppers

The value chain network for bell peppers is complex with many input suppliers dealing with mostly imported inputs, four producer types (small farmers, large farmers, private companies and farmer companies), a collection system involving wholesale markets (about 60% of the production) and major retailers (about 20% of the production), as well as exporters and some direct sales, mainly by the private and farmer companies. Currently, bell peppers are mainly produced in the Nuwara Eliya district of the Central province, and the Badulla district of the



Uva province. All the exporters are located in the Western and North Western provinces close to the airport. Farmers obtain the lowest share in the wholesale trade (the most important part of the trade), i.e. 51.7%, while in the supermarket trade, the hotel and restaurant trade, and the export trade the farmers obtain similar net margins, i.e. 57.1%. For farmers, the average gross margin in bell pepper production is considerably higher than in average vegetable production. Bell pepper produced without a poly tunnel, has the highest gross margin, but the risk of crop failure is much larger. Also, gross margins for farmers without proper connections are lower, as they receive little support and have to sell to collectors at a very low price. For farmers, connecting to supermarkets and exports is the main challenge. Overall in bell pepper production, break-even volumes and prices are considerably lower than for average vegetable production.

Over the period of 1997 to 2016 Sri Lanka has exported 1.2 million USD worth of bell pepper and had a global export share of 0.02%. In line with the information stated before in relation to the exports in HS0708 and HS0709 “Fresh vegetables not else specified,” the major export market for Sri Lankan bell pepper is the Maldives. Sri Lanka imports some small amount of bell pepper for processing industries. The exporter FOB price of bell pepper is not competitive in the international market. However, it should be noted that prices of bell pepper in Sri Lanka are particularly low in the period of February to May. In this period of the year, Sri Lanka can think of supplying at competitive prices. Currently, the export price CIF Colombo at that time of the year is Rs. 500 to Rs.600 per kg, which is basically the Indian export price CIF. If the sector manages to decrease its production costs further and raise the yield soon, it can be expected that Sri Lanka will be quite competitive in bell pepper exports in the period - February to May. And on the local market, Sri Lankan suppliers do not need to fear imports.

Hired male labourers are paid a higher daily rate than hired female labourers in bell pepper production. Hired labour is a verbal agreement on a daily rate. Forced labour is not a concern at this point. All the labourers are from the same locality, and the farmer and the workers know each other very well. Labourers use masks and rubber gloves in performing these activities. Chemical application is done by men almost all the time. While child labour is never practiced in bell pepper production, adult children help the farmer during harvesting and packing. Working conditions become more favourable at the higher ends of the value chain. i.e., in supermarkets. With exporters, working conditions are much more organized and formal in collection centres and pack houses. Women are involved in all activities in the value chain of bell pepper. Several women are leading farming operations and play leadership and managerial roles, especially in the collection centres and pack houses. Farmer organisational level in the value chain is still low, although some strong farmer groups exist. Intra-regional information sharing is frequent, but inter-regional information sharing is much less. Levels of trust between actors in the value chain are low. Some farmers follow more traditional practises in bell pepper farming, and believe in the benefits of close contact with the crop.

The value chain of Big Onions

“Yala” is the season for big onion as in initial stages the plant needs a lot of water, but 2 weeks before harvest water supply should stop. Bandarawela is a good location for seed production, and poly tunnels are used frequently. Big onion is graded in three grades with distinct different prices at wholesale level, but at retail level, all grades are mixed again. Sri Lanka is only producing big onion from September to November while the rest of its demands are covered through imports mainly from India. These imports are traded through Colombo and Dambulla.



Agro input suppliers import seed, other inputs and supply farm practice advice. Locally produced seed has better germination and higher yields, but has a high price and low availability. Therefore 70% of farmers use imported seed mainly from India. In order to make the mother bulbs sprout, they need to be stored in a cold environment. This process is called vernalisation. For mature and good quality mother bulbs, they need to be sent to Nuwara Eliya for vernalisation. This outsourced process has significantly contributed to the increase in the cost of local seeds. In retail, the government supermarkets Sathosa frequently sells and buys big onion at guaranteed prices for consumers and famers. Sri Lanka generates a demand of 18,000 to 20,000 MT of big onion per month but produced only about 20,000 MT in 2018. One may argue that 2018 was an exceptionally dry year, but even compared to an average over a number of years (i.e., about 90,000Mt), the local production is not enough to cover the demand. Sri Lanka tries to assist its big onion farmers via import duties but with minimum success, as imported onions have better storability and are stored in Sri Lanka before the due date of the duties. Over the 2006 to 2018 period, Sri Lankan production and the area under production of big onions declined sharply while imports grew sharply. Generally, over the year, March and April have the lowest prices for big onion while August to December has the highest prices. In October generally, the import duties come into full effect with the local production coming to market. So high prices are linked to local supply and low prices to import supply. Generally, imported big onion gives lower margins between wholesale and retail markets. Nowadays frequently during the season for local big onions, the import onions dominate the market and suppress the margins.

Big onion is mostly grown in the central part of Sri Lanka in locations such as Matale, Polonnaruwa and Anuradnapura. 50% of imported big onions are traded through Dambulla and 50% through Colombo. In Colombo, wholesale is done by importers, and they sell to the Colombo market as well as to dedicated economic centres in other parts of Sri Lanka. The basic product flow in the value chain is similar for imported and locally produced big onion. Big onion is traded on commission basis. The highest margins in the trading channels are obtained by the farmer and by the importers who deal with the Dambulla dedicated economic centre. Also at the retail level, significant margins are obtained. In the import-economic centre trading channel, the importer keeps a low net margin compared to supply obtained from local farmers. The gross margin in big onion farming is considerably higher than in other dry zone vegetables. Labour is the main component of total variable costs.

Asian countries accounted for the highest USD worth of exported onions during 2017 with shipments valued at USD 1 billion or a third (33.3%) of the global total. China and India are the main exporters, with China showing strong growth and India showing a strong decline in exports. Vietnam incurred the highest deficit in the international trade of onion. Vietnam apparently has a strong competitive disadvantage in onion. Sri Lanka is internationally (export parity) not competitive in onion production. Also the imported products traded at Dambulla are considerably below the price of the local produce. Without increasing production and decreasing the cost of production, local big onions cannot be competitive. Higher production and availability of locally produced seed (has higher yields than imported seed) linked to proper cooling facilities for production of the seed, can contribute to increased competitiveness. In addition, with proper cold storing facilities, big onions can be stored for about 6 months.

The engagement of women in big onion cultivation is higher compared to bell pepper. Major cultivation stages such as nursery management, manual weeding, planting, harvesting, cutting, storing and sewing demand more female labour. However, females are paid a lesser



daily rate compared to men. The big onion value chain has more farmer organisations than the bell pepper value chain. Farmer organisation and trust among producers is higher than in bell pepper, but trust and cooperation vertically in the value chain is much lower than in the bell pepper value chain.

Climate change impacts are affecting big onion cultivation in a more significant way. With climate change, rainy periods have shifted and that affects the cultivation seasons of big onions. Delay in nursery preparation as well as the harvest getting affected by heavy rainfall is a serious issue in big onion cultivation since of late.

Technological innovation

A main innovation in the vegetable value chain is the introduction of organic farming and value addition. Internationally, organic farming and value addition is a market segment with a high growth rate. In Sri Lanka, both the private and public sector are making efforts to invest in this market segment. As such, the market segment is part of the high quality vegetable value chain for fresh and processed produce. The main challenge faced by Sri Lankan organic agriculture and value addition production for the local market is the lack of an efficient quality standards, management and control system. Supermarkets selling organic agriculture products cannot guarantee to their clients that these products are truly organic, as no proper system of standards, certification and control with inspection is implemented in Sri Lanka. Therefore, clients shy away from purchasing these higher priced products. Also, in organic vegetable production for the export market, Sri Lanka faces challenges. Therefore the TAMAP will implement a special study on organic farming and value addition at a later stage.

A value chain development study is not a feasibility study or an investment plan study. So, the present study can only hint to investment opportunities in the Sri Lankan vegetable sector. The team identified dehydrated products production, potato processing, instant quick-freezing technology, improved canning, medium scale cold storage facilities, development of a complete cold chain and packaging of cut vegetables for convenience and the market of salads, as potential investment opportunities.

It was finally also observed that the quality standards in the Sri Lankan vegetable value chain are sub-optimal and the institutional framework for implementation of standards are weak. Furthermore, the food technologist of the TAMAP team strongly recommends the implementation of HACCP systems in the vegetable value chain, with properly equipped instruments and procedures, and finalises his analysis with an overview of investment opportunities related to the implementation of a Sri Lanka cold chain for fresh horticultures.



2 I N T R O D U C T I O N

2 . 1 M e t h o d o l o g y o f s t u d y

Over the last few decades, it has become increasingly clear that farming for a market cannot be promoted by stimulating the supply side. Modern commercial farming is part of a total system which gets its information from the demand side of the economy and leads this to the supply side where it sets the rules and regulations for participation of the farmers. This system operates in a regulatory environment set by policies and strategies of local and international governments, and is supported by financial and non-financial services. Also, in Sri Lanka, systems are evolving in which all stakeholders co-operate closely together to generate the highest possible value in the chain. Such chains are identified as Value Chains (VC). TAMAP initiated a series of studies to increase understanding of these value chains and their different business models. With this effort, TAMAP intends to increase knowledge regarding the development potential of these systems, and disseminate knowledge to the government regarding conducive extension services and policy making supporting such innovation.

What are Value Chains? Value Chains are interactive systems with products, money and information flowing through them, all reliant on relationships (Fearne & Hughes, 1999). The success of a value chain depends on effective flow and use of information along the entire chain, from the market via traders, retailers and processors, to farmers and agro-input suppliers. The flow depends on trust and commitment between trading partners. The success of the chain depends on understanding market opportunities and the whole chain, rather than looking at its own part of the chain in isolation. In a successful value chain, each stakeholder knows the whole chain and understands the benefits of chain-wide interdependence in the flow of products and money. Every stakeholder in the chain cooperates and works together to supply the same market opportunity and to avoid competing only on price. The value created in the chain increases through gains in efficiency and quality. Relations between stakeholders in a chain are stable and strong. Conducting such a collaborative action to avoid price competition, focus on efficiency gains and produce quality, only makes commercial sense in case market information shows that reference products in local and export markets generate considerable higher value, than the standard products of the supply chain of a sub-sector. This is exclusively the case for demand/markets catering for the middle-income and high-income groups (tourist hotels and restaurants, supermarkets, speciality shops and export production). These markets are the target for value chain development approaches.

A large amount of knowledge and methodologies have been developed related to value chain development since Michael Porter introduced the concept in his famous book Competitive Advantage in 1985. More recently, the EU has adopted the methodological framework developed by Agriterra called VCA4D (Value Chain Analysis for Development) as its method to analyse the development potential of value chains. The VCA4D is used as the guideline for a methodology for the TAMAP VCD studies (see EU publication VCA4D Methodological Brief, Version 1.2, April 2018). The methodology comprises of four components i.e. 1) Functional Analysis which identifies the chain from demand side to supply side and all stakeholders involved including their activities; 2) Economic Analysis which identifies the contribution of the value chain to economic growth; 3) Social Analysis which identifies inclusiveness of the economic growth and the social sustainability of the value chain and 4) Environmental Analysis which identifies environmental sustainability of the value chain. Under component 1) VCA4D includes technical innovation and under component 2) VCA4D includes demand/ market



research. The TAMAP studies start with an analysis of the demand/market side for the whole sub-sector (in this report High Value Vegetables). Then some dominant typical value chains within this sub-sector are comprehensively analysed (in this report Bell Peppers and Big Onions). The study finalises with a review of the technological innovation options, defining the scope for technical innovation of the sub-sector High Value Vegetables.

The methods of information collection for the TAMAP studies consisted of three major components i.e. 1) literature review and collection of international and national data and statistics, 2) interviews with key stakeholders in the sub-sector and chain and 3) value chain analysis using tools such as mapping. Conventional value chain studies are focused on value chain mapping, which includes stakeholder mapping, activity mapping, network mapping, product mapping and area and location mapping. However TAMAP value chain studies, in addition to all of that, investigates more economic, social and environmental information as well. In terms of economic analysis, VCA4D methodology focuses on looking at gross margins. In addition to that, these studies look at break-even conditions of the framing activity in terms of break-even prices and quantities. It also identifies the contribution of different cost components to the total variable cost. Most value chain studies do not look at gross margins since it requires a primary data collection process such as interviewing using a survey questionnaire. In addition, TAMAP value chain studies are interested in identifying the value distribution in value chains. This is important since it gives an indication where the majority of margins are and who is benefiting or exploiting the value chain.

In terms of gross margin analysis, data is collected from the farmers using a farm survey questionnaire. This questionnaire was designed to capture all the variable costs, revenues and the marketing mix of the particular commodity. In terms of bell pepper, the study focused on farmers in Nuwara Eliya and Badulla districts. Farmers were selected so that they represent farmers from different economies of scale. The standard bell pepper cultivation is based on a 1,000 ft2 poly tunnel. The survey included only 20 farmers, but they were carefully recruited to represent the diversity among the production process. For example, the sample of bell pepper farmers included farmers with 1 poly tunnel and with 118 poly tunnels. The sample had farmers who had been in the value chain for less than 5 years as well as those who were there for the last 20 years. In addition, the research study looked at all the stakeholders in the value chain. This included supermarket collection centres, dedicated economic centres, exporters, hotels and restaurants, large-scale farmer companies and private companies (usually owned by a single party or a few). Bell pepper traders are mostly located close to production areas. Hence the research covered large as well as small-scale bell pepper traders in Nuwara Eliya, Keppetipola, Uwa Paranagama, Bandarawela and Welimada areas. Bell pepper exporters are located in Colombo, Kaduwela, Katunayake and Negombo areas.

A similar approach was followed in studying the big onion value chain. There the research focused on locally produced big onions and imported big onions. Locally produced big onions come from Matale, Polonnaruwa, and Anuradhapura districts, including Mahaweli H region. For big onions, the primary data collection was done during the off season. Locally cultivated big onions usually start their nursery management in March-April and then cultivation happens in May. Harvest is usually after mid-September and will continue until December. Since the data collection was done in late January, only a few farmers were in to the nursery preparation process. Therefore, the data was collected on the previous season they had done, which is “Yala” of 2018. Primary data on all variable cost components and the total revenue from the harvest was captured, in the same manner as for bell pepper cultivations. Then data was collected from large scale collectors, dedicated economic centres (for bell peppers, it is



Dambulla and Colombo dedicated economic centres), super markets including Sathosa (Government owned supermarket chain), exporters, processors as well as hotels and restaurants. A special emphasis was given to the importation process of big onions. Sri Lanka imports on average 20,000 MT per month. This is done by large scale importers in Dambulla and Colombo 01. Information from them is essential to understand the differences between the value distribution of locally produced big onions and imported big onions.

2 . 2 S e l e c t i o n j u s t i f i c a t i o n

Why Vegetables?

Being a tropical country with a larger climate variation within several hours of distance, Sri Lanka is home to more than 50 vegetable types that can be commercially grown. This is for the local market as well as for the export market. Among these vegetables, Sri Lanka holds the comparative advantage in producing export quality produce for some vegetables. However, for some vegetables, there is an ongoing debate on whether Sri Lanka can be competitive in the export marker or not. Over time, some of these vegetables that have been debated as not having the comparative advantage in exporting, have now become fully import dependent. For such vegetables, it’s not about exporting any more, rather it is about sustaining the local consumption demand. Best examples are potatoes and big onions. For these crops, cultivation area, number of farmers involved, and the production has drastically come down. Therefore the government has no option but to import on a regular basis. For such crops, the question is not about whether we can import, rather it’s about how we can fulfil the local consumption demand with local production. Losing price competitiveness means as a country it is better to import. However, at the same time a government has to think about the welfare of the farmers and how to ensure the sustainability of the value chain. Therefore, in broader terms, vegetable value chains are important since they are directly linked to either export promotion policies or import substitution policies.

Why bell peppers and big onions?

Bell peppers are vegetables that have shown a promising export potential over time. Grown under a semi-controlled environment, bell pepper is increasingly becoming a household vegetable, even with the middle-class households. This is very evident as bell pepper can be seen at every supermarket outlet of major supermarket chains like Cargills and Keells. In earlier days, bell pepper was limited to high-end hotels, restaurants and exports, but now it is available for domestic consumption as well. Supermarkets like Cargills are offering three quality categories, premium, regular and budget, to suite three socio-economic categories that shop at their outlets. While Sri Lanka does not export bell pepper in large volumes, it is in the mix of all the fruit and vegetable exporters in the country. At the moment most bell pepper exports go to the Maldives. Sri Lanka is yet to develop a bell pepper value chain that attracts niche markets such as organics and global Good Agriculture Practices (GAP). Even the local prices of bell pepper look promising to attract more and more farmers to production, since on average a farmer has the ability to earn a profit of Rs.350,000-Rs.400,000 per poly tunnel per cultivation cycle. Therefore, bell pepper has a promising future in terms of local production and export promotion.

Big onions are a heavily debated commodity in Sri Lanka in every budget statement. Every year the government imposes a tax on importation (the tax was 100% during the last season of local production) to help, encourage and protect the local producers. However, since 2015, even with the importation tax during the local production, Sri Lanka had to import to cater to its consumption demand. Imported big onions are sold at a lower price. They have better storability and are high in terms of quality parameters such as colour and size. Sri Lanka



imports big onions from India. The trade deficit between export and import of big onions are about 87.8 million USD for Sri Lanka. Therefore, with big onions Sri Lanka holds no price advantage against India and at the same time, the local production is not enough to cater to the consumption demand. Therefore, the big onion value chain is important for a discussion around import substitution.



3 D E M A N D A N A L Y S I S

3 . 1 T y p o l o g y

3 . 1 . 1 S i z e o f t h e l o c a l a n d e x p o r t m a r k e t

The demand for high quality vegetables in Sri Lanka originates from three market segments i.e. supermarkets and the upmarket hotels and restaurants catering to international business and tourists and exports.

Supermarkets

Most of the supermarkets in Sri Lanka use a combination of various procurement schemes. Major supermarkets have distribution centres (DC) in Colombo. The retail outlets prepare their orders for the following day based on the day's sale. At the end of the day, all outlets report to their distribution centre about their vegetable demands (quantities and varieties) for the following day. After the DCs summarise and integrate these demand numbers, they inform their suppliers or collecting centres in the major producing areas about what they have to supply. In addition, they procure vegetables from independent procurement agencies. Collecting centres procure vegetables directly from the farmers or farmer associations, while independent procurement agencies procure directly from farmers or collectors. The means of communication between the supermarkets and the suppliers are mainly telephone and mobile phones when making the order. Supermarket employees working at the collecting centres inspect the vegetables, and sorting and grading are done. At the same time, value-added activities such as cutting and trimming are done. The supermarkets do not adhere to quality standards stipulated by formal certificates. The quality parameters actually adopted are mostly related to the physical attributes of the produce such as size, colour, texture and non-existence of pests and disease attacks. The product that does not meet the standard is not paid for and is disposed of. What is held back from delivery by the supplier is typically sold in secondary markets such as traditional wholesalers, other markets and street fairs. From each collecting centre and independent procurement agencies, the vegetables are transported to the distribution centres in freezer trucks or by trucks with no freezing facilities. At the distribution centres, products are prepared for delivery to the specific outlets and dispatched to individual outlets in Colombo and suburbs, either in freezer trucks or non-freezer trucks. For other outlets, the vegetables are dispatched directly on the way to Colombo from collecting centres. Most supermarkets use a preferred supplier system to procure their requirement, as lapses in quality, tend to be associated with the supermarket itself. The preferred supplier can be an individual farmer or a farmers’ organisation, association or cooperative. The individual preferred supplier operates on a contract basis and obtains his supply mostly from other farmers contracted by him. The organisational (farmers’ organisation, association or cooperative) preferred supplier obtains its supply mostly from contracts with farmer members. The preferred suppliers are responsible for screening the product before delivering it to distribution centres or outlets. Preferred suppliers use their own trucks (freezer or non-freezer) to transport vegetables from major production areas.

Hotels and Restaurants

The procurement system of upmarket hotels and restaurants catering to international tourists and businessmen is not directly connected to the suppliers. The hotels and restaurants place



their orders with distribution centres (DC) in Colombo, which are combined at DC level with the orders of the supermarkets. Also, these hotels and restaurants use independent procurement agencies and use the services of preferred suppliers, supplying on a contract basis similar to the supermarkets. The preferred supplier is responsible for screening his/her own product before delivering it to the procurement agent and/or hotels and restaurants. Preferred suppliers and procurement agents use their own trucks (freezer or non-freezer) to transport produce.

Exports

The procurement system of exporters is directly connected to the suppliers. They use the services of preferred suppliers supplying on a contract basis, but major exporters operate in close collaboration with the farmers. These companies have teams of extension workers in their service who work closely with the preferred suppliers. They assist preferred suppliers in compliance with the orders and contracts. But also in this system, the preferred supplier is responsible for screening his/her own product before delivering it to the exporting company. Preferred suppliers and procurement agents use their own trucks (freezer or non-freezer) to transport produce.

3 . 1 . 2 S i z e o f t h e m a r k e t f o r h i g h q u a l i t y v e g e t a b l e s i n S r i L a n k a

Solid statistical information related to the sales of high quality vegetables in these market segments are not available. So in order to assess the volume sales of high quality vegetables in each of these market segments, we follow the logic of “educated guess” to estimate the high-quality demand in each of these market segments.

Supermarkets

Sri Lanka had 90 Keells supermarkets, 373 Cargills supermarkets, 38 Arpico supermarkets and 36 Laugfs supermarkets in 2017, making up a total of 537 supermarkets of the main chains. These are mainly small and medium size supermarkets with few hypermarkets. Apart from these chains, there are approximately 50 more outlets in the country making up a total of about 590 supermarkets in Sri Lanka in total. Keells (with the biggest supermarkets) sells about 1,000 kg per outlet of fresh fruits and vegetables a day, while Cargills sells about 380 kg per outlet per day. Based on this, the estimated average over the year per outlet per day is about 400 kg of fresh fruits and vegetables of which half is vegetables i.e. 200 kg. Consequently, the supermarkets sell about 42,000 MTs of fresh vegetables annually.


Sri Lanka had international arrivals of 2.1 million in 2017. (Monthly Statistical Bulletin 2017, Sri Lanka Tourism Development Board). The average consumption of fruit and vegetables in EU countries is about 350 grams per capita per day (Freshfel Consumption Monitor), while in China it is considerably more at about 540 grams per capita per day (Fresh plaza, World Wide Consumption Patterns). Based on an average consumption of 400 grams per capita per day and an average stay of 10 nights per capita (Sri Lanka Annual Statistical Report 2016, SL



Tourism Development Board), the Sri Lanka international arrivals generate a demand of 8,400 MT of high-quality horticultures annually, of which half is vegetables e.g. 4,200 MT.

Exports

According to UNCOMTRADE, Sri Lanka exported about 17,200 MT (2017) of high quality vegetables. These exports have grown only marginally both in volume and in value terms over the 2015 to 2017 period from 15,900 MT to 17,200 MT with even a drop in 2016 (see Table 1). Apart from the fresh produce, Sri Lanka is exporting 1,344 MT (2017) of processed vegetables. These exports have declined over the 2015 to 2017 period from 2,541 MT to 1,344 MT. Also, in terms of value, these exports show a sharp decline during the period, from USD 4.47 million to USD 1.62 million.



Table 1: Sri Lanka - Export of Vegetables

Source: UNCOMTRADE

SRI LANKA - FRESH HORTICULTURE EXPORTS

2015 2016 2017

1000$ MT 1000$ MT 1000$ MT

HS07 Vegetables and certain roots 20,598.6 15,865.8 19,110.1 15,167.2 23,867.8 17,183.5

of which:

HS 0701 Potatoes fresh or chilled 2.7 0.8 44.3 55.8

HS 0702 Tomatoes fresh or chilled 8.1 0.6 200.9 63.9

HS 0703 Onions, shallots, garlic, leek and other alliaceous vegetables 47.6 20.5 135.3 70.7 124.2 42.9

HS 0704 Cabbages, brassica, cauliflower and broccoli

HS 0705 Lettuce

HS 0706 Carrots, turnips, beetroot, salsify, celeriac, radish 2.2 2.8 10.4 10.1 7.9 1.4

HS 0707 Cucumber and Gherkins 7.9 14.1 14.1 7.9

HS 0708 and HS 0709 Fresh vegetables not elsewhere specified 12,813.7 8,391.5 12,802.3 7,816.6 18,792.2 10,978.6

HS 0710 Vegetables frozen 2,943.4 975.3 1,196.1 469.8 478 168.2

HS 0711 Vegetables provisionally preserved not suitable for direct consumption 1,235.3 1,484.7 1,122.7 1,325.2 1,007.8 1,156.9

HS 0712 Vegetable parts (dried, fresh, frozen, powder) but not further preserved 288.8 80.6 208.5 30.5 134.5 18.8

HS 0714 Manioc, arrowroot, salup, artichokes, sweet potato (fresh, chilled, frozen) 3,258.3 4,896.3 3,622.3 5,444.3 3,062.4 4,808.8



To summarize, the largest demand for high quality vegetables originates from the market segment of supermarkets (estimated at 42,000 MT). Hotels and restaurants generate an estimated demand of 4,200 MT while exports generate an estimated demand of 17,200 MT. So, a total estimated size of demand of 63,400 MT in 2017. As can be seen from Table 2 the high-quality vegetable size of demand is only absorbing about 7% of vegetable production in Sri Lanka.



Table 2: Sri Lanka – Production of Vegetables

SRI LANKA - FRESH HORTICULTURE PRODUCTION

2015 2016 2017

MT MT MT

HS07 Vegetables and certain roots 905,917 924,775 928,866

of which:

HS 0701 Potatoes fresh or chilled 70,377 80,458 73,358

HS 0702 Tomatoes fresh or chilled 84,749 83,978 80,839

HS 0703 Onions, shallots, garlic, leek and other alliaceous vegetables 183,508 185,507 200,535

HS 0704 Cabbages, brassica, cauliflower and broccoli

HS 0705 Lettuce

HS 0706 Carrots, turnips, beetroot, salsify, celeriac, radish 55,446 59,362 71,607

HS 0707 Cucumbers and gherkins 36,947 35,726 31,448

HS 0708 and HS 0709 Fresh vegetables not elsewhere specified 428,502 435,859 430,386

HS 0710 Vegetables frozen

HS 0711 Vegetables provisionally preserved not suitable for direct consumption

HS 0712 Vegetable parts (dried, fresh, frozen, powder) but not further preserved

HS 0714 Manioc, arrowroot, salup, artichokes, sweet potato (fresh, chilled, frozen) 46,388 43,885 40,693 Source: FAOSTAT



3 . 1 . 3 M a j o r e x p o r t m a r k e t s a n d p r i c e s

In 2017, about 60% of the Sri Lankan vegetable exports in the dominant categories HS0708 and HS0709 Fresh vegetables not elsewhere specified (see Table 3) were oriented at the Maldives and the Middle East. The rest of the exports were spread over a large variety of countries.

Table 3 Sri Lankan exports in category HS0708 plus HS0709 Fresh Vegetables not elsewhere specified

In 1000 USD Share in total

2015 2016 2017 2015 2016 2017

Maldives 5692.7 5733.7 6573.3 44% 45% 35%

UAE 1942.7 1974.1 3282.5 15% 15% 17%

Qatar 714.7 535.4 1150.4 6% 4% 6%

Saudi Arabia 425.0 405.4 411.9 3% 3% 2%

Total exports in HS0708 plus HS0709 12813.7 12802.3 18792.2

Source: UNCOMTRADE

The Sri Lankan exports in processed vegetables are highly dominated by the export to Japan of provisionally preserved vegetables (see Table 4). The UK was a good market for Sri Lankan frozen vegetables but exports have declined sharply. Overall, Sri Lankan exports to Europe of processed vegetables show a declining trend. Also, Sri Lankan processed vegetable exports to the UAE show a declining trend. Recently food safety certification has become more stringent in Europe and competitors managed a sharp innovation in freezing technologies as well as cold chain logistics. Sri Lanka lags behind in such technologies and also faces problems in meeting the higher food safety standards.



Table 4 Sri Lankan exports in category HS0710 to HS0711 Processed Vegetables

2015 2016 2017

1000$ MT 1000$ MT 1000$ MT

Total Export Processed Vegetables 4467.5 2540.6 2527.2 1825.7 1620.3 1344.0

HS 0710 Vegetables frozen 2943.4 975.3 1196 470 478.0 168.3

Canada 58.8 7.7 41.4 4.7 62.3 12.0

France 124 52.5 68.9 30.1 50.3 17.2

Germany 59.1 19.0 24.7 7.7 58.1 17.9

Switzerland 40.8 10.4 415.1 103.8 155.0 40.8

UAE 484.8 415.9 236.7 196.9 32.9 29.1

UK 1451.4 275.6 271.3 86.4 58.3 33.4

HS 0711 Vegetables provisionally preserved not suitable for direct consumption 1235.3 1484.7 1122.7 1325.2 1007.8 1156.9

Japan 710.0 1007.1 673.1 947.8 688.0 998.4

HS 0712 Vegetable parts (dried, fresh, frozen, powder) but not further preserved 288.8 80.6 208.5 30.5 134.5 18.8

DR Korea 3.3 1.5 37.7 4.4 35.9 3.7

Seychelles 12.0 2.5

S Arabia 62.2 24.0 23.1 10.0 1.4 0.4

S Korea 56.2 34.0 36.6 4.4 35.9 3.7 Source: UNCOMTRADE

The unit export price trend in the dominant export category HS0708 plus HS0709 Fresh vegetables not elsewhere specified (see Table 5) is the best indicator for the overall price trend in the export market segment of high quality fresh vegetables. This trend shows a slow but steady improvement in the export price on average in USD per kg over the 2015 to 2017 period.

Table 5: Unit export prices vegetables (FOB) Colombo in USD per KG

2015 2016 2017

Fresh vegetables not elsewhere specified 1.53 1.64 1.71

Source: UNCOMTRADE



3 . 2 C o m p e t i t i o n

3 . 2 . 1 M a j o r c o m p e t i t o r s

Sri Lanka was importing about 426,000 MTs of high quality vegetables in 2017 (see Table 6). The imports of this produce were constantly growing over the 2015 to 2017 period. The main products imported in this market segment are potatoes, onions, shallot, garlic, leek and other alliaceous vegetables. These two product categories form 99% of Sri Lanka high quality vegetable imports during the 2015 to 2017 period.



Table 6: Sri Lanka – Import of vegetables

SRI LANKA - FRESH HORTICULTURE IMPORTS

2015 2016 2017

1000$ MT 1000$ MT 1000$ MT

HS07 Vegetables and certain roots 161068.1 399178.5 134761.2 225530.6 163710.7 426211.7

of which:

HS 0701 Potatoes fresh or chilled 37,617.9 144,667.9 33,199.3 79,695.7 37,215.5 153,049.7

HS 0702 Tomatoes fresh or chilled 4.6 2.6 51.8 37.9 114.1 6.7

HS 0703 Onions, shallots, garlic, leek and other alliaceous vegetables 122,078.4 253,620.2 99,834.1 144,636.3 123,324.8 270,716.5

HS 0704 Cabbages, brassica, cauliflower and broccoli 26.5 37.3 50.5 37.3 53.3 67.7

HS 0705 Lettuce 3.7 0.7 1 0.8 0.4

HS 0706 Carrots, turnips, beetroot, salsify, celeriac, radish 1.9 0.8 180.4 309.1 101.9 15

HS 0707 Cucumber and gherkins 0.6 0.3 30.4 26.9

HS 0708 and HS 0709 Fresh vegetables not elsewhere specified 21.2 6.3 106.6 101.1 188.6 134

HS 0710 Vegetables frozen 360.9 340.6 251.6 232.9 289.1 239.7

HS 0711 Vegetables provisionally preserved not suitable for direct consumption 299.7 283.4 384.8 274.2 1,443.5 1,699.7

HS 0712 Vegetable parts (dried, fresh, frozen, powder) but not further preserved 652.4 218.4 669 178.4 975.2 282.7

HS 0714 Manioc, arrowroot, salup, artichokes, sweet potato (fresh, chilled, frozen) Source: UNCOMTRADE



India is the main competitor for Sri Lankan supplies in both product categories (see Table 7). Also, India appears to be gaining in competitive strength as the volume of import trade in both categories in Sri Lanka is growing sharply. This is mainly related to the highly competitive price level of the India import product (partly due to the Free Trade Agreement with Sri Lanka) as compared to major competitors on the Sri Lankan market i.e. Pakistan and China.

Table 7: Import of high quality vegetables in Sri Lanka (CIF Colombo)

Item 2016 2017

MT 1000$ MT 1000$

Potatoes

India 15,008 6,160 49,446 13,541

China 20,740 8,512 37,019 9,574

Pakistan 40,073 16,448 50,543 9,460

Onion, shallot, garlic, leek and other alliaceous vegetables

China 29,823 42,534 26,745 32,646

India 113,117 56,367 233,130 86,661

Source: UNCOMTRADE

3 . 2 . 2 U n i t p r i c e s o f m a j o r c o m p e t i t o r s

From an analysis of the unit import prices (see Table 8), it is clear that for potatoes, Pakistan is the major competitor for Sri Lankan supplies, and for onion, shallot, garlic, leek and other alliaceous vegetables, India is the major competitor. When comparing unit export prices, it is clear that Sri Lankan producers cannot compete against Indian, Pakistani or Chinese suppliers. Sri Lankan export prices in 2017 for potatoes were USD 0.79 per kg, and for onions, shallot, garlic, leek and other alliaceous vegetables USD 2.90 per kg, which was considerably higher than the Indian, Pakistani and Chinese prices.



Table 8: Unit import prices of high quality vegetables in Sri Lanka (CIF Colombo) in USD per kg

Item 2016 2017

Potatoes

India 0.41 0.27

China 0.41 0.26

Pakistan 0.41 0.19

Onion, Shallot, Garlic, Leek and other alliaceous vegetables

China 1.43 1.22

India 0.50 0.37

Source: UNCOMTRADE

Sri Lanka has a considerable export of lentils to India (about 18% to 20% of the Sri Lankan high quality vegetable exports in value terms) but very few other products in the product category. The other major countries in the Sri Lanka high quality vegetable exports are the Maldives (also about 18% to 20% of the Sri Lankan overall high quality vegetable exports in value terms and 35% to 40% in the dominant category HS0708 plus HS0709), Qatar and the UAE (about 20% to 30% of the Sri Lankan overall high-quality vegetable exports in value terms, nearly completely in the dominant category HS0708 plus HS0709).

The Middle East is the most promising export market for Sri Lanka high quality vegetables (see Table 9). The UAE, Qatar and Saudi Arabia provided an import market in HS0708 and HS0709 of USD 336.2 million in 2016. The imports in 2016 were 10% higher than in 2015. The UAE is the major import market for products in these categories. However Qatar extended its share of the total import market in the Middle East from 10% in 2015 to 15% in 2016. Sri Lanka’s import share in the Middle East market is less than 1% and India is its main competitor. India supplies similar products as Sri Lanka to the Middle East in the various seasons.



Table 9: Import of HS0708 & HS0709 in the Middle East

2015 2016

UAE Qatar Saudi Arabia UAE Qatar Saudi Arabia

1000 $ MT 1000 $ MT 1000 $ MT 1000 $ MT 1000 $ MT 1000 $

HS 0708

world 12,863 10,301 2,800 6,569 4,096 5,356 14,044 11,447 5,054 7,010 6,617

Bangladesh 173 137 1,444 902 73 72 125 64 2,250

Iran 1,537 2,193 4 1 1,170 1,801

Jordan 133 238 307 606 183 309 253 558

Kenya 2,682 1,045 227 47 2,920 1,138 289 75 72

India 3,069 1,652 20 10 553 475 4,011 2,429 1,642 862 639

Egypt 2,826 2,414 276 229 1,433 3,810 2,594 2,089 376 280 1,564

Saudi Arabia 138 166 1,349 4,832 85 85 1,259 4,490

UAE 364 662 190 326

Sri Lanka 89 48 71 37 100 43

HS0709

World 205,437 283,440 27,857 41,486 48,412 39,984 208,787 322,448 44,812 52,379 56,872

India 52,836 44,179 2,496 1,943 4,773 5,296 54,480 52,894 14,742 8,887 7,575

Iran 32,336 119,843 356 445 976 295 37,396 152,407 963 233

Jordan 9,707 16,501 6,974 13,590 6,979 15,154 9,311 16,260 6,944 14,567 8,195

Netherlands 21,300 5,384 1,589 301 6,556 1,402 17,741 4,670 2,490 624 7,677

Oman 29,030 65,664 1,525 3,153 2,480 1,670 30,036 62,125 1,898 3,962 1,702

Saudi Arabia 3,494 4,371 5,519 19,923 3,786 5,056 5,377 19,394

Egypt 9,895 7,725 701 443 7,915 5,089 12,684 9,301 1,648 1,232 9,006 Sri Lanka 2,358 2,329 68 137 55 30 1,858 1,574 197 204 362

Note: No data on import volumes for S Arabia in 2016

Source: UNCOMTRADE



The Sri Lankan exports in the product category to the Maldives and the Middle East are related to the fact that reliable and frequent air cargo connections are available to these markets and that a large Sri Lankan community is existing in these countries. Also, other countries such as Canada and Australia have large Sri Lankan communities, but these countries have much more demanding import regulations. Import prices from Sri Lanka in HS0708 & HS0709 are close to parity with the ones of India on the large UAE market (see Table 10). On the Qatar market, Sri Lankan import prices are very competitive as compared to the Indian ones and this has contributed to a doubling of the import share of Sri Lanka in the Qatar market between 2015 and 2016.

Table 10: Unit Import Prices of HS0708 & HS0709 in the Middle East

2015 2016

UAE Qatar Saudi Arabia UAE Qatar

$ per kg $ per kg $ per kg $ per kg $ per kg

HS 0708

world 1.25 0.43 0.76 1.23 0.72

Bangladesh 1.26 1.60 1.01 1.95

Iran 0.70 4.00 0.65

Jordan 0.56 0.51 0.59 0.45

Kenya 2.57 4.83 2.57 3.85

India 1.86 2.00 1.16 1.65 1.90

Egypt 1.17 1.21 0.38 1.24 1.34

Saudi Arabia 0.83 0.28 1.00 0.28

UAE 0.55 0.58

Sri Lanka 1.85 1.92 2.33

HS0709

World 0.72 0.67 1.21 0.65 0.86

India 1.20 1.28 0.90 1.03 1.66

Iran 0.27 0.80 3.31 0.25 4.13

Jordan 0.59 0.51 0.46 0.57 0.48

Netherlands 3.96 5.28 4.68 3.80 3.99

Oman 0.44 0.48 1.49 0.48 0.48

Saudi Arabia 0.80 0.28 0.75 0.28

Egypt 1.28 1.58 1.56 1.36 1.34

Sri Lanka 1.01 0.50 1.83 1.18 0.97 Source: UNCOMTRADE

3 . 2 . 3 Q u a l i t y s t a n d a r d o f m a j o r c o m p e t i t o r s

China – Chinese food producers and exporters accomplish compliance with the international standards as agreed under WTO, its Sanitary and Phytosanitary Standards and Technical Barriers to Trade agreements mainly through voluntary standards. The Chinese official food standards, as embedded in laws and implemented by official institutions do not guarantee access to foreign markets. Therefore food producers and exporters developed their own standards and compliance mechanisms including certificates and accreditations. Major Chinese food producers and exporters have developed a comprehensive food safety and



standards system to comply with WTO standards and some also with more demanding US Food Regulations and EUROGAP.

India – India holds the General Marketing Standard (EU Council Regulation (EC) No. 1234/2007 for fruits and vegetables), which forces the country to comply with the general marketing standard (sound, fair and marketable quality) and indicate the country of origin. The latter must be in a language understandable by the consumer of the country of destination. This standard is considered one of the most stringent in the world and forces Indian exporters to procure the export produce only from registered farmers that follow GAP. This is basically a voluntary system, as except for a few states, not much effort has been put in by the state governments to get farmers registered. The standard applies to all marketing stages including import and export, unless stated otherwise. The holder of these products may not display or market them in any manner other than in conformity with the standard. The holder is responsible for ensuring this conformity. The EU is entitled to provide specific marketing standards for fruits and vegetables not covered by a specific marketing standard. However, where the holder is able to show they are in conformity with any applicable standards adopted by the United Nations Economic Commission for Europe (UN-ECE), the product shall be considered as conforming to the general marketing standard. Operators who wish to indicate classes on the produce should comply with the classification provisions of the UNECE standards.

3 . 3 E n v i r o n m e n t

3 . 3 . 1 E x p o r t r e g u l a t i o n s o f S r i L a n k a

Sri Lanka applies both Tariff and Non-Tariff Measures to regulate import and exports. Sri Lanka has been a member of the World Trade Organisation since 1 January 1995 and applies the General System of Preferences (GSP) and Trade Facilitation Agreements. Sri Lanka has special GSP+ conditions when trading with the EU and has negotiated a number of free-trade agreements with countries in Asia. The general custom import tariffs in the framework of WTO agreements is 30 percent on agricultural products with some agricultural products having specific import duties. In addition, Sri Lanka imposes Export Development Board levy, Value Added Tax (VAT), Port and Airport tax, Nation Building Tax, Port Handling charges and agent commissions to imported agricultural products which could add up to more than 100 percent of the CIF value for imported agricultural products. Also a special commodity levy (SCL) is charged on various agricultural products such as sugar, chickpeas, potatoes, onions, dairy products and fruits. The SCL rates change frequently and are a major source of uncertainty to importers.

The Non-Tariff Measures relevant for the trade in high quality vegetables applied by Sri Lanka are:

● 38 categories of plants or plant materials are banned and/or restricted for imports

● Vegetables containing Genetically Modified Organism (GMO) are subject to restricted import and sale in the domestic market.

● Para tariffs in the form of export levy and infrastructure development levy on imports are applied

● Licensing requirements for many products demanding exporters and importers to have licenses from different authorities which are time consuming, costly and difficult to get.

● Sanitary and Phyto-Sanitary measures are applied to agricultural products under which quarantine, certifications and inspection requirements are implemented.



3 . 3 . 2 T r a d e a n d b u s i n e s s i n f r a s t r u c t u r e o f S r i L a n k a

Many of these measures are reducing the export competitiveness of Sri Lankan high value vegetable products to the world market. Also, the stringent mainly Non-Tariff import restrictions of EU, USA and Japan on high quality vegetable exports from Sri Lanka further limited the export possibilities for Sri Lankan exporters. Sri Lanka mainly exports to the Maldives because 1) the Maldives applies the least restrictive non-tariff import regulations, 2) the Maldives has frequent daily flights with Sri Lanka and 3) the Maldives has a broad Sri Lankan community creating a good network for trade.

Apart from general trade documents such as bill of lading, certificate of origin, bill of entry or airway bill and proforma invoice, the Maldives only requires registration of the importer with the Ministry of Trade and Commerce. The Maldives import system thus does not help Sri Lankan producers and exporters of high value vegetables to raise their standards and competitiveness. Apart from the Maldives, Sri Lanka exports high quality vegetables to the Middle East (UAE, Qatar and Saudi Arabia). With the Middle East also, Sri Lanka has regular daily flights and a broad Sri Lankan community facilitating the trade relation. In its trade regulations, the Middle East is less strict than EU, USA and Japan, but stricter than the Maldives and as such helps the Sri Lankan producers and exporters of high value vegetables to get used to higher standards and higher competitiveness. Strengthening the political situation in Sri Lanka, improving the infrastructure and a good supply of power, and further promotion of tourism and flights to Sri Lanka are considered by the stakeholders as a positive impetus for the growth of the high quality vegetable sector and sensible trade promotion of vegetable exports in the future.

3 . 4 P r o j e c t i o n s

3 . 4 . 1 S t r e n g t h o f S r i L a n k a i n m a r k e t

Sri Lanka producers and exporters of fresh vegetables have developed contractual relations with major supermarkets, hotels, restaurants and export markets (especially in the Maldives). Supply in value chains is increasingly better managed, and the quality and quantity of high value supply has increased. In addition, the offered assortment of high quality vegetables has increased as well, with new products for Sri Lankan suppliers such as bell peppers entering the business.

3 . 4 . 2 W e a k n e s s o f S r i L a n k a i n m a r k e t

Sri Lanka is a high cost producer of high value fresh vegetables with low compliance with quality standards. This severely reduces the access of the Sri Lankan supply to many international markets. Competition of imported products in the local market is severe with the volume of exports being only a fraction of the volume of imports. Logistics and marketing conditions in the value chain are sub-optimal as cooling facilities are limited and a real cold chain for the produce is lacking. Several exporters also mentioned constraints at the agro-input site (especially quality and hybrid seeds) as a major constraint for rapidly adjusting to trends in the fresh vegetable market. In addition, the regulations for import and export of high value



vegetables from Sri Lanka are complicated and bureaucratic and change regularly leading to additional costs.

3 . 4 . 3 E s t i m a t e d d e m a n d o v e r t h e 2 0 1 7 t o 2 0 2 1 p e r i o d

The growth of the market is determined by population growth (about 1% in Sri Lanka) and by revenue growth in the market segments. Based on current ongoing developments in Sri Lanka, the growth trend in high quality demand for fruit and vegetables has been estimated in Table 11.:

Supermarkets growth trend

According to the Fitch Report, the aggregated revenue growth in Cargills, Keells and Arpico supermarket chains in 2017 is 21%. Since 4% to 5% of it is related to inflation, it is about 16% in real terms. Fitch expects the modern groceries retail sector to continue its double-digit growth over the medium term, helped by the currently low penetration of supermarkets in the country, improvement in per capita income, rising urbanisation and changes in customer buying patterns.

Hotels and Restaurants growth trend

According to the Sri Lanka Tourism Development Board, international arrivals will grow at least 3 percent annually over the medium term, helped by high scores as Srii Lanka becomes a preferred tourist location (for example best tourist location of 2018 by Lonely Planet), new direct airline connections (for example Russian airline directly from Moscow started in 2018) and extensive tourism promotion activities.

Exports growth trend

Exports of high quality vegetables are stagnating at the level of 16,000 to 17,000 MT annually.

Table 11: Estimated growth of the demand for high quality vegetables in Sri Lanka (MTs)

2017 2018 2019 2020 2021

Supermarkets 42,000 48,720 56,500 65,600 76,000


4,200 4,350 4,500 4,700 4,900

Exports 17,200 17,400 17,600 17,800 18,000

Total 63,400 70,470 78,600 88,100 98,900

Source: Own estimations

Of course, it should be notified that a breakthrough in technology and new business models can have a large impact on the current trend, for example, the large-scale introduction of cold chain technology is expected to have a major impact on export sales of high quality produce. However, in this study we choose to follow a conservative approach and base the demand trend on trends that are already materialising in Sri Lanka. Based on these trends, it is clear that the sale of high quality vegetables through supermarkets in Sri Lanka is the most important market segment.



4 B E L L P E P P E R S

4 . 1 F u n c t i o n d e s c r i p t i o n

4 . 1 . 1 D e s c r i p t i o n o f t h e p r o d u c t i o n a n d t r a d e

In Sri Lanka bell pepper is cultivated in semi-protected environments. Though this is misunderstood as a greenhouse environment, it is only a poly tunnel. Therefore, it does not fall under full protected agriculture. In general, farmers start with a standard 1000 square feet poly tunnel. As estimated by the Department of Agriculture, the investment for a 1000 square feet poly tunnel with drip irrigation facilities is Rs.375,000 on average. However, this varies between Rs.250,000 to Rs.700,000, depending on whether they have used higher gauge materials or a contractor for construction. This is the highest capital cost that a bell pepper farmer has to incur. However once built, a poly tunnel will be able to last on average for 10-12 years with minimum repairs. A decade ago, farmers had to rely on materials that were brought from Colombo, or had to travel themselves to get the necessary materials for construction of poly tunnels. However, things are much easier now as there are agents who sell all necessary materials such as nets, pipes, drip irrigation systems in the region and sometimes in the village. For example, several farmers in Uwa Paranagama area who started bell pepper production in the early 2000’s have now started taking subcontracts to build poly tunnels. They also sell necessary materials separately at wholesale and retail levels.

Bell pepper comes in three basic colours. In the early stage of the plant, fruits are green in colour. Then they will either become red or yellow. In general farmers use several popular varieties such as: Indra, Herculese, Polaris and Sakata. These are being marketed by companies such as CIC, Onesh and Sakata. The number of seeds in a packet or the weight of the packet varies based on the seed company. For example, Indra comes in 10 g packets which have around 1000 seeds. Therefore, the cost per seed packet is also high for this particular variety. However, this is ideal if the farmer has more than one poly tunnel of 1000 square feet or one that is bigger. The Sakata variety has the highest seed germination rate of 98%, while the others have a rate of less than 85%. Seed price has gone up over time. Since these are hybrid seeds, one can’t expect an F2 generation. Therefore, seed cost is a recurring cost for every season.

Chemical fertilizer is an essential part of bell pepper cultivation. All farmers use Albert solution as the necessary fertilizer for the crop. In addition, there are several other inorganic fertilizers which they use to supply essential micro-nutrients such as Zn, Ca and Mg. Albert solution is costly. Therefore on average, farmers have to spend around Rs.10,000 rupees in purchasing Albert solution for a 1000 square feet poly tunnel. Figure 1 shows bell pepper cultivation under a poly tunnel environment.



Photo 1: Bell pepper cultivation under poly tunnels

Application of pesticides, mainly insecticides and fungicides are a common practise in bell pepper cultivation. Weedicide application is almost negligible in bell pepper cultivation, as the floor of the poly tunnel is usually covered with polythene. Whatever grows as weeds are removed manually. On average bell pepper farmers apply 10 types of insecticides and fungicides in to their cultivation. Though there are recommendations given by pesticide companies and the agriculture instructors of the Department of

Agriculture, farmers tend to apply more. Heavy dependency on pesticides has raised questions on the safety of the produce for consumption. All of these chemicals are available at the local retail store. In addition, chemical companies promote their brands directly to farmers or farmer organizations. However, some chemical fertilizers, particularly those that contain micro nutrients such as Zn, shows shortages in the market place. While there are substitutes available from different companies, farmers spoke of the quality and the previous ones that were available to them. At the moment there is a mite attack that is creating difficulty in bell pepper cultivation and only a few farmers have been able to manage that properly. Some farmers have managed to control the mite attack with a heavy dose of frequent chemical application. For example, farmers would use three types of insecticides every seven days in rotation for about 6-7 months. However, some farmers have managed to control the mite attack using only bio-pesticides.

In general bell pepper has a one-year lifecycle. After field plantation, fruits can be harvested after 3-4 months. Usually the initial harvests are green in colour (when the trees are growing, several fruits have to be removed first for the tree to grow. Therefore, the first 2-3 harvests are in green colour). Colour fruits can be harvested after about 5 months’ time. Therefore, in its life span, a tree will produce two colours, green and yellow or red. Usually during the life cycle of a tree, 25% of the harvest is green and the rest is colour (However this might vary based on the market prices, if the price for colour is significantly higher, then farmers would remove the smaller green fruits and allow colour fruits to mature). Bell pepper is priced under three grades. Usually the grade is based on the weight of the fruit. Fruits that are mature and weigh more than 150 g fall under grade 1. Sometimes there are grade 1 fruits that weigh around 350 g. But on average, grade1 fruit that is bought by supermarkets weigh around 250 g.

The second grade would weigh between 70-150 g and anything below that will be graded as grade 3. All these grades from 1-3 carry uniformity in shape and colour. Sometimes there is a market for discoloured, very small and crooked fruits as well. For example, farmers supply these types to Military camps. They are called “Soopins”. Except for Soopins or the grade 4, fruits need to have a nice colour as well as uniform and clear skin. Fruits that have damaged skins are sorted as Soopins regardless of their weight. Once fruits are harvested, they are stored in crates for transportation. Farmers and collectors who directly collect from farmers use larger crates that can store around 25 kg. However, at the collection centre after the final sorting, bell pepper is loaded into smaller crates that can hold around 12-15 kg. These smaller crates are then loaded into cold trucks for transportation. They will be transported to hotels, supermarkets and the export factories.



Photo 2: Bell pepper grades from 1-3.

Labour is the most expensive input in bell pepper cultivation. On average a farmer will have to spend at least 2 hours per day in a poly tunnel. This sometimes will continue for one year. In such a case, a farmer will have to spend close to Rs.75,000 for labour. However, none of the farmers see their involvement as a cost. Therefore they do not account that in calculating costs.

They only consider hired labour as a cost of labour. On average, a single farmer can take care of a 1000 square feet poly tunnel by employing 2 hours of labour per day. More labour is required at the construction stage of the poly tunnel.

The sorting area for bell pepper is usually a clean place and constructed with cement tiles. Generally, a washing area is part of the establishment. Farmers do wash their harvest before bringing it to the collection centre where mostly another round of washing is necessary, as there might be chemical residuals. Even though farmers are advised not to apply chemicals at least a week before harvesting, they do apply chemicals even the day before harvest. For example, the

highest maintenance cost at the Keells collection centre in Welimada, is for water usage and labour for washing close to 900 kg of bell pepper every day.

Photo 3: Bell pepper sorting areas and packing into crates and cold transport

Produce that comes to super market collection centres will be transported to their main warehouses (distribution houses) or retail stores on the same day or within 24 hours. For example, usually bell pepper is harvested early in the morning around 6-7 am and will be transported to the collection centre by 11 am.

This will then be sorted, cleaned and loaded into the cold truck and they leave for the main distribution centres or outlets in the late afternoon or night so that produce is available for sale

early the next morning. This process remains the same regardless of whether bell pepper goes to hotels, super markets or export factories. Once the produce arrives at these destinations, it may be stored in a cold room (usually 4 degrees centigrade) for about a week. This time of storage might be longer than a week for an exporter, but larger hotel chains, restaurants and supermarkets will only keep bell pepper under cold storage for a maximum of 48 hours.



Photo 4: Special crate size to transport bell pepper from collection centre to supermarket

Source: Own research

Exporters use air transportation to send their produce to export destinations. For exports, bell pepper needs to be repacked for air transportation. Usually bell pepper is packed in corrugated boxes with ice that would weigh around 10 kg. These are then loaded on a pallet. Each box is labelled individually with the produce details and the destination.

4 . 1 . 2 A c t o r s / s t a k e h o l d e r s a l o n g t h e v a l u e c h a i n

Actors or stakeholders in the bell pepper value chain can be identified under categories of input suppliers, production, trading and consumption. These actor categories are illustrated in the below Figure 1.

In terms of input suppliers, seed traders, agro chemical traders, machinery traders, fertilizer traders and advisory services are the main important actors. Bell pepper growers, as explained earlier, cultivate several seed varieties. Each of these varieties is imported into Sri Lanka by different companies. The size of the pack in terms of the number of seeds and weight varies as well as the price and the germination rate. These seed importers have their local representatives or dealers, and farmers can now easily buy from nearby agriculture input stores. The situation is similar to agriculture chemicals (pesticides, insecticides, fungicides and weedicides) where farmers can now buy from the local store. However, there are some chemicals that provide micro nutrients that farmers do not have easy access to and those have to be bought from Colombo. For example, at the moment farmers find it difficult to find a supplier for the nutrient Zn, as the usual importing company stopped importing due to price increases. Almost all agriculture machinery importers and traders now have a local dealer that farmers can go to. The situation does not change at all with respect to fertilizers. Bell pepper farmers are heavily dependent on chemical fertilizers. Though some apply organic matter to a certain extent, for example to substitute around 10-15% of the requirement of fertilizer, many are fully dependent on chemical fertilizers. Poultry manure is the most demanded organic fertilizer and is also available at the local fertilizer stores. Agriculture advisory services however



is a significant issue. Farmers are connected with the local Agricultural Instructors (AI’s). However, farmers are still dependent on the seed traders, fertilizer and chemical traders and experienced farmers. Interestingly, many farmers who started bell pepper cultivation 10-15 years back have shared their knowledge with others, and many followers are young farmers between 25-40 years of age. Farmers share their knowledge of new diseases, cures for such diseases and where to buy the necessary chemical treatments. This process has largely eliminated the requirement of government extension services among bell pepper growers.

In bell pepper cultivation, it is easy to identify 4 types of producers: small scale farmers, large scale farmers, private companies and farmer companies. Small scale farmers have at least 1,000 ft2 of bell pepper cultivation, which is the standard poly tunnel used in bell pepper cultivation. They on average produce 4-5 kg per tree during the life cycle and there are on average, 450 plants in a standard poly tunnel. Most farmers, who have at least been in bell pepper cultivation on average have 5 poly tunnels, that is 5,000 ft2 of bell pepper cultivation. However, there are large scale bell pepper producers in Nuwara Eliya and Badulla districts. These large scale farmers work with more than 50 poly tunnels, which accounts for a 50,000 ft2 area of bell pepper production. Farmers who have the largest number of poly tunnels in bell pepper production in the up country have 118 poly tunnels, which accounts for more than 100,000 ft2 area where close to 80,000 ft2 is allocated for bell pepper only. Private companies, mainly exporters have their own bell pepper production facilities. These facilities are mostly privately owned by the company, but some are co-financed by the company and farmer is signed up to an agreement to provide an exclusive supply. Farmer companies represent an entity which has the elements of a conventional farmer cooperative, but has legal registration under the Companies Act. Members of these organizations are farmers, and their production flows through the farmer company. These organizations also have dedicated farmers who produce bell pepper, but who have taken the membership of the company or invested in it. Such farmers supply through large scale collectors and traders in the area.

Bell pepper trading goes through the wholesale market, super markets, farmer companies, hotels, restaurants, exporters and importers. Supply comes to the market directly or through collectors. In terms of wholesale markets, bell pepper is traded in Nuwara Eliya, Keppetipola and Colombo dedicated economic centres. These dedicated economic centres trade close to 60% of the bell pepper production. Approximately 70% of it is directly traded through Nuwara Eliya dedicated economic centre. While Colombo is predominantly a secondary trading wholesale market for bell pepper, close to 10% of what goes through the wholesale value chain goes directly to the Colombo wholesale market. These are farmers who send their other produce also to the Colombo market using larger collectors. For example, every night larger lorries of collectors with up-country vegetables go to Colombo, and bell pepper is becoming a regular commodity in the vegetable mix. Nearly 20% of bell pepper traded through the wholesale market is directly traded through the Keppetipola market.

Cargills, Keells, Arpico, SPAR, Softlogic and Laughs are the leading supermarkets that sell bell pepper, and cover close to 20% of the bell pepper production in the Nuwara Eliya and Badulla districts. Among these supermarkets, Cargills purchase the majority followed by Keells. Keells buy only one quality, which is the grade one or the bigger bell pepper which weighs more than 150 g. However, Cargills buys up to three qualities and they sell under three packaging types: premium, regular and budget. Other supermarket chains buy limited amounts of bell pepper at the moment. However they might pose a demand in the future as they expand into many areas of the country. Hotels also buy bell pepper from many sources. Most of the time they try to buy directly from larger producers or farmer companies. However, hotels and restaurants also buy from the Colombo wholesale market, and sometimes from supermarket outlets as well since their demand is not that large. For some hotels and restaurants, the daily requirement of bell pepper is less than 1 kg. Therefore it is more convenient for them to purchase from a close-by supermarket outlet.



Farmer companies supply mainly to supermarkets, hotels and restaurants. There are collectors who supply to supermarket collection centres as well. Farmer companies and collectors supply to exporters also. Bell pepper exporters mainly buy from large scale farmers, farmer companies and collectors. However, there are situations where they buy from the Colombo wholesale market as well when the supply is not enough to fulfil the order. Bell pepper importation is very limited. None of the imported bell pepper comes to supermarket outlets/other retail stores or wholesale markets. However imported bell pepper is being used by high end hotels and restaurants in very small quantities. Imported bell pepper is also used to make value added products, but only as a secondary ingredient of the particular value-added product.



Figure 1: Stakeholders/Actors involved in different stages of the value chain

Stakeholders/Actors involved in different stages of the value chain



Figure 2: Actors and respective activities in different stages of the value chain

Activity

Actors

Input Grading and packing

Production Transport Marketing/processing

Consumption

Seeds (All imported)

Fertilizer

Agro chemicals

Advisory-services

Poly tunnels

Land preparation

Nursery

Planting

Fertilizer, Agro chemicals

Irrigation

Weeding

Harvesting

Cleaning

Sorting

Grading

Packing

Storing (Store with cold storage, maximum 14 days)

Loading

Transporting

Unloading

Buying

Repacking

Selling locally

Exporting

Importing (This is as an ingredient for value added product)

Buying

Storing

Consumption

Farmers/cooperatives

Private companies

Local chemical traders

Government institutes

Family labour

Hired labour

Wholesalers

Supermarkets

Exporters


Households Loaders/unloaders


Transport agents

Supermarkets

Hotels and restaurants

Wholesalers/Retailers

Hotels and restaurants

Importers/exporters/processors

Actors and respective activities in different stages of the value chain



Figure 3: Intra trading between production and consumption

Out of country consumption/production Inter-trading between production and consumption

In country consumption

Import Farmer companies

5%

Hotels/restaurants

Supermarkets

Export 20% 5% Wholesale markets

60% 10%%

Production Collectors/traders



4 . 2 F l o w s o f p r o d u c t

4 . 2 . 1 V a l u e c h a i n n e t w o r k m a p

Value chain map shows the flows of products along the different stages of the value chain (see Figure 2 and 3). It also shows major actors in the different stages of the value chain and the main linkages among them. In terms of products, the bell pepper value chain is not complicated since there is no processing done at the moment. Therefore, what is seen is the flow of the fresh produce along the different stages of the value chain and how it flows among the actors in the respective stages of the value chain. Eventhough it is predominantly fresh bell pepper that flows in the value chain, a diverse group of actors is involved, especially in the trading and consumption stage of the value chain. This was illustrated in detail with Figure 3. The value chain network map captures the main movements of the products along the different stages of the value chain among the different actors involved.

The bell pepper value chain network map can be divided in to three main areas: input services, production, and trading and consumption. As identified previously in the bell pepper value chain actors’ diagram, inputs mainly fall into two categories: production inputs and agricultural advisory services. Agriculture advisory services are mainly done by the agricultural advisors of the Department of Agriculture. They may be attached to the agriculture division of the provincial council or to the central government. However, as identified earlier, many farmers rely on agro-chemical traders and seed traders for cultivation specific information. As mentioned earlier, production inputs such as seeds, fertilizer, agro-chemicals and materials for poly tunnel construction are now easily available locally.

Bell pepper production can be categorized in to several groups using different denominators. However, in the production process, it is very easy to identify two groups of producers based on the scale of the production. The majority of bell pepper farmers in Nuwara Eliya and Badulla districts, nearly 70%, of them have 2-3 poly tunnels. A standard poly tunnel is 1,000 ft2 but there are poly tunnels that expand up to 1,500 ft2. Therefore, a larger portion of farmers have poly tunnels that cover an area less than 5,000 ft2. Even though only 30% of the farmers have more than 5,000 ft2 area, among them there are nearly 10 bell pepper farmers who have more than 50,000 ft2 area.

The trading and consumption process of the bell pepper value chain is complex and inludes many actors (see Figure 4 and 5). As shown earlier, there are inter-trading happening among them. Consumption of bell pepper happens locally as well as internationally since nearly 10% of the production is being exported. A very small amount is also being imported for high-end hotels and restaurants, and as a secondary ingredient for value added products which are again exported. Bell pepper production (from small as well as large scale producers) can reach the wholesale market, supermarkets, farmer companies, hotels and restaurants or exporters either directly or through the collectors.



Input supply Production Trading and consumption

Private and public sector extension services

Planting materials, agro chemicals and fertilizers and machinery importers and local agents

Small scale farmers: < 5000ft2

(Average poly tunnels is 1000 ft2)

Large scale farmers: > 5000ft2 (Average poly tunnel is 1000 ft2)

Who

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Su

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Farm

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s

Ho

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a

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resta

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Exp

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rs

Co

llecto

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Final consumer

Imp

orte

rs

Pro

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rs/

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Value chain network map Figure 4: Value chain network for bell pepper



Figure 5: Product flow diagram for bell pepper

4 . 3 L o c a t i o n o f a c t i v i t i e s

4 . 3 . 1 A r e a s o f p r o d u c t i o n a n d t r a d e

Bell pepper was initially introduced to the Uwa Paranagama area of the Uwa Paranagama Divisional Secretariat Division of the Badulla district of the Uwa province. The Uwa Paranagama area had the ideal climate as well as the framers who were willing to try out bell pepper under poly tunnels. With the help of officers from the Department of Agriculture and dedicated farmers, bell pepper is now grown in a wider area covering several districts. Currently bell pepper is predominantly cultivated in the Nuwara Eliya district of the Central province and the Badulla district of the Uwa province. In general, farmers are scattered in these two areas. However the majority of the supply comes from several Divisional Secretariat areas: Uwa Paranagama, Welimada, Bandarawela, Nanu Oya, Walapane, Bindunuwewa, and Keppetipola.

Nuwara Eliya and Badulla cover three major regional economic centres in Sri Lanka namely: the Nuwara Eliya regional economic centre, the Bandarawela regional economic centre and the Keppetipola regional economic centre. The bell pepper produced in Nuwara Eliya and Badulla districts comes to these regional economic centres where it is traded as a wholesale product. In addition, there are supermarket collection centres in Nuwara Eliya, Welimada and Bandarawela managed by Keells supermarkets and Cargills supermarkets. Individual farmers, farmer organizations and large-scale collectors bring in their produce to these collection centres on a daily basis. Also, there are several large scale collectors in both districts who collect from individual farmers and farmer organizations, and then sell the produce to hotels and restaurants, exporters as well as the Colombo regional economic centre (Manning market). They have their own collection houses, cold storages and cold transportation networks.

Poly tunnel

400 plants 1-year life cycle Average 4 kg per

plant Standard size:

1000 ft2 Cost Rs.350,000

without drip water

Marketing

Supermarkets Whole sale Retail Hotels and

restaurants Exporters Importers

Product flow diagram



Bell pepper is consumed all around the country (see Figure 6). Since all major supermarket chains sell it in their outlets, bell pepper is accessible for the whole country. For example, Keells has a product range in every supermarket and bell pepper is one of the commodities in that product range. Recently Keells started packing bell pepper in 1 kg packs (crates) to be transported from their main pack house in the Colombo district to all the supermarket outlets, even to fulfill a 1 kg of daily demand. Bell pepper is a regular commodity in most high-end hotels and restaurants. For example, AGCO (All Island Agriculture Cooperative Society Ltd.) is one of the major pack houses for fresh vegetables in Nuwara Eliya. Their main consumers are the large hotel chains and high-end restaurants. They send bell pepper to hotels and restaurants in the Western, Southern, Central and North central and North western provinces of Sri Lanka.

Currently, export of bell pepper as a fresh produce happens through air transportation. Therefore, the Bandaranayke International Airport at Katunayake is the main port for exports of bell pepper. All the exporters that supply bell pepper are located in the Western and North Western provinces, close to Katunayake (1-2 hours travel to the airport). Importation of bell pepper is done as a value added product. For example, HJS Condiments Limited imports close to 30 MTs of bell pepper dipped in a preservative using sea freights. They re-export bell pepper as a pickle mixed with gherkins, again using sea freights. Therefore, bell pepper as a fresh produce is exported from Katunayake, and as a value-added produce it is imported and exported from the Colombo sea port.



Figure 6: Location map for bell pepper

Source: Downloaded from the World Wide Web

Badulla district

Covers major areas such as Uva Paranagama, Welimada, Bandarawela More than 300 farmers Close to 15 large scale collectors 6 major collectors with pack houses 8 farmers with more than 30,000 ft2

Nuwara Eliya district

Close to 150 farmers Around 8 large scale collectors 4 major collectors with pack houses Majority are small producers with < 10,000 ft2

Colombo port

Bandaranayake International Air port

Colombo wholesale market



4 . 4 Q u a n t i f i c a t i o n

4 . 4 . 1 V a l u e o f t r a d e a n d a c t o r s i n v o l v e d

Volumes of bell pepper being traded per day are not recorded at a central location. However price information is available (see Figure 8 and 9). The Nuwara Eliya dedicated economic centre records price information but not quantity information. The situation is similar to bell pepper trading at the Keppetipola and Colombo wholesale markets, where they do not record bell pepper trading information, or price or quantity information. However, some information on trading quantities is available with the Keells and Cargills collection centres. Keells collect bell pepper from their collection centre at Welimada. Cargills collects bell pepper from three collection centres in Nuwara Eliya, Keppetipola and Bandarawela. In addition, one large scale private collector in Bandarawela - Colombage Lanka Distributors, collects bell pepper at a larger scale and supply to the Colombo wholesale markets, exporters, hotels and restaurants, and sometimes to the Cargills collection centre in Bandarawela as well. In addition, the All Island Agriculture Cooperative Society Ltd. (AGCO) also collects large volumes of bell pepper on a daily basis. They also supply directly to hotels and restaurants and the Keells supermarket main pack house in Colombo. Also the Uwa Paranagama export production village collects limited information on the bell pepper volumes traded on a monthly basis. However, this information does not provide a complete picture of what is being traded from the Uwa Paranagama region, since many farmers operate outside this entity and work with larger collectors. Therefore, in terms of volumes being traded, complete information is not available.

However, research work identified the average amounts being traded through each entity as a percentage of the total traded volume. This is through triangulation of information by many sources. For example, (see Figure 7) on average nearly 60% of the bell pepper produced in the Nuwara Eliya and Badulla districts are being traded via wholesale markets in Nuwara Eliya, Keppetipola and Colombo. Based on these percentages, and known trading volumes of the supermarket chains, it is possible to establish a daily trading quantity of bell pepper by different actors.

Figure 7: Per day volume trade for bell pepper under different actors

Source: Nuwara Eliya dedicated economic centre

60%20%

5%

10%5%

Per day volume (Kg)

Wholesale markets Super markets Farmer companies Exporters Hotels and restaurants



Figure 8: Bell pepper prices


0

2000

4000

6000

8000

10000

Red Yellow Green Red Yellow Green Red Yellow Green Red Yellow Green Red Yellow Green

2014 2015 2016 2017 2018

Bell pepper prices - Nuwara Eliya Wholesale market

January February March April May June July August September October November December



Figure 9: Bell pepper average monthly prices from 2014 to 2018




5 B E L L P E P P E R S - V A L U E C H A I N V A L U E D I S T R I B U T I O N

Value chain value distribution graphs look at how value is distributed, in terms of margins in each trading channel for the commodity under consideration. For bell pepper, this is done for major trading flows such as: export, super markets, dedicated economic centres (wholesale markets), and hotels and restaurants (see Figure 10 to 12).

Figure 10: Value chain value distribution - economic centre value chain




Figure 11: Value chain value distribution - supermarket value chain


Figure 12: Value chain value distribution - hotels and restaurants value chain




Figure 13: Value chain value distribution - export value chain


Figure 13 was compiled based on the trading on a particular day and tracking the margins in different trading channels. For this, a particular farmer was selected who deals with all trading partners: super markets, wholesale markets and exporters, as well as hotels and restaurants. The cost of production was therefore taken as a constant value for all trading channels. In all these scenarios, the farmer works with a collector. Therefore, farmer’s margins remain the same regardless of the trading channel. However, the collector’s margin varies. The collector keeps the highest margin when he supplies to the export value chain, where his net margin is 71.4% of the value he paid to the farmer. The next highest margin is when he supplies to hotels and restaurants, followed by the supermarkets and economic centres. The economic centre keeps the highest margin from the final consumer, compared to any other trading channel which is 84.6% of the purchase value. Supermarkets also keep a higher margin, only a little less than economic centres. Exporters are not in a position to keep higher margins as others due to the freight cost involved. Farmers cooperatives keep the lowest margins when selling to their final consumers (which are the hotels and restaurants).



6 B E L L P E P P E R S - E C O N O M I C A N D F I N A N C I A L A N A L Y S I S

6 . 1 F a r m l e v e l e c o n o m i c a n a l y s i s , i n t e r n a t i o n a l v i a b i l i t y a n d c o m p e t i t i v e n e s s

6 . 1 . 1 G r o s s m a r g i n a n a l y s i s

Gross margin analysis looks at the farmers’ cost of production and calculates economic indicators such as break-even yield, break-even price, and cost shares for major cost components. Gross margins only cover variable cost components. By far the biggest cost component of the bell pepper production system is the cost of the poly tunnel. For some farmers the economic life of the poly tunnel is 3 to 5 years, but for some it is close to 10 years. Therefore, there is no clear information to decide whether the poly tunnel should be taken as a variable cost or a fixed cost. Therefore, to make a comparison, both situations are considered. The respondent sample comprised of farmers who are both large scale and small scale. As mentioned, this demarcation was done based on the ft2 of bell pepper production where the demarcation is 5,000 ft2 area. This is on average 5 standard 1 000 ft2 poly tunnels. It is obvious that gross margins are higher when poly tunnel cost is not included. With poly tunnels, the average gross margin from a 1,000 ft2 poly tunnel is Rs.658,938. This is the profit of doing a bell pepper cultivation for 12 months, from planting to final harvest. Therefore, on average, the payoff is Rs.53,9111 per month for a year. Therefore, bell pepper cultivation yields a significant income per month that clearly puts farmers above the average earnings of a vegetable farmer of Sri Lanka, which is about Rs.15,000-20,000 per month. The average gross margin, even with the cost of the poly tunnel, clearly covers the investment cost of the poly tunnel itself. On average a poly tunnel will cost about Rs. 370,000 to construct including irrigation equipment. This might go higher on average by Rs.50,000 if drip irrigation is to be installed. The interviewed producers indicated their plans to increase the cultivation area within the first 3-5 years of their cultivation by adding another poly tunnel each year. This is because annual gross margins cover the cost of the poly tunnel for the next year. Then they maintain poly tunnels as long as possible. Without the poly tunnel, the average gross margin for a bell pepper farmer is Rs.973,088 per 1,000 ft2 area. At the outset, bell pepper seems to be a very lucrative production process. The sample included farmers who faced better prices during the 2017-2018 cultivation year. Therefore, they were better off in terms of farmgate prices. However, there are farmers who did not do well at all. The data shows that some farmers didn’t manage to cover the cost of fertilizer and chemicals. What was clearly evident from the research study was that, unlike other vegetables grown in the up-country region, bell pepper farming needs connections in order to get better prices. For example, there are farmers who did not have any proper linkages and their produce was sold to collectors at a very low price, sometimes half the price of the closest economic centre. These farmers had little support in managing pest and diseases, and their crop management practices were not supportive of better harvest like the ones adopted by successful farmers. Entering in to supermarket value chain is also not that easy, especially to Keells where they demand the grade one (weight > 150g). It is even harder to get into the export trading channel unless farmers have connections to exporters. For example, several



exporters who export bell pepper have established direct linkages with farmers in Nuwara Eliya and Badulla area and they are working with them for the last 10 years. Figure 14: Cost components as a percentage of TVC of bell pepper


0.37

3.3

1.4

47.1

8.3

3.1

0

1.8

13.1

17.8

74

24.8

5.8

11

0.85

6.14

10.07

61.08

14.86

4.08

2.70

0 10 20 30 40 50 60 70 80

Seed cost

Fertilizer cost

Pesticides cost

Polytunel cost

labour cost

Other material cost

Transport cost

Cost components as a percentage of TVC

Average Max Min



Table 12: Gross margin summary for bell pepper

Item Min Rs. Max Rs. Average Rs.

Gross margin (TR -TVC) - with poly tunnel 31,915 2,420,000 658,938

Break-even yield (TVC/AVG price} 605 2,825 1,598.5

Break-even price per VC (TVC/Production) 108 323 226

Gross margin (TR -TVC) - without poly tunnel 172,350 3,120,000 973.088

Break-even yield (TVC/AVG price} 336 1.879 819

Break-even price per VC (TVC/Production) 43 270 122


Considering poly tunnels as a variable cost component, the average break-even quantity of production is 1,598.5 kg of bell pepper. The break-even price is Rs.226. On average 1,000 ft2 poly tunnel will have 450 plants. If we assume the lowest average of production per tree as 4 kg (as suggested by data collected), then 1,000 ft2 yields a total of 1,800 kg of bell pepper. The break-even price of Rs.226 per kg is low and farmers always get a higher price. When the poly tunnel cost is taken out of the equation, break-even yield comes down to just 819 kg and the break-even price decreases to Rs.112 per kg, on average.

6 . 1 . 2 V i a b i l i t y V C i n t h e i n t e r n a t i o n a l e c o n o m y

Sri Lanka ranked number 72 among bell pepper producing countries. The global export share is 0.02%. Over the period of 1997 to 2016, Sri Lanka has exported 1.2 million USD worth of bell pepper. In terms of market share in global imports, Sri Lanka ranked at the 123rd position accounting to a value of 23,000 USD during the period of 1997 to 2016. Sri Lanka has a Revealed Comparative Advantage (RCA) of 0.26. The Revealed Comparative Advantage is defined as the ratio of two shares. The numerator is the share of a country’s total exports of the commodity of interest in its total exports, and the denominator is the share of world exports of the same commodity in total world exports. The RCA takes a value between 0 and infinity. A country is said to have a Revealed Comparative Advantage if the value is more than one. Therefore, based on the statistics, Sri Lanka at the moment does not hold a Revealed Comparative Advantage in bell pepper exports. However, Sri Lanka exports to nine countries and imports from six countries. Table 7 and 8 describe this further.



Table 13: Bell pepper exporting countries from Sri Lanka 2016

Country Export value (1000 USD)

Share in exports (%)

Maldives 982.1 78.9

Switzerland 104.0 8.4

United Arab Emirates 85.9 6.9

Seychelles 21.7 1.7

France 16.1 1.3

Qatar 15.5 1.2

Norway 8.2 0.7

Bahrain 5.6 0.5

Kuwait 3.7 0.3 Source: https://www.tridge.com/intelligences/bell-pepper/LK

The Maldives is the main export market for Sri Lankan bell pepper accounting to 78.91% of the export share. Sri Lanka also exports to Switzerland, France and Norway touching base with European Union countries. The United Arab Emirates is holding a 6.9% share in the export of bell pepper. Tourist hotels are the main clients in the Maldives for Sri Lankan bell pepper. At the moment Sri Lanka does not export organic bell pepper nor anything that is produced under the Good Agriculture Practices (GAP) certification.

Table 14: Bell pepper importing countries to Sri Lanka 2016

Country Export (1000 USD) Share in imports (%)

Netherland 12.7 55.1

Thailand 5.5 23.7

Singapore 2.9 12.6

United Arab Emirates 2 8.7

Source: https://www.tridge.com/intelligences/bell-pepper/LK

Sri Lanka imports bell pepper from the world’s second biggest bell pepper exporter, the Netherlands, which accounts for 21.6% of the global bell pepper exports. Bell pepper is imported to Sri Lanka as a processed product as well. For example, H J S Condiments Limited manufactures two types of pickles: Mixed pickles and Bandrilla that is based on gherkins but uses imported red bell pepper from India. The bell pepper is imported as a processed product. Therefore it is imported under a different HS code and is not recoded with other imports as shown in the above Table 14. But these manufactured pickles are then re-exported predominately to Japan and France. On average H J S Condiments Limited imports around 30 MTs of processed bell pepper from India per year.

Approximately 15 countries accounted for 91.4% of the global exports in bell pepper in 2017. Europe exported the highest dollar worth of peppers during 2017 with shipments valued at USD2.7 billion or over half (53.2%) of the overall total. In second place was North America at 30.9%, while 11.1% of worldwide shipments of peppers originated from Asian exporters.



Smaller percentages came from Africa (3.3%), Latin America excluding Mexico but including the Caribbean (1.2%), and Oceania led by New Zealand and Australia (0.4%).

Among the top exporters, the fastest growing peppers exporters since 2013 are: China (up 130.9%), Morocco (up 109.9%), Vietnam (up 56.5%) and Jordan (up 53.5%). Three countries posted declines in their exported peppers sales, namely Israel (down -53.4%), Slovenia (down -35.9%) and the Netherlands (down -3.3%). Among the South Asian countries, India ranked at No.13 in recorded net exports from bell pepper in 2017. Other Asian countries in the mix are China, South Korea and Vietnam.

Major companies that engage in bell pepper exports and seed trading are: Alfafood GmbH (Germany), American Top Foods LLC (United States), Boumamar Trading (Netherlands), Cannery Row SL (Spain), Henan Alchemy Food Co. Ltd. (China), Mave Enterprises Inc. (United States), Shanxi Qinghe Trading Co. Ltd. (China), TMEM (France), Vast Exporters (India) and Viet Star Import Export Company Ltd. (Vietnam). This information suggests that India is the only South Asian country that is in the large scale export of bell pepper and engages with seed business as well.

Table 15: Major bell pepper exporting countries in the world 2016

Country Value (US $) Contribution (%)

Spain 1.14 billion 22.4

Netherlands 1.1 billion 21.6

Mexico 984.7 million 19.4

Canada 353.2 million 6.9

United States 231.7 million 4.6

Morocco 154.7 million 3.0

Israel 105.5 million 2.1

Turkey 96.4 million 1.9

South Korea 91.1 million 1.8

China 81.6 million 1.6

Belgium 79.6 million 1.6

France 73.9 million 1.5

Jordan 56.1 million 1.1

Vietnam 53.9 million 1.1

Slovenia 48 million 0.9

Source: https://www.tridge.com/intelligences/bell-pepper/LK



6 . 1 . 3 C o m p e t i t i v e n e s s a n a l y s i s

Competitiveness analysis looks at a value chain from an export and import perspective. The objective here is to see whether the product is competitive in export or import markets. For the moment, neither the Export Development Board (EDB) nor Sri Lanka Customs records import and export data of bell pepper under a separate HS code. Therefore, it is not possible to identify how much, in terms of quantity, is imported or exported. As shown above, secondary sources show some limited data, the latest being for 2016, on import and export value in USD terms for bell pepper. Therefore, in terms of doing a competitive analysis, the research has to rely on information shared by exporters and importers on identifying CIF and FOB prices.

Looking at the export value chain, where collectors supply to the exporter (there are farmers who directly supply to the exporter as well, but this is about 10% of their requirement), there is Rs. 925/kg difference between the farmer’s cost of production and the FOB price faced by the exporter. In this particular trading channel, the farmer’s net margin is 47.6% of the cost of production value (transport and handling cost deducted). The collector keeps about 79% of the net margin. Transportation and handling costs of bell pepper are on average higher, as it involves packaging in crates/corrugated boxes and the use of lorries with cold transportation facilities. Usually the transportation and handling costs are lowest for the farmer. Farmers bring bell pepper in either crates or corrugated boxes but without cold transportation facilities.

Photo 5: Bell pepper transport, normal and cold lorries

The picture shows farmer’s lorry bringing produce to the collection centre and lorries with cold transportation facilities leaving the collection centre.




Table 16: Margin break down and net margins in export value chain for bell pepper

ITEM Export value chain

Cost of production (Rs per kg) 210

Margin: Transport and handling 10

Percentage 4.76%

Margin: Production margin 130

Percentage 61.90%

Net margin 57.14%

Farm gate price/collector buying price (Rs per kg) 350


Percentage 7.14%

Margin: Collector margin 275

Percentage 78.57%

Net margin 71.43%

Collector selling/exporter buying price (Rs per kg) 650


Percentage 4.61%

Margin: Exporter margin 295

Percentage 45.38%

Net margin 40.77%

Exporter FOB price (Rs per kg) 975

Margin: freight cost 200

Percentage 20.50%

Exporter CIF price (Rs per kg) 1175


Exporters usually add about 40-45% as their net margin, before sending bell pepper for air transportation. They keep the highest margin in terms of transportation and handling to cover additional grading, temporary cold storage (usually freights are done once a week; therefore on average bell pepper stays at the cold storage for about 5-7 days) and packing into corrugated boxes, labelling and loading on to pellets. Then on average Rs.200 per kg is added as the freight charges. This will be around a 20.5% margin on the ready to air transport product.



Most exporters close their business at this point, however some exporters have their agents working in the export destination that will clear the produce (after paying clearing and handling charges) and transport to the final location, usually a hotel, a super market or a restaurant), or else the customer will be responsible for receiving the produce. Either way, the exporter does not carry the clearing cost of the produce at the receiving export market.

Several exporters and importers mentioned increasingly deals of bell pepper produced in India. In fact, some exporters supply to export destinations like the Maldives, directly from India through their clearing agents in the Maldives. In this kind of a transaction, bell pepper never comes to Sri Lanka, but a Sri Lankan exporter will buy from India and directly send bell pepper to the Maldives.

Photo 6: Imported bell pepper processed products

With respect to bell pepper imported from India, on average Rs.180 is paid for 1 kg of a processed product. This is processed and then stored in large barrels with necessary food preservatives. If imported as fresh, then the buying price varies a lot based on world market prices. For example, as indicated by exporters, FOB price in India was around Rs.100/kg for fresh bell pepper in December 2018, but as of March 2019, this has increased up to Rs.450/kg.

Source: World Wide Web

While this information suggests that processed bell pepper FOB prices are even lower than fresh bell pepper, it might be related to forward contracts and scale economies of buying larger volumes.

As of March 2019, bell pepper is being traded at Nuwara Eliya at a price far below this one. At Keells, for the premium grade (weight above 150 g), the price is on average Rs.200/kg. They pay Rs.190/kg for green, Rs.260/kg for red and Rs.230/kg for yellow. This is even lower at the Nuwara Eliya, Keppetipola and Bandarawela wholesale markets where green bell pepper is being traded at Rs.160/kg and colour is being traded at Rs.230/kg (Please note that farmers are still making the average break-even price of Rs.226/kg, considering the poly tunnel cost in to the equation). Usually, the price of bell pepper, regardless of the colour goes down during the period of February to May. This is clearly shown in the price information that was discussed earlier. The highest dip in the bell pepper prices at the wholesale markets are usually recorded between March and April months. On average, for about 8-10 months of the year, wholesale prices of bell pepper are better, and are significantly higher than the break-even prices.

Exporting of bell pepper yields more economic benefits to all the stakeholders in the value chain. Bell pepper is a lucrative business opportunity for farmers and traders involved in the value chain, where on average, the net margins are always higher than 30%. Bell pepper wholesale prices are highly stable, except for the months of March and April where the price



drops to almost half per kg. However, this price drop is well compensated with significant price increases during the last four months of the year and January. Compared to the value of imports and exports of bell pepper (as mentioned earlier, quantities are not available as well as the prices and only secondary information is available, the latest being 2016), it is clear that imports are low and exports are higher, suggesting that Sri Lanka has the ability to compete in the international market for bell pepper. Almost all exported bell peppers are in fresh form which suggests that value addition will create more opportunities to gain more export income. What is being exported is also not organics or not certified as global GAP. Therefore, Sri Lanka’s major destination for bell pepper for the moment is the Maldives. However, with the possibility of organics and GAP, Sri Lanka has the potential to attract more high-end markets such as Dubai, the EU and the USA. With world market price fluctuations, it is clear that importation of fresh bell pepper is not economically feasible at all. Even Sri Lanka’s closest market, India poses higher FOB prices compared to wholesale prices in Sri Lanka for the most part of the year. Consumption of local bell pepper is mainly in the fresh form where it is becoming a household item in salad making. Import of processed bell pepper might not attract a demand outside the high-end hotels and restaurants for making special dishes. Therefore, in terms of competitiveness, export value chain of bell pepper provides higher economic gains to all the stakeholders in the value chain, and holds the potential for value addition and to attract high-end markets.



7 B E L L P E P P E R S - S O C I A L A N A L Y S I S

7 . 1 W o r k i n g c o n d i t i o n s

In terms of production, the biggest variable cost component in bell pepper cultivation is labour. On average a person has to spend around 2 hours in a 1,000 square feet poly tunnel. When hired labour is used, men are paid a higher daily rate than women. However, their working hours are the same. On average a man would be paid Rs.1250 per day and a woman will be paid Rs.900 per day. In most cases, lunch and tea is included but not breakfast. Therefore, men and women are not paid the same daily rate. Farmers argue that men had to be paid more since they will do more work given an 8 hour day of work. At the production stage, labour is not practiced under a contractual agreement, rather it is a verbal agreement on a daily rate. Forced labour is not a concern as all the labourers are from the same locality, and the farmer and the workers know each other very well. Labourers need to engage with pesticide applications which is the most significant component in terms of job safety. Here, labourers use masks and rubber gloves in performing these activities. Chemical application is done by men almost all the time. While child labour is never practiced, adult children of the farmer usually engage with production when time permits. For example, adult children help the farmer during harvesting and packing, if his educational activities are not disturbed.

Involvement of labour covers many activities when it comes to trading, transportation and marketing. While packing and grading activities are predominantly done by women, loading and unloading are done by men all the time. Usually a box or a crate is close to 25-30 kg. Therefore lifting of these is done by men. Labourers who work at the regional economic centres always work on daily rates and don’t get tea or meals. In a regional economic centre, you can either work on a daily rate or on the number of boxes/crates you handle during the day. Usually payments are negotiated with the wholesaler. For example, a labourer at an economic centre can work for a wholesaler either on a daily rate or on a piece-based rate. Working conditions and the safety of the workers are hardly monitored in such a place. These workers do heavy lifting and nothing is done to educate them on proper lifting, loading or unloading. Child labour is not practiced in regional economic centres. Working conditions are much more organized and formal in collection centres and pack houses. For example, men and women who work at supermarket collection centres work on a monthly wage. There are no pay differences based on gender and there is a formal job contract. They have strict working hours, a sign in time and a sign out time. Proper training is provided in terms of handling agricultural produce and job safety is a priority. They wear proper gear when performing their activities. While job attractiveness is not even something that is discussed among workers at production level and at regional economic centres, employees found their jobs to be attractive when it comes to supermarkets and pack houses. For example, jobs become more attractive as we move along the value chain from a collection centre to an export factory/packing house. Working conditions in a production site and at a wholesale market (regional economic centre) are not fully socially acceptable and sustainable. However, things are much more socially acceptable as well as sustainable in collection centres and pack houses managed by supermarkets, large scale collectors and exporters.

7 . 2 G e n d e r e q u a l i t y

Labour accounts for the highest cost component in the bell pepper production, when the cost of the poly tunnel is not considered as a variable cost. On average, labour accounts for 16.86%



of the total variable cost followed by 10.07% for pesticides and 6.14% for fertilizers. The involvement of women in the value chain is included in the labour component of the cost structure. Labour is used for all the activities in the value chain, but there are some specific activities that women perform in any production activity. For example, women are usually not asked to apply pesticides, work with water pumps, or apply fertilizer, especially if it is inorganic fertilizer.

The involvement of women happens at the key stages of production, harvesting, marketing and processing. In the bell pepper production stage, women perform activities such as nursery management, planting, fertilizer applications and manual weeding. Though women usually do not engage in fertilizer applications (the best example being in rice production where fertilizer is applied extensively), the bell pepper value chain engages women in the application of fertilizer. Except for very few micro nutrients, the main fertilizer in bell pepper cultivation is the Abler solution. This is applied in very little quantities, and can be easily done by a woman. Therefore, fertilizer application is a task performed by women in the bell pepper production. Nurseries are not that large to manage. Therefore it is also a task that women perform. For example, a 1,000 ft2 poly tunnel will need about 450 plants and that can be easily managed by a woman. Manual weeding is a task done by women in almost all vegetable production processes. However, weedicide application is mostly done by men. Bell pepper planting is also performed by women most of the time, while the men will manage the construction of the poly tunnel.

Harvesting, grading, sorting and packing functions are also done by women in the bell pepper production process. Harvesting is almost fully done by women. Once produce arrives at the collection centre (either the supermarket or the farmer company), grading, sorting and packing is being done by both men and women. In terms of marketing women are predominantly involved in stock taking, invoicing and banking activities. In the processing industry also, women have a specific job in the processing plants, mainly in labelling and packing. There are several women led training operations in the bell pepper value chain. There are also women who are playing leadership and managerial roles, especially in collection centres and pack houses. Overall, the role of women in the bell pepper value chain decreases when moving up the value chain towards consumption.



Photo 7: Women in the bell pepper value chain


Figure 15: Role of women in the bell pepper value chain



7 . 3 D i s t r i b u t i o n o f s o c i a l c a p i t a l

Strength and representativeness of producers’ organizations:

In terms of becoming farmer organizations or companies, the bell pepper value chain still has a long way to go. While there are a few strong farmer organizations, especially in the areas such as Uwa Paranagama and Keppetipola, farmers are scattered in Nuwara Eliya, Welimada and Bandarawela. Uwa Paranagama and Keppetipola. These areas also are home to several large scale bell pepper producers who work in collaboration with other farmers. They are strong in terms of working together since they account for a larger supply and have mastered the technology and the art of cultivating bell pepper. Some of these farmer organizations are planning to build their own cold storage facilities to be able to store when the harvesting is done. These farmer organizations supply to the wholesale market and exporters. Other farmer companies supply to large pack houses, hotels and restaurants so they can have more stable orders and better prices. However, talking to unorganized farmers, it was noted that they are increasingly willing to collaborate with larger producer organizations. This is to attract better buyers. The not-so-well-connected farmers need to find a way to link to these farmer organisations. The research study team was able to link up several farmers from Bandarawela with a well-established farmer in Uwa Paranagama to provide training on best practices of crop management.

Information sharing:

Farmers in the same region share information but those in different regions don’t share information. For example, the mite attack is one of the biggest issues in bell pepper cultivation in recent times. Farmers are trying their best to solve the issue with a mix of organic and inorganic chemicals. What is being tried is known to everyone in a given region. However the information regarding what is being tried, and the successes and failures of the Nuwara Eliya farmers, is not known to the Uwa Paranagama farmers. Farmers in a given region know very well about other framers in the region, even to their last harvest quantities and where they sold their produce. However, this information is not shared as the distance increases, especially when moving in to a different Divisional Secretariat Division. The disparity in information sharing is higher moving along the hierarchy of the value chain. Farmers and farmer organizations do have a considerable level of information sharing and they always look for opportunities to share. However, there is a clear competition among collectors, supermarkets and exporters. With numerous incentive schemes, they are trying to establish a local producer group. For example, whenever a farmer wants to supply to Keells, the manager will personally visit the cultivation, advise on the production and quality maintenance and keep regular contact. Cargills does not work on forward contracts but rather with spot contracts. Larger collectors and private companies and farmer companies are giving subsidies on a cost recovery basis to their farmers, for example, on seeds, fertilizer and other agro-chemicals. Also, exporters have engaged in similar activities to bind the farmers to their operations.

Trust among actors:

Lesser information sharing is a proxy for lesser trust among the actors in the value chain. While farmers trust their neighbour farmer in the same Grama Niladhari Division, there is little trust between two supermarket collection centres. However, there are farmers (small and large) who supply to both supermarket collection centres, earning the trust of the collection centre manager on the produce he supplies. Therefore, this shows that trust is low when there is high competition among the two parties. The farmer’s objective is to get a higher price, therefore he does not worry about the trust between the two supermarket collection centres.



Participation in decisions and community activities:

This is highest within farmer organizations. They work collectively and also take part in community activities. The research team witnessed two such activities in Uwa Paranagama and Bandarawela where the farmers cooperated to colour-wash a temple and clean a playground of a nearby by school.

Taking traditional practices into actions:

Bell pepper is cultivated in poly tunnels, uses irrigation facilities (sometimes even drip irrigation), plenty of agro chemicals and chemical fertilizers. It is a semi-controlled environment. Therefore it involves modern agricultural technologies. However, there are producers who still believe in key traditional practices. One of the respondents from Uwa Paranagama who has more than 50,000 ft2 of bell pepper, mentioned the importance of connecting with the plants. He was referring to the human touch with the crop management, using fewer chemicals and spending some time everyday going through every poly tunnel, compared to farmers with only 2 or 3 poly tunnels who visit these only two to three times per week.



8 B I G O N I O N S

8 . 1 F u n c t i o n d e s c r i p t i o n

8 . 1 . 1 D e s c r i p t i o n o f t h e p r o d u c t i o n a n d t r a d e

Big onion is among one of the most important cash crops in Sri Lanka. Big onions in Sri Lanka is cultivated during the “Yala” season, predominantly under rain-fed cultivations. Big onion cultivations require a specific nursery site. The nursery needs direct sunlight, must have a well drained loamy soil, and must be a fallowed field for a few seasons. Especially sequential cultivation of onion for several seasons will lead to more soil pathogens. In terms of land preparation, the following steps have to be taken: plough or turn the soil to 20 to 25 cm depth 3-4 weeks before seeding, make a good tilth turning soil several times and allow the soil to be exposed to direct sunlight during land preparation. The standard bed size should be 3m x 1m x 15cm and the surface soil of a bed should be fine tilth. Farmers should use decomposed organic manure into a 10cm depth (10 -15 kg/ std bed) before sterilization of the bed.

Photo 8: Big onion cultivation in the field

Farmers apply N P K as their main fertilizer. However, they use commercially available onion fertilizer more than N P K. For example, on average a farmer would use 5 of 50 kg bags as N P K fertilizer mixture, but they will use 6-10 onion fertilizer bags in the same 50 kg capacity. To control the spread of disease, seed farmers usually add 4-6 g from a recommended fungicide to 1 kg of seeds and then mix it in

thoroughly. In seed sowing, farmers apply seeds at the rate of 40-50 g/bed to the depth of 1 cm in rows and 10 -15 cm apart. It is covered with straw mulch after seeding. After that, daily watering is needed until germination. Germination is usually completed within 8-10 days. Once germination happens the mulch has to be removed. Then beds needed to be covered using white poly- ethylene to protect from rains and sunlight during the initial stage of seedlings.

The seedlings, which have 3-4 leaves, are 15-18 cm high with some bulb and at an age of about 35-40 days are suitable for transplanting. Seedlings need selection prior to planting to achieve good bulb yield. An onion crop can be successfully produced on most fertile soils. Soil pH in the range of 6-7 is usually recommended. But on organic soils a lower pH is satisfactory. Suitable soil types (Reddish Brown Earth and Regosols) are available in the dry zone of Sri Lanka. Crop need long day length ( > 12 hours) but some varieties accept 11-12 hours day length period. Only these varieties can produce good bulbs under Sri Lankan conditions during the “Yala” season. There should be low rain fall (less than 750 mm) throughout the cropping period. The harvesting period (last 1 month) needs to be dry and hot for a good yield.



It is very important to decide the proper time of nursery application because it decides the time of planting. In Sri Lanka, early April to early May is recommended for nursery application. The adequate climatic requirement for the crop is during the “Yala” season (May to September). Therefore, it is essential to transplant by mid-May or mid- June to achieve good yields.

Well-drained land selection is essential. Cropping site is a critical factor for a good yield. Primary weed control is needed prior to land preparation. This can be done manually or by using a non- selective weed killer such as Glyphosate (2-4 liter/ha). The application must be done when weeds are actively growing and 10-14 day before land preparation. The land must be ploughed at a depth of 8 inches and the soil prepared smoothly. Irrigation must be adjusted to the bed width and length. The normal recommended bed size is 1m x 3m x 15cm. Prior to planting, it is essential to apply any kind of well-decomposed organic manure at least at the rate of 10 mt/ha. Fertilizer N, P and K should be used 2-3 days before planting. For better yield, 100-156 plants/m2 is preferable. Planting at a 1 cm depth gives good bulbs. At the initial stages of the crop the water requirement is high. Therefore, it is necessary to irrigate at about 3 day intervals. This interval is dependent on the soil type. Two weeks before harvesting, the water supply should be stopped to increase the quality of the harvest.

For seed production during the “Maha” season, it is necessary to select medium size uniform (60-70 g/bulb) mother bulbs from a recommended variety, with related characteristics and store up to December. Vernalized (store bulbs under 8-15 c0 for two weeks just before planting) bulbs should be treated with the recommended fungicide. Basal chemical fertilizer must be applied 2 days before planting (TSP- 100kg/ha, MOP- 50 kg/ha), 1st top dressing at one week after planting (Urea- 65kg/ha) and the 2nd top dressing at flower bud initiation (Urea -65, kg/ha MOP - 25kg/ha). Mother bulbs are planted on raised beds with a spacing of 22.5 x 22.5 cm. The suitable time of planting is early January and the crop should be covered with white polythene at the height of about 3ft. during rains and in the night. Sunhemp around the crop can attract insects and lead to better pollination. Mature seeds can be harvested about 3 months after planting and well dried. Bulb rot, purple blotch and anthracnose are the major diseases in the “Maha” season. Because of the higher risk of diseases, it was needed to find favourable areas for true seed production. Bandarawela (IM3) has a higher seed yield compared to DL1 areas with low disease incidences. Planting time in Bandarawela and the cultural practices are similar to DI1 region. However, it takes a longer period (more than 30 days compared to DL1) for the crop to mature. Rain during December to April can spur disease incidences. Therefore, true seed should be produced in poly tunnels with side opening for ventilation.

For true seed production during the “Yala” season, medium size ( 60-70g/bulb ) mother bulbs from the previous “Yala” season need to be stored up to May. These mother bulbs need to be planted early May to mid-May with the spacing of 15 x 15 cm on raised beds. Bulb treatment, fertilizer and cultural practices are similar to the “Maha” crop but it is not necessary to cover the crop. Disease incidences are much lower than in the “Maha” season with higher seed yield. The crop matures about 100 days from transplanting depending on the cultivation and weather. At the 50 % neck fold stage, the mother plant must be bent or pressed. Thereafter water supply must be stopped. After 14 days the crop can be uprooted. It needs shade and must be dried to improve quality and storability. Then the bulb can be seen covered with dry scales, after which the harvest is suitable for storage



Photo 9: Big onion grades

Grading of locally produced big onions is based on the size. Usually there are three types: grade 1 is bigger than 1.4 inches in diameter, grade 2 is between 0.5 and 1.5 inches in diameter, and grade 3 is less than 0.5 inches in diameter. Farmers use a sieve to measure the sizes. Grade 3 attracts the lowest prices and is also called “Soopins.”


There is a significant price difference between the three grades. While grade 1 is traded at an average price of Rs.80 per kg, grade 2 is traded at an average of Rs.65 per kg and grade 3 is traded on average for Rs.45 per kg. However, although grades are used at the wholesale level, no grades are used in the retail market. In the retail market, all grades are mixed together and sold. Imported onions are imported using a bulk price and no grades. Consequently imported onions have no grading at wholesale level.

Locally produced big onions are available for a few months of the year. Whatever available during this time period goes through the Dambulla economic centre. Local onions are available in the market place from September to late November. Therefore, a large quantity of big onions is being imported especially from India. Several big importers control the importation activities where they import throughout the year and hold large scale storages as well. These storages are in Colombo but there are also several large-scale stores available around the Dambulla economic centre. Big onions are imported via the Colombo sea port but traded through the Dambulla dedicated economic centre. A very small quantity of big onions is exported from Sri Lanka. During the season, Sri Lanka exports small amounts to the Maldives which is transported by air.

8 . 1 . 2 A c t o r s / s t a k e h o l d e r s a l o n g t h e v a l u e c h a i n

Actors/stakeholders involved in the big onion value chain are input suppliers, producers, traders and consumers (see Figure 16 and 17). Input suppliers are mainly seed importers (there are several major agro-chemical companies that import big onion seeds, mostly from India), fertilizer and chemical traders, machinery traders and agriculture advisory services. Most big onion farmers around Dambulla belong to families who have been in big onion farming for more than 20-30 years. They know the cultivation practices very well. Some of these farmers are successful seed producers. These farmers don’t need extension services of the government and only new farmers use those services.

The locally produced true seeds, which are labelled as “Dambullu Red” and “Galewela light red” have higher germination rates than imported seeds (6 kg/ha of local seed compared to 6.5-11 kg/ha of imported seed). However, due to the low availability of locally produced seed



and its relatively high price, more than 70% of farmers use imported seed. Average farm-gate price of big onion produced using local true seed is higher than that using imported true seed. The higher price is related to better storability, uniformity, and higher consumer preference of bulbs harvested from local true seed. Even though the total cost of production was higher with local true seeds, the profitability indicators showed higher returns from local big onion seed cultivation. Other agro-chemicals and machinery are available from local stores.

Small scale farmers on average work on less than 5 acres of land while large scale farmers work with more than 5 acres of land. At the same time there are larger farmer companies that work collectively covering larger production areas. Most of these farmer companies also produce seeds. For the moment, farmers need to rely on the Department of Agriculture to make big onion seeds locally available. In order to make the mother bulbs sprout, they need to be stored in a cold environment and most of these framers do not have the capacity to do that. This process is called vernalization and for this procedure, mature and good quality mother bulbs need to be sent to Nuwara Eliya. This outsourced process has significantly contributed to the increase in the cost of local seeds. On average, 1 kg of seed will cost around Rs.12,000, with a maximum value of Rs.18,000 and Rs 9,000 per kg. A recent government subsidy program helped farmers to buy local seeds at a cost of Rs. 9,000 per kg. Seed production itself is a good business and a farmer can produce 180 kg of seeds using 3,000 kg of mother bulbs.

Trading of big onion goes mainly through the Dambulla dedicated economic centre and Colombo. Colombo hosts the largest number of big onion importers to the country, and these big onions are sold at the wholesale market price. Supermarkets and other retailers supply the produce to the consumer. Under the government’s buying program of locally produced onions, a considerable amount of big onions is being bought by “Sathosa,” which is the government retail supermarket system. “Sathosa” sells imported big onions during the off seasons. From time to time, the government announces subsidy for consumers as well as for producers through the “Sathosa” supermarket chain (during the harvesting period “Sathosa” buys at a guaranteed price and absorbs the cost of the low market price). Hotels and restaurants also buy big onions mainly from the wholesale markets in Colombo or in Dambulla.



Figure 16: Stakeholders/Actors involved in different stages of the value chain: Big onions



Figure 17: Actors and respective activities in different stages of the value chain: Big onions

Activity Hierarchy



8 . 2 F l o w s o f p r o d u c t

8 . 2 . 1 V a l u e c h a i n n e t w o r k m a p

The monthly demand for big onions in Sri Lanka is about 20,000 MT. Local production is not enough to cater to this requirement. For example, during 2018, only about 20,000 MT was produced locally during the whole year. One may argue that 2018 was an exceptionally dry year but even compared to an average over a number of years (i.e. about 90,000 MT per year), the local production is not enough to cover the demand. The 2018 supply was available from mid-September to end-November. Additionally, a small quantity was available during December. This clearly shows that big onion importation is essential to cover the local demand. Usually, the government imposes an importation tax on big onions, on average Rs.40 per kg, to allow the local produce to flow in to the market. In 2018, under special orders of the President, the Ministry of Finance imposed a 100% tax on big onions to discourage importation and allow local producers to cater to the local demand. But production data suggests, that even with this high taxation, imported onions filled the gap in the consumption demand. Imported big onions have a high storability. They are imported and stored well before the importation tax is imposed. Big onion farmers complain that due to this mechanism, the imported onions come to the market even during the harvesting of local big onions.

The main trading channels for big onion are (see Figure 18):

1. Locally produced big onions come to the wholesale market via large scale collectors and traders, or are brought to the wholesale market by individual farmers.

Local production ………. Collectors……. Wholesale market

a. Wholesale market sells to exporters and then to the final consumer

b. Wholesale market sells to local retailers and then to the final consumer

c. Wholesale market sells to hotels and restaurants

d. Wholesale market sells to the food processing industry

e. Wholesale market sells to small scale supermarkets

2. Locally produced big onions are bought by large scale collectors and then directly sold to different actors

Local production………. Collectors………. Other entities

a. Collectors sell to supermarkets

b. Collectors sell to hotels and restaurants

c. Collectors sell to exporters

d. Collectors sell to the food processing industry

3. Locally produced big onions are bought by the supermarket chains and then sold at supermarket outlets. This includes Sathosa as well.



Local production………. Supermarkets/Sathosa

4. Locally produced big onions are bought by exporters and sold to the final destination

Local production………… Exporters

5. Locally produced big onions are bought by the processing industry

Local production………… Processing industry

6. Locally produced big onions are bought by hotels and restaurants

Local production ………… Hotels and restaurants

7. Big onions are imported by larger supermarkets including Sathosa

Imports …………………. Large scale supermarkets/Sathosa

8. Imported big onions 50% through Dambulla wholesale market

Imports……………………Dambulla/Colombo markets

From Dambulla/Colombo, onions will flow through all the trading channels that are relevant to the wholesale market mentioned above. Once they come in to the wholesale market, imported onions are treated the as same as locally produced onions in the value chain.

.



Figure 18: Value chain network map for big onions

Private and public sector

extension services

Planting materials,

agro chemicals, machinery

traders

Inputs Production/Supply Marketing and consumption

Production with locally made seeds

Production with imported seeds

Imports

90% of demand

Farmer

s and cooperatives

Collectors

Wholesale markets

Processing

industry

Hotels

/restaurants

Consumption

Imports

International

Supermarkets/Sat

90%

10

%

0

15%

80%

15% 90%

80%

10%

40%

40%

60%

5%

5%

5%



8 . 3 L o c a t i o n o f a c t i v i t i e s

8 . 3 . 1 A r e a s o f p r o d u c t i o n

See Figure 19 for a map with the main growing areas in Sri Lanka. Big onions are commercially grown in Matale, Polonnaruwa, Anuradhapura and Mahaweli H region. Matale district includes areas such as Kimbissa, Galewela, Sigiriya and Dambulla. Anuradhapura district includes areas such as Ipologama and Maradankadawala. Mahaweli H region includes areas such as Eppawala, Thalawa, Thambuthegama, Galnewa, Nochchiyagama and Meegalawa. The rest of the production comes from the Polonnaruwa district. Predominantly Dambulu Red and Galewela Red varieties are grown in these regions. Some farmers use imported seeds as well.

The majority of the production comes to the Dambulla dedicated economic centre. Then it reaches the final consumer through a complex trading channel network. From Dambulla it reaches to destinations all over the country. In the distribution, different actors are involved such as other wholesale markets, hotels and restaurants as well as exporters and retailers.



Figure 19: Location map for big onions

Source: Work Wide Web

Anuradhapura district and Mahaweli H region: 479 Ha, 905 and 541 farmers

Anuradhapura: Covers Ipologama and Maradankadawala Mahaweli H: Eppawala, Thalawa, Thambuthegama, Galnewa, Nochchiyagama, Meegalawa Mother bulbs from own farms, neighboring farms and government subsidy Dambullu Red and Galewela Red are main varieties

Matale District: 462 Ha, 1452 farmers

Covers Kimbissa, Galewela, Sigiriya and Dambulla areas Mother bulbs mainly from own farms Dambullu Red and Galewela Red

Pollonnaruwa District: 104 Ha, 354 farmers

Mother bulbs are mainly from neighboring farms (Matale district) Dambullu Red and Galewela Red

Colombo Market

Colombo port

Bandaranayke international

airport



8 . 4 Q u a n t i f i c a t i o n

8 . 4 . 1 V a l u e o f t r a d e a n d a c t o r s i n v o l v e d

Over the last two years, big onion farming using imported true seeds was not highly successful and now more farmers are using locally produced true seeds, mainly Dambulu Red and Galewela Light Red. Table 17 shows yearly production data for the period 2006 to 2018. Local production usually comes to the Dambulla dedicated economic centre only for a short period of time. Production usually starts to come after the 15th of September and will continue to come to the market until about the end of December. Therefore, locally produced onions are available only for about three months of the year. Over the years, big onion production had ups and downs in terms of production. However, the overall trend shows a decrease in production. The production area has also decreased significantly over the past few years, from its highest level of 6,988 ha in 2007 to 1,068 ha in 2018. According to farmers, the downward trend in production and area under big onion production will continue (see also Figure 20).

Table 17: Area and production of big onions

Year Area (Ha) Production (MT)

2006 6,814 73,616

2007 6,988 92,166

2008 4,091 57,371

2009 5,081 81,707

2010 4,158 58,930

2011 3,483 61,037

2012 5,386 83,561

2013 4,223 69,635

2014 6,827 101,166

2015 5,875 89,767

2016 3,318 63,555

2017 2,931 44,171

2018 1,068 20,580

Source: Dambulla dedicated economic centre



Figure 20: Area and production of big onions

Source: Dambulla dedicated economic centre

Figure 21 shows that imports of big onion actually continue the whole year through but are highest in March and April. The import values are highest in January and February.

Figure 21: Monthly quantity, value and CIF price of big onions for 2018

Source: Sri Lanka Customs data



Table 18: Annual importer quantity, value and CIF for big onions from 1990-2018

Annual Quantity, Value and CIF of Imported big Onions

Year Quantity (MT) Value (Rs/Million) CIF Price (Rs/kg)

1990 27,078 279.3 10.31

1991 46,330 626.6 13.52

1992 32,868 353.8 10.76

1993 34,229 390.8 11.42

1994 47,400 529.9 11.18

1995 77,459 861.0 11.12

1996 89,158 1,088.0 12.20

1997 119,317 1,312.0 11.00

1998 96,769 1,669.0 17.25

1999 83,986 1,641.0 19.54

2000 117,806 1,496.0 12.70

2001 111,847 1,775.0 15.87

2002 130,117 1,900.0 14.60

2003 131,420 2,083.0 15.86

2004 115,120 2,168.8 18.84

2005 110,713 1,826.1 16.49

2006 119,478 1,940.2 16.24

2007 140,773 4,392.2 31.20

2008 146,623 3,473.2 23.69

2009 143,275 4,687.6 32.72

2010 158,086 6,649.3 42.06

2011 170,947 6,556.4 38.35

2012 145,418 3,762.5 25.87

2013 170,310 9,266.3 54.41

2014 150,967 5,481.3 36.31

2015 214,321 6,757.7 31.53

2016 225,522 7,076.3 31.38

2017 232,109 12,100.0 52.13

2018 246,055 12,735.0 51.75 Source: Sri Lanka Customs data

Table 18 shows a gradual increase in the imports of big onion over the last decennia. Table 19 and Figure 22 show a significant dip in imported quantities in September and then it increases steadily. It should be remembered that the local harvest comes in from late September to early December. In 2018, this had little impact on imports as 2018 had one of the lowest productions in recent times. This justified the increased imports even during local harvest time. Table 20 and Figure 23 show the price development. Even during harvest time in Sri Lanka, the prices were low in 2018 as compared to the previous year.



Table 19: Wholesale prices of big onions at Dambulla dedicated economic centre

Dambulla - Wholesale Price of Big Onions (Rs per kg)

Year January February March April May June July August September October November December

2012 52.40 51.85 53.27 62.75 59.47 74.13 61.88 61.87 40.00 46.00 62.06 86.23

2013 63.75 75.45 60.20 58.00 53.80 61.95 87.12 93.35 61.33 66.35 139.76 83.56

2014 58.75 44.45 45.20 64.60 61.15 66.88 73.15 77.43 52.76 55.83 67.15 95.8

2015 62.00 64.30 63.76 64.80 91.40 83.32 81.00 86.84 67.46 91.50 109.60 68.70

2016 56.70 43.25 59.90 69.45 61.68 61.15 62.60 67.56 73.80 65.70 72.70 83.70

2017 71.08 74.25 71.19 72.28 67.01 78.25 73.36 100.45 104.83 115.86 126.06 113.45

2018 110.16 84.05 51.45 42.08 73.56 83.00 87.76 86.15 77.25 85.76 92.55 67.97

Source: HARTI



Figure 22: Wholesale prices of big onions at Dambulla dedicated economic centre

Source: HARTI



Table 20: Retail prices of big onions in Dambulla area

Dambulla Retail Price of Big Onions (Rs per kg)

Year January February March April May June July August September October November December

2012 67.80 65.32 70.53 76.15 74.00 87.87 80.32 76.48 64.40 70.33 76.25 116.75

2013 83.00 94.50 80.25 74.80 70.00 76.00 98.64 130.67 85.75 97.50 191.33 108.40

2014 77.75 58.40 61.96 72.80 80.05 83.20 93.00 100.00 79.84 74.40 86.00 106.80

2015 84.50 78.00 80.00 81.75 108.25 116.60 96.75 116.40 97.00 114.50 139.00 91.00

2016 72.40 60.84 76.00 79.75 79.40 78.00 82.20 83.84 88.80 86.20 92.40 106.00

2017 89.32 95.00 88.90 90.20 88.04 90.38 92.16 122.5 125.44 129.55 156.75 146.00

2018 142.80 100.00 77.65 65.52 89.90 101.50 106.40 106.33 97.88 100.53 116.50 88.52

Source: HARTI



Figure 23: Retail prices of big onions in Dambulla area

Source: HARTI



Table 21: Price comparison for big onions between local production season and high import seasons (Rs per kg)

Year March Wholesale

March Retail Difference

October Wholesale

October Retail Difference

2012 53.27 70.53 17.26 46.00 70.33 24.33

2013 60.20 80.25 20.05 66.35 97.50 31.15

2014 45.20 61.96 16.76 55.83 74.40 18.57

2015 63.76 80.00 16.24 91.50 114.50 23.00

2016 59.90 76.00 16.10 65.70 86.20 20.05

2017 71.19 88.9 17.71 115.86 129.55 13.69

2018 51.45 77.65 26.20 85.76 100.53 14.77 Source: Own research

Table 21 looks at the wholesale and retail prices for two months of the year during the period 2012 to 2018. March generally records a high importation with April having a high consumer demand due to the New Year festival. October generally records the lowest importation with import duties in full effect and local production coming to the market. In March, trade is in imported big onions and in October, trade is in locally produced big onion. From 2012 to 2016 a clear trend can be seen that margins between the wholesale market and the retail market in March are lower than in October. When imported onions are traded the margins are lower, resulting in a lower consumer price. However, this trend was reversed during 2017 and 2018 when margins between wholesale and retail price in October appeared to be lower than in March.

Since 2015, local production shows a decreasing trend and 2017 and 2018 recorded the lowest levels of production. With a significant consistent demand, there is a need for more importation despite its being the season for local production. Importation data suggest an increase in imports since 2015. Also, in 2018 during the local production seasons, the trade was mostly in imported onions. This resulted in lower margins between wholesale and retail markets.

8 . 4 . 2 V a l u e c h a i n v a l u e d i s t r i b u t i o n m a p

Imported onions enter Sri Lanka through the port of Colombo and from there nearly 50% of the imported big onions are transported to Dambulla. These onions are traded through the Dambulla economic centre. The other half of the imported onions are traded in the Colombo wholesale market for big onions. Colombo wholesale market for big onions is located outside of the Colombo dedicated economic centre. Stores of these larger importers of big onions are located in the second cross street in Colombo 01. These big onions are traded at a wholesale rate and go mainly to Southern, Northern and Central provinces of Sri Lanka, directly to dedicated economic centres in those regions. Rest of the imported big onions goes directly to larger storages in Dambulla (they are imported by large scale traders in Dambulla dedicated economic centre) and then flow to the market, just like the locally produced big onions. Therefore, imported as well as locally produced onions that flow through Dambulla Dedicated



Economic Centre were looked at. Big onions are traded in the wholesale market on a commission base. Traders at Dambulla keep a commission and so do the traders in Colombo dedicated economic centre. This commission is based on the price being traded (see Figure 24).

Figure 24: Price and commission structure at the wholesale market for big onions


According to Figure 25 and 26 the highest margins in the trading channels are attributed to the farmers and by the importers who deal with the Dambulla Dedicated Economic Centre. After that, significant net margins can be seen at the retail level. In the import-economic centre trading channel, importer keeps a low net margin compares to the farmer. This has allowed the wholesale trader at Colombo Dedicated Economic Centre and the retail markets to maintain higher margins and still offer a lower price to the consumer compared to the trading channel of farmer to economic centre.



Figure 25: Value share in economic centre value chain for big onions


Figure 26: Value share in the import to economic centre value chain for big onions




9 B I G O N I O N S - E C O N O M I C A N D F I N A N C I A L A N A L Y S I S

9 . 1 C o n t r i b u t i o n o f V C t o t h e g e n e r a l a n d a g r i c u l t u r e s e c t o r G D P

9 . 1 . 1 G r o s s m a r g i n a n a l y s i s

Table 22: Summary of the gross margin analysis for big onions

Item Minimum Rs Maximum Rs Average Rs

TVC 273,050 456,900 361,810

TR 308,000 920,000 616,000

Average price 60 115 80

Production quantity 5,000 10,000 7,875

Gross margins (TR-TVC) 9,200 552,050 254,190

Break-even price (TVC/Production) 30.4 63 48

Break-even quantity (TVC/Price) 3,200 5,736 4,631 Source: Own research

Figure 27: Cost components as a percentage of TVC for big onions




Gross margin analysis was done to analyse the cost of production, total revenues and profits, and to assess break-even prices and quantities. All the farmers considered here are those who work with locally produced true seeds (research suggests that locally produced true seeds give farmers more profits compared to imported true seeds). In addition, farmers in Galewela, Sigiriya, Kimbissa and Anuradhapura areas have not been working with imported true seeds for the last two years. Imported true seeds are planted in March and harvesting is done in May, and heavy rains were destroying the harvest.

The average price faced by the farmers in Dambulla is Rs. 80 per kg. Their average variable cost is Rs. 361,810 per acre and total revenue per acre is on average Rs. 616,000. Therefore, the average gross margin or profit per acre is Rs. 254,190. Farmers’ average production per acre is 7,875 kg. Break-even quantity on average is 4,631 kg per acre. Average break-even price is Rs. 48 per kg per acre. These values are consistent with the cost of production information collected by the Economic Division of the Department of Agriculture and HARTI. The break-even is high for big onion when compared to other vegetables produced in these areas. On average break-even price for dry zone vegetables such as tomato, wing and long beans, brinjals and okra is around Rs. 25-35 per kg. However, from an acre, average gross margins in big onion are higher due to high yield. For example, okra will only yield 2,500-3,000 kg per acre.

On average 57.2% of the total variable cost is related to labour. Big onion cultivation is labour intensive. There are specific stages in the cultivation that require labour such as: nursery management (establishing nursery ground, establishing seeds, watering, weeding and main cost components in nursery management), land preparation (ploughing and bucket making), planting, fertilizer applications, watering, manual weeding, chemical weeding, pesticide applications, harvesting, cutting (big onion leaves need to be removed), packing (this involves storing in bags and sewing them up) and loading for transport. Among these labour-intensive activities, labour is mostly needed for planting, watering and harvesting.

Seeds, fertilizer and pesticide costs also range from 9-10 5 of the total variable cost. Compared to other production systems, big onion seed cost is high with the locally produced true seeds. On average, the cost of 1 kg of seeds varies between Rs.12,000-18,000 per kg. A recent government subsidy brought the price down to Rs.9,000 per kg. On average a farmer uses 3 kg of seeds per acre; therefore it is a considerable cost. Other costs also account for nearly 10% of the total variable cost. Other costs are usually for food, drink and for chewing betel leaves, as well as oils for machinery. During planting and harvesting on average 30-40 people will be working on an acre of land. These people need to be supplied with tea, fruits, betel leaves and short-eats. Transportation cost only accounts for 2.8% of the total variable cost. This is because most farmers have their lands close to the Dambulla dedicated economic centre. Also farmers who cultivate more than 5 acres will have their own lorry.

9 . 1 . 2 V i a b i l i t y V C i n i n t e r n a t i o n a l e c o n o m y

Global sales from onion exports by country totalled USD 3.1 billion in 2017. Overall, the value of onion exports dropped by an average -11.7% for all exporting countries since 2013 when international sales of onions were valued at USD 3.5 billion. The value of globally exported onions retreated by -2.7% from 2016 to 2017. Among continents (see Table 23), Asian countries accounted for the highest dollar worth of exported onions during 2017, with shipments valued at USD 1 billion or a third (33.3%) of the global total. In second place were the European exporters at 30.8%, while 20.8% of worldwide shipments originated from North America. Smaller percentages came from Africa at 8.6%, Latin America excluding Mexico but



including the Caribbean at 3.1%, and Oceania – mostly New Zealand and Australia – also at 3.1%.

Table 23: Leading export countries of onions, value of exports and the export share

Country Value USD million Percentage

Netherlands 545.6 17.5%

China 507.2 16.3%

Mexico 386.7 12.4%

India 359.6 11.5%

United States 218.8 7.0%

Egypt 206.5 6.6%

Spain 130.4 4.2%

New Zealand 80.7 2.6%

France 76.2 2.4%

Peru 68.6 2.2%

Italy 44.3 1.4%

Canada 42.2 1.4%

Turkey 40.6 1.3%

Poland 40.5 1.3%

Germany 39.1 1.3% Source: http://www.worldstopexports.com/onions-exports-by-country/

The listed 15 countries shipped 89.4% of global onions exports in 2017 by value. Among the above countries, the fastest-growing onions exporters since 2013 were: Turkey (up 49.1%), China (up 36.5%), Canada (up 34.2%) and Peru (up 9.1%). Those countries that posted declines in their exported onion sales were led by: India (down -40.2%), France (down -24.5%), Germany (down -21.6%), United States (down -15.2%) and Poland (down -11.2%).

Vietnam (see Table 24) incurred the highest deficit in the international trade of onions. In turn, this negative cashflow highlights Vietnam’s strong competitive disadvantage for this specific product category but also signals opportunities for onion-supplying countries that help satisfy the powerful consumer demand. Sri Lanka is ranked number 10 in this list. Sri Lanka records a negative 87.8 million USD in onion trade. This is shown in Table 24.

http://www.worldstopexports.com/onions-exports-by-country/



Table 24: Net export deficit of onions (negative value)

Country Net export deficit USD million (negative value)

Vietnam 246.0

United States 217.1

United Kingdom 167.1

Malaysia 157.7

Saudi Arabia 137.9

Japan 131.6

Russia 128.5

Germany 106.3

Canada 95.0

Sri Lanka 87.8

United Arab Emirates 81.0

Bangladesh 76.2

Indonesia 61.7

Belgium 48.4

South Korea 47.6 Source: http://www.worldstopexports.com/onions-exports-by-country/

9 . 1 . 3 C o m p e t i t i v e n e s s a n a l y s i s

Big onions as mentioned earlier, enter the market through local production and through imports. In general, competitiveness analysis compares the import and export value chains of a commodity. However, this is not possible in the case of big onions. It is very clear that Sri Lanka is not price competitive in the world market in producing big onions. Some exporters export a negligible amount of big onions mainly to the Maldives, which does not have a significant economic impact on the foreign earnings. This is clearly shown in Table 24, where Sri Lanka records a negative trade value (trade deficit) of 87.8 million USD.

Big onion cultivation is not subsidized in Sri Lanka except for some interventions in local seed production. Therefore, compared to India, Sri Lanka’s break-even price or the cost of production is on average 6-7 times higher than India. Hence in terms of exports, Sri Lanka does not hold the comparative advantage. Sri Lanka on average imports nearly 20,000 MT per month from India to supplement its local demand. Therefore, in terms of expenditure on imports, Sri Lanka spends about Rs.12,000-12,500 million per year on average. Hence a competitiveness analysis should look in to the comparison between the local production versus imports as an import substitution policy intervention.

In order to understand the competitiveness of locally produced and imported big onion value chains, we have used one trading channel, which is where big onions enter the market via the Dambulla wholesale market. Nearly 50% of big onions that are imported are traded through the Dambulla market. The research study data suggested that, on average, the cost of production or the break-even price for big onions is Rs.48 per kg. This information is validated with other literature and other farmers who were not part of the data collection activity.

http://www.worldstopexports.com/onions-exports-by-country/



When farmers’ cost of production is at Rs.48 per kg, they keep a net margin of 54.17% on trading at the Dambulla wholesale market. The Dambulla market works on a commission basis. Prices below Rs.80 are charged a commission of Rs.2 per kg. Farmers on average look for a margin of Rs. 25-35 per kg. For this analysis we have taken Rs.31 per kg as the average margin per kg. Transportation will cost on average Rs.3 per kg. Big onions are transported in gunny and nylon bags. They are stacked on lorries and crates are not used (unless the onions are traded at a supermarket collecting centre). Therefore, usually the cost of transportation per kg is lower than most other vegetables. With this considered, big onions are traded in the wholesale market at Rs.84 per kg.

The same margins are applied when big onions are traded in the Colombo wholesale market as well for locally produced onions. Therefore, big onions that enter the Colombo wholesale market at Rs.84 per kg will be traded to a trader from Gampaha for Rs.99 per kg. This price includes transportation and handling charges (Rs.3 per kg), commission in trading (Rs.4 per kg when the trading price is above Rs.79 and between Rs.99) and the traders’ margin (this is the trader who buys from Dambulla and sells at the Colombo wholesale market).

Once produce is taken from the farmers, on average the price margin that is kept is lower. Traders who come from Gampaha will keep about Rs.12 per kg as their margin before setting the retail price. With the cost of transport and handling (Rs.3 per kg) the final consumer price will be Rs.114 per kg for locally produced big onions.



Table 25: Margins and price flow of locally produced big onions traded through the wholesale market

ITEM Economic centre value chain

Cost of production (Rs per kg) 48


Percentage 6.25%

Commission 2

Percentage 4.16%

Margin: Production margin 31

Percentage 64.50%

Net margin 54.17%

Dambulla wholesale price (Rs per kg) 84


Percentage 3.57%

Commission 4

Percentage 4.76%

Margin: Wholesale margin 8

Percentage 9.52%

Net margin 1.19%

Colombo wholesale price (Rs per kg) 99


Percentage 3.03%

Margin: Retail market margin 12

Percentage 12.12%

Net margin 9.09%

Gampaha retail price (Rs per kg) 114


In comparison, we need to look at the imported big onion value chain. Imported big onions come to Dambulla as well as the Colombo wholesale markets. CIF price of big onions for the year 2018 was taken as the starting price for trading, which is Rs. 51.75 per kg. With larger volumes, transport and handling charges are low (Dambulla trades close to 10,000 MT of imported big onions per month and they are imported and stored). Therefore Rs. 0.25 per kg is added to the CIF price as transport and handling charges and then the starting price at Dambulla market becomes Rs.52 per kg. This produce will now go through the same trading channel to reach the final consumer.



However, the significant difference here is the margin that larger importers keep in sending imported big onions to the Dambulla market. While farmers keep about on average Rs.25-35 per kg as a margin, large importers only keep about on average Rs.10-12 per kg. Therefore, imported big onions that enter the Dambulla market at Rs. 52 per kg will be traded at Rs 69 per kg. This will then be traded at Rs.84 per kg at the Colombo wholesale market and will come to a consumer in Gampaha for Rs.99 per kg. The efficiency gain is Rs.16 per kg, which gives the opportunity to supply the consumer at a lower price than with the locally produced big onion.

At the moment, locally produced onions are not price competitive with the imported onions. To be price competitive, production needs to increase and the cost of production needs to decrease. If the cost of production goes down, farmers can still accommodate their margins but will be able to meet the prices of imported big onions at the Dambulla market. In terms of local production, farmers use locally produced true seeds and imported true seeds. Imported true seeds are cultivated around two months before locally produced true seeds (planting is done around March-April). In addition, another intervention tried growing big onions in Hambantota during the off season where planting happens in January-February and the harvest is available in April-May. However, both these interventions failed with changes in the rainfall patterns. Big onions can be grown in the Jaffna and Kalpitiya areas as well. However, for those farmers red onions give more profits compared to big onions. Hence there is little incentive for them to grow. This leaves no option other than increasing local production in the current big onion growing areas (Matale, Anuradhapura, including Mahaweli H region and Polonnaruwa) and storing. With proper cold storing facilities, big onions can be stored for about 6 months. However, more research is needed to evaluate the storability of local true seeds since cold storage demands quality produce and varieties made for long term cold storage. In order to increase the production area, farmers need incentives to bring the cost of production down.



Table 26: Margins and price flow of imported big onions traded through the wholesale market

ITEM Import-Economic centre value chain

CIF price (Rs per kg) 52


Percentage 5.76%

Commission 2

Percentage 3.80%

Margin: Importer/trader margin 12

Percentage 23.00%

Net margin 13.44%

Dambulla wholesale price (Rs per kg) 69


Percentage 4.34%

Commission 3

Percentage 4.34%

Margin: Wholesale margin 9

Percentage 13.00%

Net margin 4.32%

Colombo wholesale price (Rs per kg) 84


Percentage 3.57%

Margin: Retail market margin 12

Percentage 14.20%

Net margin 10.71%

Gampaha retail price (Rs per kg) 99




1 0 B I G O N I O N S - S O C I A L A N A L Y S I S

1 0 . 1 W o r k i n g C o n d i t i o n s

Field working conditions hardly comply with international norms and standards. For example, none of the labourers who work in the field use safety gear and most of them are barefoot. Only a handful of people use face masks during the application of pesticides. After the harvest, big onions leaves have to be removed before drying. This process is mainly done by women but they hardly use any protective gloves while working with sharp objects like knives. The harvesting of big onions in Sri Lanka is done manually. Therefore a labourer has to be in the field, working in the sun for a whole day straight. On average 40 labourers including 6 men will perform the harvesting activity on an acre.

Photo 10: Big onion harvesting in the field

Labour use is seasonal. Therefore workers are hired on casual terms on a daily wage rate basis. Men are given a higher labour rate which is Rs.1,500 per day while women are paid only Rs.1,000 per day. Labour contracts are not relevant. Since labourers work without proper safety gear, employee safety is an issue in the onion production industry. There is less job satisfaction among the labourers involved in big onion production.


Workers however, obtain a daily wage which is considerably higher than the wage in other vegetable value chains. For example, in the same area, labourers who work in okra and brinjal fields will get Rs.1,250 for a male and Rs.900 for a female.



Photo 11: Big onion cutting and loading in the field and wholesale market


In both the wholesale and retail markets, loading and unloading is done by casual labourers. They are called “Nattami.” They work on a commission basis; usually a piece-based rate to load and off load. A piece is usually a 50 kg bag of big onions. The big onion value chain does not involve child labour at any point. Children of the farmers, especially young children of school going age will take part in their parents’ farming operation at their leisure time. At other trading entities such as supermarkets, exporters and Sathosa, labourers work more on a permanent basis.

Photo 12: Bagging big onions in the field




1 0 . 2 G e n d e r e q u a l i t y

Compared to other vegetable value chains in the dry zone, the involvement of women is high in big onion farming. In big onion farming, women take care of nursery management, planting, manual weeding, harvesting, cutting, packing and sewing. The Table 27 below gives a comparison of male to female ratios in the labour-intensive stages of cultivation.

Table 27: Percentage of labour involvement according to gender

Crop management stage Female Male

Nursery management 10% 2%

Planting 30% 4%

Manual weeding 10% 0%

Harvesting 15% 5%

Packing and sewing 8% 4% Note: For cutting women receive Rs 2.5 per kg


Information shows that manual weeding and cutting is very much a job performed by female labourers. In addition, females dominate in terms of nursery management, planting, harvesting, packing and sewing as well, on an average ratio of at least 2:1. However, the involvement of women decreases along the value chain stages such as in marketing and processing, and the share of women in total labour is much lower. The highest level of involvement of women is in the crop management stages explained earlier.

Photo 13: Women in big onion fields




Figure 22: Women involvement in the big onion value chain

Decreasing involvement of women along the value chain stages

Involvement

at nursery,

planting,

weeding,

harvesting,

cutting and

packing

Women at

pack houses

of large

collectors

Few women

mainly on

invoicing

activities

Few

women

mainly on

invoicing

activities

Farming

Collection

Wholesalers Retailers



1 0 . 3 D i s t r i b u t i o n o f s o c i a l c a p i t a l

Strength and representativeness of producers’ organizations:

The average big onion farmer is part of an organisation and better connected to other farmers than in the case of other vegetable farmers in the dry zone. Big onion farmers in the dry zone are connected at levels comparable to the paddy farmers. Frequently, paddy farmers cultivate big onions in the “Yala” season in the dry zone. Big onion producer organizations have a strong voice and can organise effective actions against imports. For example, their recent protest and appeal to the President of Sri Lanka made the Finance Ministry impose a 100% tax on big onion imports during the “Yala” season of 2018. However with the decrease in the volume of production and the area under cultivation, the influence of the farmer organisations in big onion production is decreasing.

Photo 14: Big onion farmers protesting in Dambulla

Information sharing:

Information sharing among famers is at a high. For example, farmers routinely exchange information on seed production and seed availability. Another area that farmers collaborate in terms of information sharing is finding new lands that are up for lease when the planting season comes.


Famers exchange information on price as well during harvesting times. Farmers collaborate strongly to obtain a better price for their produce. However, the level of information sharing decreases along the other actors of the value chain: collectors. wholesalers, supermarkets, hotels and restaurants, and importers and exporters.

Trust among actors:

While there is a high level of trust among farmers, it was noted that this trust does not transpire to the wholesale market or to the retail levels (mainly supermarkets and Sathosa). For example, the government is making plans to build cold storage facilities close to the Dambulla dedicated economic centre. One of the main objectives of this is to provide facilities for vernalization in big onions and also for storage. However, the research team could not see a consensus among traders in the wholesale market about this facility. It seemed that they had little information related to this investment, and indicated that they did not want to be involved as it was managed by several key importers and the government counterparts.

Participation in decisions and community activities:



Participation in decision making and community activities is high among the farmers. This is evident in the ways that they organise to bargain for better prices for the locally produced big onions. However, this level of common decision making is not prevalent among the wholesale traders. Farmers also gather for community level activities. At the moment of the research for example, they showed their organisational skills of working together, as cultivation requires high levels of labour and machinery for land preparation.

Taking traditional practices into actions:

Big onion cultivation uses high amounts of agro-chemicals but manual weeding is a traditional practice that is still being done in big onion cultivation. This leads to high costs as weeding is one of the high labour cost components. Looking at the chemical requirements in the commercial cultivation of big onions, it is unlikely that traditional environmentally friendly practices could play a major role.



1 1 B E L L P E P P E R A N D B I G O N I O N S - E N V I R O N M E N T A L A N A L Y S I S

1 1 . 1 I m p a c t o f c l i m a t e c h a n g e

At the beginning of 2016, Sri Lanka faced the worst drought in 40 years, severely affecting agricultural production in the country. This situation was further exacerbated by severe floods in mid-2017 in the south-western parts of Sri Lanka. The impact of continuing dry spells and severe floods was disastrous for the country’s food production. While agriculture in Sri Lanka has evolved in close harmony with the prevailing climatic conditions of the country, it has been made evident during recent decades that the traditional farming experiences and accumulated knowledge on weather patterns have become less useful in the process of agricultural decision making. The climate in the country has undergone a change to such an extent that the expected rainfall does not come at the correct time of the growing season, thus putting farmers in extreme difficulty. Diminished agriculture production and income as well as higher food prices due to climate change have affected the access to food by households. Research has found that more than 50% of households in the Eastern Province of Sri Lanka could not afford an adequately nutritious diet in 2014, while this has gone up to 48% in the Uva Province. Also, the Food Price Index (FPI) has increased by a staggering 22% from 104.3 in 2014 to 127.5 in 2017, compared to a 10% increase in the Non-Food Price Index (NFPI) during the same period. Recent observations, studies and research suggest that many farmers cope and even prepare for climatic changes minimizing crop failure through increased use of drought tolerant local varieties, Rain water harvesting, extensive planning, mixed crop, agro forestry, opportunistic weeding, wild planting, gathering and a series of other traditional farming system techniques. Observations of agricultural performance after extreme climatic events in the last two decades have revealed that resiliency to climatic disasters is closely linked to levels of farm biodiversity. One of the adverse effects of climate change is global warming - a rise in global temperature due to the generation and accumulation of greenhouse gases.

Bell peppers and Chilies

Crop growth is indirectly controlled by temperature due to the balance between photosynthesis and respiration rates. High temperature influences many aspects of plant physiology and growth, which in turn may have a direct or indirect effect on crop yield. Many studies have shown the direct influence of increased or decreased temperature in the production of chilli. The bell peppers which were grown under high temperature (33°C) showed reduced fruit set and flower malformation when grown in temperatures below 18°C resulting in the formation of parthenocarpic fruits and reduced fruit set. The number of leaves that developed from the cotyledon stage until flowering was reduced when the pepper (Capsicum annuum) was grown at locations with high soil and night temperatures. The changes in day and night temperature markedly influenced the seedling morphology of sweet pepper. Higher day temperature and lower night temperature resulted in seedlings with darker green colour leaves and higher numbers of nodes till the first flower.

The temperature also plays a role in the occurrence of diseases in chilli. The elevated temperature along with elevated CO2 significantly increased the incidence of diseases viz. bacterial wilt, bacterial spot and anthracnose caused by Ralstonia solanacearum, Xanthomonas campestris pv. vesicatoria and Colletotrichum acutatum, respectively, whereas, the incidence of Phytophthora blight caused by Phytophthora capsici in chili was decreased at elevated temperatures. The infection of necrotic spot tospovirus in chilli was also favoured by



high temperature. The study on the effect of root zone temperature on growth of chilli pepper showed that plants growing on root zone temperature of 20°C+/-2°C had more leaves, greater leaf area and dry weight than plants growing on root zone temperature of 25°C-40°C. Pollen viability and germination are known to be sensitive to high temperature. Pepper plants maintained under a moderately high temperature regime (32°C/26°C, day/night) for 8 days before flowers have reached anthesis showed reduced in vitro germination, resulting in a reduced number of seeds per fruit. The higher temperature was also found to be correlated with capsaicin content of chilli pepper, where high temperature during the growth period showed an increase in capsaicin content of the chilli pepper. The temperature stress affects the yield as well as traits such as plant height, branches, canopy diameter, fruit weight, transplant success, fruit diameter and number of fruits per plant, which leads to poor growth and development of chilli plants resulting in a reduction in fruit yield.

The drought condition adversely affects the germination of seeds and also has other negative effects on crop growth and development. The occurrence of drought increases the concentration of salts in the soil which affects the reverse osmosis of loss of water from plant cells. This leads to poor plant growth and reduces productivity due to inhibition of several physiological and biochemical processes such as photosynthesis and respiration etc. However, the drought stress is well recognized as an environmental condition that influences the accumulation of capsaicinoids (capsaicin and several related compounds), alkaloids in hot pepper that cause the sensation of heat, when eaten in chilli peppers. The young seedlings of chilli cannot withstand either deficit or excess of soil moisture. However, the older seedlings can tolerate moisture stress comparatively to a certain extent. The distribution of rainfall throughout the growing season of chilli also acts as an important factor which influences the growth and yield. Unequal distribution of rainfall causes severe yield loss due to several physiological and biochemical adversities and infestations by insect pests and diseases. Less rainfall or dry weather during the crop growing season encourages the infestation by thrips [28] which is one of the main insects that damage chilli plants. The increase in temperature and moisture stress (low moisture) causes early flowering in chilli plants and many other phenotypic changes that lead to poor growth and yield.

Soil acidity and salinity are among the most deleterious abiotic stresses affecting crop productivity and are responsible for significant crop loss globally. Acidity and salinity make the soil unsuitable for crop cultivation due to various reasons like immobilization of nutrients like phosphorus and increased levels of toxic forms of elements such as aluminum and iron. Chilli plants are considered moderately sensitive to salt stress. However, the high soil salinity leads to poor germination, delays stand establishment, and reduces subsequent growth and yield. Yield reduction begins when the electrical conductivity (EC) of saturated soil extraction is greater than 1.5 dS/m. The chilli plants which were given salt treatment showed a drastic reduction in growth parameters, along with reduced chlorophyll content and accumulation of proline. Chillies can grow well under slightly acidic soil conditions. However, very low soil pH is not suitable for growing most of the crops including chilli. The main problem associated with acidic soil is the immobilization of the macro nutrient i.e. phosphorus that rapidly converts into insoluble complexes due to precipitation reaction with Al3+ and Fe3+.

Big Onions

To grow good bulb onions, you need to know how day length and temperature affect onion plant growth. Onions are photothermoperiodic; that means they are sensitive to temperature and also to day light. Day length or day light hours—determined by the sun tracking north in the northern hemisphere during the spring and summer and south during the fall and winter—stimulates the onion plant to start making a bulb (and to stop making leafy growth). Each onion variety will form a bulb only after it has received a certain number of hours of day light each



day for a certain number of days. Onions are categorized into long-day (northern), intermediate-day (central), and short-day (southern) varieties. Temperature stimulates the onion plant to stop making a bulb and begin sending up flower shoots and forming seeds—called bolting. Once an onion reaches a certain size—and again this differs by variety—temperatures of between 40° and 50°F (4° to 10°C), will cause it to bolt. (Onions are cool-season biennial plants–meaning they require two seasons to complete the cycle from seed to seed; the two seasons are separated by winter cold.)

There are many varieties of onions suited for growing bulbs. When you choose a bulb onion variety for your garden (and your growing region), it is important to know how many day light hours you will have during the growth season and the low and average temperatures during that time. Onions first form tops—leaves—then (depending upon the variety and day length) start to form bulbs. For example, long-day onions will quit forming tops and begin forming bulbs when the day length reaches 14 to 16 hours while short day onions will start making bulbs much earlier in the year—when there are only 10 to 12 hours of daylight. Onion is also sensitive to flooding during bulb development with yield loss up to 30-40%. Under the climate change scenario, the impact of these stresses would be compounded. These stresses are the primary cause of yield losses worldwide by more than 50%. The response of plants to environmental stresses depends on the developmental stage and the length and severity of the stresses. Onions may be more at risk with regard to water than to temperature, as they have shallow roots and a fairly high demand for water. However, as onions are an annual crop that can be fallowed if necessary, onions are not in as precarious a position as a tree crop that has the same total annual irrigation needs. Onions are susceptible to a variety of pests and pathogens, especially under damp conditions. Depending on how climate change affects precipitation, it could increase or decrease this problem. Onions are especially susceptible to weeds, which may in turn be influenced by climate change, but the direction of this effect is unclear.

Mitigation and adaptation strategies

There are several technologies which are available such as breeding for drought tolerant varieties that can be useful for reducing the impact of climate change. Application of genetic engineering and advanced breeding techniques for developing plants resistant to environmental stress is happening for most vegetables in the world. The extent of information that breeders have now, offers them advanced tools for breeding, such as markers for QTLs and single genes for genetic transformation techniques. Use of drip irrigation technology can help in proper utilization of water from a limited source during the critical growth period of chilli and other crops as well. In areas where water scarcity is the main problem, the soil moisture can be preserved by following the practice of mulching, which not only helps in reducing evaporation loss of soil water, but also helps in maintaining soil temperature and reduces weeds from the chilli growing field.

The loss of yield by insect pests (such as thrips) and diseases (like leaf spot, leaf curl) can be prevented by developing hybrid varieties or by screening for a genotype which can tolerate insect, pest and disease infestation. Through genetic engineering approaches, various biochemical pathways of the plants can be manipulated in order to make the crop plants tolerant to abiotic stresses caused by climate change. For example, the over expression of heat shock protein, proline and abscisic acid as it helps in the adaptation of crop plants to withstand drought and salt stress. Another way of improving the crop yield under drought stress is to develop varieties which have high EUW (Effective Use of Water) ability, which implies maximal soil moisture is captured for transpiration, reduced non stomatal transpiration and minimal water loss by soil evaporation.

Tissue culture/micropropagation techniques can be utilized to produce a large number of seedlings from a limited initial material as this will help in overcoming the problem of



germination in chilli. Also the plant tissue culture may generate genetic variability (somaclonal variation) that may produce variants with desirable characteristics such as resistance to biotic and abiotic stresses. Plant growth promoting rhizobacteria (PGPR) have strong potential to be successful biofertilizers and bioenhacers.

Photo 15: Big onions under drip irrigation

Therefore, they can be used in areas where soil fertility is a major problem. Some other simple but effective

adaptation strategies include growing chilli and onion crop in a raised bed to avoid damage from excess water during heavy rain. Also the preparation of a

proper drainage system will reduce the adverse effects of heavy rain and floods on the growing crop. Change in the sowing date may help in escaping insect pest and diseases. The use of soil and moisture conservation measures will help in judicious utilization of water during the drought season and liming on the acidic soil helps in reducing the concentration of toxic elements such as AL3+ and Fe3+ which decreases the immobilization of available phosphorus in the soil. Fertilizer management through fertigation, adjustment in cropping pattern, developing suitable agronomic adaptation measures for reducing the adverse climate related production losses, developing crop simulation models for crops for enabling regional impact adaptation and vulnerability analysis, identification and refinement of indigenous technological knowledge to meet the challenges of weather related damages, and developing storage systems for pre and post-harvest produce can reduce the risk of damage caused by climate change.



Photo 16: Drying house and cold store for vernalization for big onions


Photo 17: Rain water harvesting and preventing water evaporation of bell pepper




1 2 T E C H N O L O G I C A L I N N O V A T I O N

1 2 . 1 T e c h n o l o g i e s u s e d

Operations within the value chain for high quality vegetables are only partly modernized. Collection and distribution centres exist and cleaning, selection and packaging is done. Some cold storage exists and also some cold transport is conducted. However, a complete cold chain for high-quality Sri Lankan vegetables does not exist. Also, a streamlined system to deal with products that are not selected as high quality exists only partly, with very low levels of vegetable processing in the country.

Vegetables are processed into canned vegetables in brine, mixed vegetables, canned potatoes etc. Vegetables are also dried under controlled temperatures into dehydrated vegetables which have a long shelf life of 2 years. Dehydrated vegetables such as carrots, leeks, cabbages, potatoes, onions, garlic, broccoli, cauliflower, various other vegetables and herbs which have medicinal values are in high demand in Europe and the U.S. Potato products are in high demand as well. Products such as frozen French fries and potato flakes are in demand even in the African region for their various preparations as a staple food. Potato crisps and chips, potato starch etc. are all in increasing demand now. Frozen vegetables are a very high value product in the world market in recent years. This is one of the most efficient methods of preserving vegetables in its original natural taste even after keeping it for one year. Instant Quick Freezing (IQF) products and frozen products are very high value products under freezing technology.

For the manufacture of any of the above products, fresh and good quality produce is the most important factor in achieving a high quality finished product. For this reason, the control of raw material quality from the farm level is a very important aspect of the value chain. Critical Control Point (CCP) of raw materials can start from the growing point of the produce. Introduction of Good Agricultural Practice (GAP) is an important factor in getting quality raw materials or produce for any of the above mentioned market segments.

Selection of the right kind of produce during farming, suitable soil, right climate, rain pattern, water supply, high quality seeds for good yield and flavour, colour, texture, size and keeping quality etc., depends on the right agricultural practices and methods adopted by the farmers. The training of the farmers is important in getting the right variety and quality produce from the farm. Even the harvesting method used in collecting fruits and vegetables plays a very important role in getting the best quality product, as a natural ripening process results in high quality fruits, with texture, colour, aroma etc. For example if produce is not picked by hand or using nets or other means, there is always a chance of the produce to get some what damaged on the outer surface, which in turn gets rotten during the ripening process. If immature products are harvested, the produce may not ripen even after a long waiting period and the farmer, the retailer or the processor has to use artificial ripening methods which will result in a very poor quality product with no aroma or natural flavour. This part of the project shall be discussed in detail in other chapters of this study.

Technology options

Many of the food items sold in a modern supermarket are fresh, but most of them are processed—canned, waxed, dried, frozen, bottled, pickled, packaged, wrapped, baked or changed in one way or another. Stabilization of foods, which keeps them from spoiling, is the



main purpose of processing. Micro-organisms are the first thing we think of in connection with the deterioration of food.

Canning involves the application of temperatures that are high enough to destroy essentially all microorganisms present in the food and air tight sealing in sterilized containers to prevent recontamination, in order to preserve the food as much as possible in nearly the same condition in which it is served as when it is freshly cooked. The temperature and length of time of heating may vary with the type of food and the kinds of microorganisms that are likely to be present in it. Most of the canned foods are packed in tin cans made of tin coated steel, but also use glass containers, aluminum cans or a combination of plastic and aluminum pouches which are retortable. Canning is done for both fruits and vegetables where the temperature and time of processing are higher for foods with high pH like vegetables. Aseptic canning uses these principles. The food is processed under conditions that provide rapid heat penetration. Then it is filled into cans and sealed in an aseptic chamber to avoid contamination during these operations.

Freezing comprises of both slow and quick-freezing methods. Freezing may preserve foods for a long period of time, provided the quality of food is good to begin with and the temperature of storage is far below the freezing temperature of the food for long preservation. During freezing preservation some microorganisms are destroyed which cannot withstand the low temperature, but the preservation is mainly effected by arresting the growth of microorganisms at the low temperature of freezing and storage. But in some foods enzyme reaction may still take place even at freezing point and below temperatures which can change the flavour and texture of the product. To avoid this problem, blanching is done before the freezing process. De-hydro freezing of fruits and vegetables aims to combine the best features of both drying and freezing. Dehydrated vegetables offer the economies of greatly reduced weight and volume, but quality maybe impaired in the late stages of drying. Freezing has advantages, but the costs of storage and transportation are relatively high. De-hydro freezing consists of drying the vegetable to about 50 percent of its original weight and volume—but not to the stage where quality impairment occurs—and then freezing the food to preserve it. The quality of de-hydro frozen vegetables is equal to that of the frozen products, but they cost less. The temperatures applied for freezing varies between -4 C to -40 C from 3 hours to 72 hours depending on the raw material used and the freezing methods (fruits, vegetables, meat fish etc.).

Chemical preservation is defined as the use of chemical agents to retard, hinder or mask undesirable changes in food which is caused by microorganisms, by enzymes of food or by purely chemical reactions. The preservatives may be classified as organic or inorganic. The organic preservatives are organic such as benzoic acid, esters of p-hydroxy benzoic acid, dichloride benzoic acid or inorganic preservatives such as sulphur dioxide. They are sodium benzoate, sulphites and sorbic acid. They control microbial growth, prevent enzymatic and non-enzymatic changes or discoloration in some foods.

Dehydration or drying has been practiced from centuries Drying is used as a preservation method for many fruits, vegetables, meat, fish, pulses cereals, nuts, spices etc. It may be the first preservation method used by humanity as sun drying was a common method to store food for the off-season. Nowadays controlled conditions of heating are used, with the forced circulation of air or artificial drying as compared with sun drying. Freeze drying is a method of drying involving freezing and then sublimation of ice under vacuum. In this process the freeze-dried product remains in its original shape. De-hydrated products are usually economical. Most of them are relatively easy to prepare. Their low weight and volume make them convenient to store. They are well adapted to use whenever transportation is a problem.

Much has been done to improve the quality of dehydrated food. Some of the things that have led to improvement are the use of raw materials that are better adapted to the requirements of



dehydration and new processing technology such as the fluidized-bed dryer, where enough hot air is blown into granular-type food so that it flows like a liquid and is kept in suspension in air throughout the drying time. This equipment is used commercially in the final drying stage for dried mashed potatoes in the form called “granules.” High-vacuum drying also makes it possible to remove practically all of the water from foods so that, suitably packaged, they store well.

Aseptic preservation is high-temperature, short-time, or high-short processing. Its principle is that the destruction of bacteria increases about tenfold for every 18 degrees of rise in processing temperature, while the chemical reactions responsible for the deterioration of the product are only doubled. The food is made safe without being overcooked.

High osmotic pressure preservation works through the withdrawing of water from microbial cells when they are placed in solutions containing large amounts of dissolved substances such as sugar or salt. As a result of this water loss the microbial metabolism is halted, and the water activity is stopped or controlled. High osmotic pressure may inhibit microbial growth but it cannot be destroyed. Yeasts and mould are more resistant to osmotic pressure. For example, jams, jellies and pickles are rarely affected by bacterial action because of their higher sugar or salt content. But it is not uncommon to find mould growth on their surface if exposed to air. During this period canning of fruits and vegetables and meat and fish were also in practice.

Irradiation is a potential processing method for foods. Although no irradiated food was on the market in1958—in fact, the law did not permit it—millions of dollars have been spent on research on irradiation. Just as X-rays can be used to destroy cancer cells in the human body, gamma rays or high-speed electron scans be used to kill micro-organisms and insects in foods. Irradiation does not make the foods radioactive.

1 2 . 2 M o d e r n i z a t i o n o f t e c h n o l o g i e s

Technologies used in modern vegetable processing

IQF Processing. This is one of the most efficient methods used in frozen vegetables. In this process the vegetables are graded, washed and peeled before it is made into slices or cubes or any other sizes according to the customers’ requirements. After the vegetables are sized, it is blanched for 4-5 minutes depending on the type of vegetables such as leafy vegetables, underground tubers (potatoes, carrots, beet roots etc.), tomatoes, cabbages, leeks, peas, beans etc. The time of blanching varies with the type of vegetables.

After blanching the product is cooled by using chilled water or cold air etc. and then transferred to the freezing unit (vacuum freezer, tunnel freezer, blast freezer, immersion freezer etc.) to bring the temperature of the product down to -15 C to -20 C. The cooling is done in such a way that the product does not lose its shape and size, or gets freezer burn etc. Some of the products are cooled slowly and some of them take a few minutes to achieve the temperature. Once it is frozen the products are packed in suitable packing (cartons, polythene bags etc.)The products once packed are stored under low temperature in a cold room to be stored at -20 C.

Drying or Dehydration: In this process the vegetables are washed and passed through the same process of cubing, blanching and cooling etc. During blanching some sulphiting



treatments may be done to maintain the natural colour of the product. Once the product is ready for drying it passes through various types of driers such as the continuous tunnel drier, vacuum drier, freeze drier, fluidised bed drier, tray drier, microwave drier and various other models of driers which are suitable for different types of vegetables and also depends on the investments. Depending on the type of drying method, the yield and the quality of the final products change. For example, freeze drying is the best method to maintain the shape, flavour and colour of the final product but is much more expensive than the other method of drying. The products after drying reach a moisture content of about 8-9%, which is good to keep the product for one year. The products are packed in moisture resistant packages such as aluminium foil containers, multilayer packages, waxed cartons etc. Polythene bags which are less permeable to moisture and oxygen are also good containers for dried vegetables.

Chilled Convenience Foods: These are products packed in trays, polythene pouches or paper trays etc. The vegetables are cut into desired sizes and shapes after cleaning. The cut vegetables are packed in trays or other containers using packing conveyors. The trays or bags are sealed and then passed through a chilling unit to bring the temperature to 7-8 C for the product and are stored in cold rooms at 5-6 C. This product has a very low shelf life of about 1-2 days. The product is suitable for short term storage, local market supplies or for export.

Canning of Vegetables: This is one of the oldest methods of processing but is still used in the preservation of vegetables, especially for long periods of storage. The vegetables are prepared according to required sizes, blanched and cooled through a cooling tunnel, under a cold water spray or by dipping in cold water etc. Various types of blanchers and cooling systems are available in the market. The product is then filled in hermetic containers (mostly tin cans or aluminium cans) and filled with brine as a covering medium. The cans are passed through an exhaust box to remove the air from the cells of the vegetables and then cans are sealed using a can seaming machine which keeps the product air tight. The cans are then subjected to a sterilization process in an autoclave with set time and temperature controls under vacuum. The modern sterilizers are controlled automatically. The cans are cooled inside the autoclave and then dried and stored under ambient temperatures. The product has a shelf life of 2-3 years. Manual, semi-automatic as well as fully automatic lines are available for canning units.

Ready-to-eat products in Retortable pouches: This is another new technology now developed for the packing of vegetables, rice, cereals etc. for long shelf life, easy handling and transport. The products are ready meals or cooked vegetables, meat etc. which are filled in multilayer foil pouches after proper cooking with required ingredients. The pouches are sealed under vacuum conditions and it is sterilized in an autoclave under set time and temperature. The product shelf life is more than one year. Any vegetables or meat curry etc. can be packed in this modern system of packing. This is a fully automatic line except for the preparation of food items to be filled in pouches.

Packing and export of fresh produce: The fresh produce from farms are brought to the processing facility where the vegetables are sorted and graded thoroughly by passing through an inspection conveyor. The graded products are washed and dried well before packing in suitable containers like trays or bags of the customer’s choice. As it is fresh produce which is exported, much care is taken while sorting, packing etc. Modern equipment is available for fully automatic operation and semiautomatic operation up to packing and storage. Some companies



do manual operations throughout the process. After drying, some produce may be subjected to a waxing process to avoid spoilages, control ripening and chemical reactions within the vegetable or fruit during storage. The products after packing are stored under a low temperature (5-6 C). The packing area is a clean room with a controlled atmosphere of around 26 C. As the product is ready for export, it is loaded into reefer containers and shipped by air to the destination. Much care is required during packing, storage and transport of the products. A cold chain facility is essential for this operation.

Available technologies and innovation possibilities for Sri Lanka vegetable VC

After visiting the various collection centres and cold room facilities in some parts of Sri Lanka (Nuwara Eliya, Badulla, Bandarawela, Welimada etc.), the following observations have been made by the experts.

1. Collection centres are managed by high end supermarket chains like Cargills, Keells etc. There are very few collection centres managed by farmers or co-operatives in the region. Farmers bring their produce to the collection centres and it is graded and received by the collection centres. The products are selected, washed, cleaned and packed on the same day and are transported to the packing centres and supermarket outlets on the same day or the next day, without any storage at the collection centres.

2. No cold room facilities were encountered in any of these collection centres. According to the collection centre managers, the produce is received and transported to the final destination on the same day in their reefer trucks and most of the collection centres have a minimum of 3 reefer trucks.

3. Some of the collection centres have washing and drying facilities while others just have a washing facility with normal concrete tanks or plastic tanks. They use chlorine as a disinfectant in the vegetable washing process to reduce microbial load, but others use normal cold water to wash the vegetables like potatoes, carrots, beets, radish and such other produce. The produce which is very dirty and with soil (carrots, potatoes, beet root, radish etc.) are washed in cold water and drained for a while and packed in crates or boxes. All the selection and packing is done manually; hence a good quality final product is supplied.

4. No precooling facilities are available in any of the collection centres or near the production areas. This is an important aspect of reducing the farm heat of the product to maintain a better quality before reaching collection centres. As the Nuwara Eliya area is a cold climate region the products were found to be fresh looking. Some of the farmers supplied the products after cleaning with cold water from the farm area, which reduced the farm heat to a reasonably low temperature while transporting to collection centres.

5. The transport from farm to collection centres is done in small trucks, pickups and closed vans. Some of the farmers deliver in their own personnel cars. When it is a long distance this method of transport is not advisable. The collection centres operated within a 25 to 30 km radius only. Therefore not much damage or spoilage was noticed. But the fate of the produce from long distance and hilly areas from where transport could be very difficult especially during the rainy season is not known. As most of the collection centres only operated in a systematic way, we could not establish spoilages more than 10%. But the Keells supermarket chain collection centre near Bandarawela reported spoilage of about 20% from collection centre level to delivery and sales from the outlets. So we could establish a loss of 30 % from farmer to outlets in Colombo and other areas for vegetable produce alone.



After visiting various collection centres of the major supermarkets like Cargills, Keells and others, the observation is that they all have developed a good value chain system. They have a good arrangement with farmers to supply produce on the same day of harvest, normally before 12 noon. The farmers are advised to harvest the product in the very early hours and also to clean produce which is dirty with water, before transporting to the collection centre. This helps in getting a clean product as well as reducing the field heat. The farmers are given proper instructions on how to pack the produce in crates and transport it in clean vehicles. In some cases, there are provisions to transport it in reefer containers from farms. As produce reaches the collection centre, it is received and once again cleaned if necessary, as these collection and packing centres have washing and other cleaning facilities. The bacterial count is reduced by adding a small quantity of chlorine which is a good disinfectant. The Nuwara Eliya Cargills collection centre is equipped with a drying unit also. After the produce is washed with water, the washed products are graded, dried and then packed in crates to transport to the packing centre in reefer trucks. The same system of collection, grading and packing can be applied to groups of farmers who want to join together and develop a collection centre of their own. This is a good model to promote to farmers where there is no marketing set up in the areas. This will help the farmers to get a fair price. Even the supermarket chains have some incentive schemes to promote farmers. The farmers are given better prices for 1st grade products in some cases.

6. There are only very few companies in the vegetables processing sector in Sri Lanka. Most of the vegetables are sold as fresh either for export or for local market consumption. The major processors of vegetables were Bio Foods Ltd, Hayleys, Nidro, CR Exports, Expolanka, CBS Limited etc. They are in the business of fresh packing of vegetables for exports to the Maldives and the Middles East. Opportunities for fresh exports to the Middle East, Egypt, India and Europe can only be achieved by improving quality and strict adherence to international quality standards like EUREPGAP, CODEX ALIMENTARIUS etc. There are agencies who can certify and advice in upgrading the companies. SGS certification is an important step in this line. ISO 22000 certification is one of the certifications which can be achieved by many food processing industries. It takes about two years to get the certification process completed. Bio Foods Ltd. has facilities for the freezing of vegetables and herbs. The company started in 2017 only for IQF products. They also do dehydration of spices (Jalapenos, turmeric, ginger) and herbs. They are the company which has an export activity for their products in processed vegetables. The company has a very high standard of operation, quality control and hygiene system, and maintains HACCP and GMP. The products are exported to the USA, UK, Europe, Japan and Middle East countries. All their machinery and equipment are from Europe. They also have a facility to process coconut into aseptic filling of coconut water, coconut milk etc. Other products are desiccated coconut, virgin oil, flavoured milk etc. NIDRO is also in the fresh vegetable processing sector. They process most of the vegetables and some fruits which are packed in cartons, trays or polythene bags. They are mostly exported to the Maldives and some small quantities are exported to Middle East countries. They export throughout the year, but exports slow down during off-season. They are one of the companies which is equipped with precooling facilities, cold rooms and reefer trucks for transporting their produce to the processing facility and to the airport. The time taken by them from receiving to export is about 24 hours only.

Innovation possibilities in the vegetable processing sector in Sri Lanka should start at the farm level. Farmers should have full awareness and must be trained in handling fresh



vegetables. The Nuwara Eliya climate is most suitable for vegetable growing and storage as the temperature is much lower, but in other areas like Anuradhapura, Dambulla, Vavuniya, Killinochi etc. precooling technologies can substantially improve quality. Professional greenhouse development can be very interesting for Sri Lanka being a small country with a lack of land. Yields could be increased multiple times and quality improved drastically. The following issues should bring needed innovation:

1. Training of farmers in Good Agricultural Practices as well as advice on varieties and produce to be cultivated according to market demand, together with seed supply management.

2. Maintenance of records for pesticides and chemicals use at farm level and fertilizer management.

3. Training on harvesting methods, as well as cleaning and precooling of produce. 4. Use of plastic crates for the transportation of fresh produce. 5. Provision for cleaning facilities near the farms to remove soil, foreign matter etc. 6. Provision for hydrocooling facilities near farms to control farm heat of the product after

harvesting and advising farmers on early harvesting from 4 am. 7. Setting up of grading, sorting and packing facilities near farms or at a central location

where the volume of production is high. 8. The packaging facility could also have a precooling facility and a cold room for short

term storage. Smaller cold rooms up to 100 tons capacity is suggested. 9. The facility should be equipped with utilities, parking, loading /offloading bay, empty

container /crates storage etc. 10. Develop a system of available land for farmers to lease and for cultivation of products

in demand. 11. Development of an information/database for all stakeholders (processors, exporters,

supermarket chains) to know what products are available for purchase. 12. Implementation of an insurance programme for farmers to protect them from crop

failures and price fluctuations, etc.

Also increased introduction of dried products such as potato flakes, potato chips, frozen French fries and fresh packing of potatoes are good proposals for vegetable processors. IQF and canned vegetables, dehydrated vegetables as flake or powder form are also in demand for export as well as for defence and police forces. Manufacturing of starch from cassava or potato or any other such raw materials available in surplus would be a good low investment project.

Medium size cold storage can be used to store seed potatoes in and around farming areas. With proper cold storage facilities, potatoes can be stored for up to 9-12 months and other vegetables up to even 6 months. However, traders were interested in storing them for only 2-3 weeks on average. Some of the traders and farmers are of the opinion that during season, the produce should be stored in cold rooms for 2-3 months and then be sold so that they get good value for their produce. Stores at the economic centre can be easily converted in to cold storage facilities given their structure and accessibility. Because harvest is directly taken from the field by traders, the post-harvest losses are very low, less than 10% at the Nuwara Eliya dedicated economic centre. We received information from the Keells collection centre near Bandarawella that their post-harvest losses from collection centre to supermarket sales centre was 20%. This is alarming and there is a need for controlling this by using modern methods such as cold chain facilities. The inspection of the product at the supermarket outlet on a daily basis can reduce these losses. It is also important to maintain proper temperature controls at the cold room level and at the supermarket display cabinet.

The introduction of cut vegetable packing units in trays for the supermarket chains is advisable in order to reduce losses and wastage by keeping the produce in the shelf for a longer number



of days. The products which are older than one day could be packed in trays and stored in cold rooms or be supplied to restaurants. The display cabinet can be replaced with fresh produce from the farm.

To summarize, the following issues should bring innovation at the retail level: 1) Provision of cold rooms and display cabinets with cooling. 2) Suitable distributors or retailers with proper storage and reefer trucks. 3) Promotion of the supply of produce with high demand and good prices. 4) Promotion of small scale packaging facilities for cut vegetables such as salads. 5) The supply chain needs to add variety in terms of niche and upcoming products like organic, natural, chemical-free or safe vegetables, which can attract a committed clientele that will be willing to pay for such products. Chains should invest in the market to create a niche and value-added segment, and this can lead to viable selling of highly perishable products like fruits and vegetables. About 37% of stores are achieving returns on fruits and vegetables through volume, quality delivery, commitment and consistency, which can only come from efficiently coordinated and well-linked supply chains. Annex 1 figure shows an innovated value chain model.

The innovated model will be based on differentiation of the products (quality, size, prices etc.), minimal processing to a form and shape which is closer to the final consumer product (e.g. fresh cut vegetables and ready-to-eat salad mixes) and processing of the raw material or lower grades, waste or by-products by converting the short shelf-life product to a storable form. Certain vegetables could be especially promoted due to their health proprieties. In addition, health-related information in the form of books, booklets or leaflets could be distributed. Table 29 gives examples of innovative business models related to value addition in vegetables focusing on cold chain development.

1 2 . 3 L a b o r a t o r i e s a n d q u a l i t y c o n t r o l s y s t e m s

Quality standards and quality control for vegetable VC

Sri Lanka has a legal structure for quality control but many Acts are outdated and not in compliance with international best practices. Sri Lanka has no Central Body that coordinates or monitors market surveillance. Various bodies are incorporated in the system such as CAA and SLSI which are both implementing market surveillance for vegetables. Regulators don’t use product certification bodies accredited by SLAB or another international accreditation. In addition, responsibility for technical regulations for vegetables is with the Ministry of Health, Nutrition and Indigenous Medicine and the Ministry of Agriculture. Standards for vegetables are prepared by SLSI in 3 categories i.e. Food, Agriculture and Test Methods. SLSI aligns as much as possible with international standards and is a member of ISO and IEC. Metrology is important for agriculture standards and in Sri Lanka this is under MUSSD. This body also contains the National Measurement Laboratory which executes the calibration function in Sri Lanka. Conformity in Sri Lanka is mostly through the SLSI mark and not through international accreditation. Finally, none of the market surveillance bodies perform accredited inspections with many bodies being understaffed and underfunded. Quality of service has also been lacking in some particular areas of the NQI, such as metrology and conformity assessment.

All of this makes coordination among public and private stakeholders difficult. For vegetables, at least seven institutions cover similar aspects of the value chain. A producer for the domestic market or for export would have to navigate between all these institutions to ensure compliance with regulations, and thus lose on efficiency in a competitive international market. Furthermore,



a start-up facility will find this situation a legal impediment to function and survive. When looking at the list of institutions, this situation is confirmed by an obvious lack of any coordination body or function among these institutions. In addition, not all key NQI bodies report to the same ministries, which misaligns planning and resourcing.

Laboratories

Food safety and hygiene play a major role in industry and food quality is the result of numerous factors such as physical, biochemical, and microbiological characteristics [5]. Therefore, it is imperative that these factors are considered in layout design in the food processing industry. Many practices such as the Hazard Analysis And Critical Control Points (HACCP) or Good Agriculture Practices (GAP) and Good Manufacturing Practices (GMP) attempt to ensure food safety and hygiene requirements in the food manufacturing process. In order to align with these requirements, layouts need to focus on segregating the work area to control hazards and prevent contamination of the products being manufactured. This focus will ensure that the layouts comply with the requirements of the food industry and avoid modifications required later that usually result in additional costs.

The complexity of equipping a laboratory and the consequent delay in the production of useful results should not be underestimated. In the early stages, the requirements for equipment may seem large and complex but once the laboratory is established, the running costs are relatively low. It is sometimes not appreciated by the non-technical administrator that analysis may require 10 or 20 individual items and that if even one is not available, the analysis cannot be carried out. On the other hand, many items are common to different analyses so that once the many hundreds of items required in a food control laboratory have been provided, there comes a point at which productivity can rise sharply and investment decrease.

Some of the instruments and equipment needed for chemical analysis by a modern food control laboratory are: 1. Analytical Balance; 2. pH meter; 3. Spectrophotometer, UV-visible, double-beam; 4. Spectrophotometer, atomic absorption; 5. High Performance Liquid Chromatograph (with UV and differential refractive index detectors); 6. Gas Chromatograph (with flame ionization and electron capture detectors); 7. Hand re-fraction meters; 8. Pipettes, Burettes; 9. Beakers, Conical Flasks; 10. R.B Flask; 11. Blender; 12. Grinder; 13. Pulverizing hammer mill; 14. Air oven, forced draft; 15. Vacuum oven, with pump 16. Muffle furnace; 17. Centrifuge; 18. Refrigerator; 19. Freezer; 20. Heaters and hot plates; 21. Steam and water baths; 22. Distillation column; 23. Water bath; 24. Distillation column. All of the above equipment and instruments are essential for a well-equipped food laboratory. These are movable, although the larger or more sensitive units are generally not moved, once placed. The major items of fixed equipment constructed in place are the fume hoods. The extensive use of solvents, ashing and noxious chemicals in food analysis, requires more fume hoods than other types of laboratory work.

Records will be needed which show that: samples are received, stored, handled and analyzed under environmental conditions that will not adversely affect analyses; temperature, humidity and light controls are adequate in sensitive areas to protect samples, extracts from them, personnel and equipment; the results of environmental sampling in laboratory areas are recorded; these should include records of air-flow rates across fume cupboard apertures. There is a need for a full-fledged microbiology laboratory for any modern food processing facility. The analysis of various microorganisms present in the raw materials before processing



is a good practice. But the analysis of the final product packed and after a few days of storage is most important to check the quality and shelf life of the products. The shelf life of the product depends on the extent of microbial level in the product after sterilization or freezing, drying etc. It is important to incubate canned products to check the presence of microorganisms in the final products. This laboratory must be isolated from the physical and chemical analysis section of the main laboratory, where the physical and chemical parameters of the raw materials and finished products before packing is checked. Proper maintenance of analysis reports is very important to trace any issues after the product has been sold in the market. As with any other aspect of the laboratory's activities, the responsibility for housekeeping activities must be clearly defined. Cleaning staff and laboratory staff must each have clear instructions as to their respective duties in relation to: cleaning premises, control of fridges and machines and pest control.

Quality Control

Good hygienic practices tend to be lacking in Small and Medium Size Enterprises (SMEs) more than in other food businesses. It is common for Small and Medium size enterprises to face a variety of problems such as: inadequate location, layout or size of the facility, non-cleanable structures, old non-cleanable equipment and poor staff training. Some countries face basic sanitation problems, such as easy access to potable water and safe disposal of waste. Furthermore, it is often difficult for SMEs to obtain raw materials from reliable and affordable sources. Prerequisite programs therefore tend to be ineffective and quality management systems such as HACCP is difficult to implement, and there is little effect on hazard control. On the other hand, strict adherence to the dogma that HACCP cannot be implemented without full control over the prerequisites has also impeded the uptake of HACCP in SMEs.

Both SMEs and large enterprises can implement quality management systems. Table 28 shows the 4 key areas of HACCP in vegetable sector operations i.e. supply, storage, transportation and consumption using the cold chain as an example. The Table shows the hazards from the biological, chemical and physical point of view.

With the hazards identified, it is possible to determine critical control points so that food is safe. To determine critical control points is the core of HACCP. Therefore in the early planning stage, the selection of CCP should follow scientific methods, starting from farm level. Quality Control means compliance with specifications. It includes sampling, inspection, and testing to ensure that the materials comply with specifications (and also control of products which do not conform with specifications). This includes the inspection of raw materials, temperature controls, weight controls, organoleptic testing, etc. Quality assurance is to ensure the effectiveness of various control systems. An internal systems audit will check if the control on incoming material is in place effectively. An audit of this type would form an integral part of formal quality management systems such as ISO 22000.



Table 28: Hazards in the cold chain for vegetables

Chain operations

Potential hazard

Supplement Dangerous additives, chemicals or pesticides, design mix, and impurity; environmental pollution of origin points (farms, collection centres), deficiency of facilities and equipment; lack of technical scientific guidance and safety supervision programs

Storage Cross-contamination; damage, decay, pollution, and reversal of the goods; Improper controlling of temperature and dangerous working methods; loss and damage of goods; Mixing of produce of varying storage temperatures.

Transportation Inappropriate transporting arrangement; Poor quality reefer containers, temperature control, truck efficiency (refrigerated and insulated trucks); Loss and damage of products; cross-infection

Consumption Poor storage facility, and temperature control in consumer sites like supermarkets, wholesalers, retailers, etc.; improper handling and storage by consumers after purchases.


The various factors to be checked in the processing of vegetables are:

1. Moisture content

2. Case hardening due to overheating

3. Ph

4. Net weight

5. Flavour loss and discoloration due to high temperature and enzymatic browning

6. Taste and aroma

7. Consistency and thickness of the product

8. Presence of foreign particles and other pesticides

9. Brittleness of dry product.

10. Raw material maturity of vegetables, ripeness, and suitability of fruits for processing

11. Temperature controls

12. Microbial analysis

The various Critical Control Points in HACCP for vegetables are (see also Annex 2):

1. CCP1 - Vegetable collection and transport (Hazards: unripe, pesticide, soil contamination, bruises, contamination from unclean vehicles etc.; Control: harvesting of mature vegetables, cleaning, clean vehicle for transport, crates for storage during



transport; Corrective Action: awareness and training of farmers, training of collection supervisor, collection and transport of vegetables in crates)

2. CCP2 - Washing and cleaning (Hazards: physical contamination; Control: screening, pesticide residue control, good housekeeping, etc.; Corrective action: cleaning, pre-screening, Person Responsible, etc.)

3. CCP3 - Peeling and cutting (Hazard: Biological; Control: use of gloves, other protective covering, minimum handling /storage time, good housekeeping, proper storage; Corrective action: increased supervision, cleaning schedule, Person Responsible-Q.C. department, supervisor/manager), Documents - lab reports, standard manuals, raw material register etc.

4. CCP4 – Sizing (Hazard: Biological and chemicals; Control: proper equipment –dicer/shredder; Corrective action: code of practices, cleaning schedule. Person Responsible - supervisor, Q.C. personnel, documents - lab reports, standard manual.

5. CCP5 - Blanching. (Hazard: biological and chemicals; Control: ensure correct temperature and time for blanching; Corrective action: QC checks to see if time and temperature is controlled. Person Responsible - process supervisor, Documents - QC reports, batch production sheets.

6. CCP6 - Cooling after blanching(Hazard:?;. Corrective action: physical – proper cooling and draining is affected before entering the drier: person responsible - production supervisor.

7. CCP7 - Canning /Freezing (Hazard: Biological; Prevention: use wholesome raw material, correct time and temperature, clean equipment; Control: proper storage of raw materials, cook at required time and temperature, discard products not meeting microbial specs. The person responsible - QC department, process supervisor.

8. CCP8 - Filling, sealing in food grade poly bags. plastic, glass containers, other packaging materials tamper proof seals. Hazards: Biological and physical; Control: calibration of filler with volume/wt. adjustment; Corrective action: re-pack under-filled bags and unsealed bags and also defective seals. The person responsible - packing section supervisor, production supervisor.

9. CCP9 - Labelling and coding. (Hazard: wrong coding, wrong printing on the bags. Control: supervision, printing of labels according to the specifications of the Bureau of Standards.

10. CCP 10 – Packaging - Right selection of packaging for dry products, moisture resistant bags. (Hazard: Moisture absorption, caking, lump formation, off flavour and colour changes, undesirable odour and flavour formation; Corrective action: right packaging material with moisture resistance.

The quality manual is the document covering all quality issues and making references where necessary including procedures that are critical to safety, legality and quality (SLQ). It contains an outline of working methods and practices. The production manual covers all aspects of raw material receipts, selection, grading, storage, production and packing in the entire process of food processing. This document should be available to the senior staff and production manager at all times. Any licensing authority should have access to quality and production manuals.

Annex 3 to 10 show some specific equipment and technology options relevant to Sri Lanka’s vegetable sub sector.



1 2 . 4 O r g a n i c p r o d u c t i o n a n d o t h e r o p p o r t u n i t i e s f o r v a l u e a d d i t i o n

Organic agriculture intends to reduce negative environmental impacts and increase resilience against environmental impacts and/or to provide more efficient and responsible use of natural resources. Internationally, the organic agriculture industry grows by 20% annually since the late 90s. Organic is the top of choice for the health and for the ecologically conscious. Inorganic fertilisers and synthetic pesticides and herbicides are a no-no and crops are preferably grown where they will thrive naturally. Of late, the organic agriculture movement is showing more and more interest in the impact of climate change on agriculture as well. Sri Lanka agriculture has to adapt to a more eradicable rainfall with droughts and floods becoming a more common feature in the climate of Sri Lanka. But also, high and increasing amounts of greenhouse gas lead to overall higher temperatures with severe consequences for the agriculture sector. Organic farming intends to reduce negative environmental impacts and to increase resilience against environmental impacts and/or to provide more efficient and responsible use of natural resources. Within Green Agriculture and Organic farming, there are companies that operate which are able to produce positive nutritional/health, ecological and sometimes also social effects, based on financially viable business models. Such agricultural value chains represent innovative approaches to business that can be disseminated and replicated. Such organic farming and value addition is part of the high-quality vegetable market in Sri Lanka for fresh and processed products. Supermarkets and exporters supply organically produced vegetables and Sri Lanka has seen more and more farmers and private sector activities in organic farming. Especially in spices and horticulture value chains, the drive for organic production is strong. An example of successful organic agriculture in Sri Lanka is Hayley’s outgrowing schemes for horticultures. The company works with smallholders and provides farmers with sprinkler irrigation and extension services and purchases their produce (contract farming). Currently, the company is expanding the area under sprinkler irrigation to 1,000 acres with 1,000 farmers benefiting from 3 harvests of crops annually. The sprinkler irrigation is most effective on their main crop gherkin and cucumbers and guarantees a sustainable production in the Sri Lankan dry zone. Hayley’s follows a transparent pricing policy with farmers for their produce.

The government of Sri Lanka supports Green Agriculture through the National Agriculture Policy (NAP). The National Agriculture Policy of Sri Lanka has as one of its objectives to promote environmentally friendly and resilient farming systems and conserve the natural resource base for agriculture, especially in relation to the challenges of land degradation and climate change. Specific interventions refer to adapting to climate change, soil conservation measures and measures for risk mitigation in the agriculture sector.

Climate adaptability through the selection of right location, new climate adapted varieties, planting times and methods and other adaptation measures for cropping systems to reduce vulnerability due to climate change. NAP will support the access to new, climate-adapted genetic material for the different agro-ecological regions, according to the work that is being carried out by the Department of Agriculture and also through germ-plasm transfers from outside sources. NAP will also boost the conservation of genetic variations of indigenous crop varieties, as natural resources with great potential for the development of new varieties adapted to local environmental stresses. In order to overcome water scarcity and for improved water-use efficiency, the NAP will support the implementation of rainwater harvesting systems and micro-irrigation techniques that can mitigate the risks associated with high dependence on rain-fed agriculture. Also, improve climate resilience through access to weather forecasting, predictions for climate change and agro-meteorological advisory services.



Soil conservation through enforcement of the Soil Conservation Act (1951). Soil quality is depleted by a number of factors, including climate-based erosion, loss and use degradation. The NAP promotes the conservation of soil as a quality resource in agriculture through sustainable farming techniques and the development of technology that counters soil loss or degradation. Reducing agrochemicals, using mulching or implementing and enhancing agroforestry systems can help to maintain soil quality and raise productivity. The NAP recognizes that soil conservation is a trans-generational issue and that current users of land resources in effect benefit from a lease of those resources, but in return, they should commit to passing on the resource in an equal or better condition than when they received it ('a full repairing lease'). The NAP therefore, promotes awareness among farming communities of the importance of soil conservation and practicing of Participatory Land Use Planning (PLUP) activities as keys to the environmental and economic sustainability of agriculture. Risk mitigation through 1) design of irrigation reservoirs, canals, drainage systems, and related structures as far as possible secured against disaster damage, 2) the promotion of climate smart agricultural practices to mitigate greenhouse gas production, encourage adaptation to climate change and minimize waste and 3) value addition to increase the return from agricultural produce and establish brand recognition for product qualities and application of GAP and GMP. In addition, encouragement of crop insurance schemes will enable a reduced risk environment for farmers. The main challenge faced by Sri Lankan organic agriculture and value addition production for the local market is the lack of efficient quality standards, as well as management, and control systems. Supermarkets selling organic agriculture products cannot guarantee to their clients that these products are truly organic as no proper system of standards, certification, and control with inspection is implemented in Sri Lanka. Therefore, clients shy away from purchasing these higher priced products. Main challenges faced by the Sri Lankan organic agriculture and value production for the export market are:

• Lack of market research and marketing since many products of Organic Agriculture need new logistics and distribution networks.

• Access to markets and potential customers is lacking due to the fact that Organic Agriculture produces different products than conventional agriculture.

• Little access to information on new production methods and the use of new materials or chemicals for more environmentally friendly production.

• Low levels of knowledge and capacity among the stakeholders regarding the more environmentally friendly production and processing technologies.

• Access to finance is limited as Organic Agriculture is considered riskier than conventional agriculture.

• The purchasing power of target customers is limited, and for many clients, the price and quality of a product is the main purchasing incentive, and awareness of sustainability is still low.

• Organic certification is a time and financial resources intensive procedure and requires high levels of discipline in its implementation.

• New and unconventional partnerships have to be created to adapt new environmentally friendly technological solutions.

• Only a few business development service providers offer services designed for the needs of Organic Agriculture.



• Many Organic Agriculture activities start as projects by non-profit organizations and face the problem of formalization once they develop into commercial business activities.

Table 29 provides an overview of investment opportunities in Sri Lankan vegetable value chain be it for conventional and/or for organic production.

Table 29: Investment opportunities - Sri Lankan vegetable value chain

Opportunity Investment size in EURO

Justification

1 Seed potato cold stores for farmers:

✔ Approx: 50-100 MT capacity cold store: 4° Celsius

✔ Construction area: 1 MT/m2: 100-200 m2 + handling area of 100 m2

✔ Storage in pallet boxes of 1 to 2 m3

✔ Installation of ventilation and cooling technology

✔ Simple sorting machine: but can also be manual

✔ Simple packing machine: but can also be manual

Investment in one unit of 100 MT approx. € 120,000. Scope for a minimum of 20 units exists Total: € 2.4 mln

After harvest, seed potatoes have to be stored for approx. 8 months until the next growing season starts. Current practice is of storing in ambient temperature, resulting in massive deterioration of seeds.

2 Seed potato cold stores for Cooperatives:

✔ Approx: 1,000 MT cap. cold store: 4° Celsius

✔ Construction area: 1 MT/m2: 1,000-+ handling area = 1,500 m2

✔ Storage in pallet boxes of 2 m3


✔ Sorting machine: 5 MT/hr

✔ Packing machine for 25-50 kg netbags

Investment in one unit of 1,000 MT approx. € 1,000,000 Scope for a minimum of 5 units exists Total: € 5 mln

Same as above




Justification

3 Cold stores for the medium-term storage (2-3 months) for potato, onion, carrot, red beet, garlic, chili, and ginger:

✔ Size can be from 1,000 to 4,000 MT and even bigger): 0-10 ° Celsius

✔ Storage in pallet boxes of 2 m3


✔ Sorting machine: 5 MT/hr

✔ Packing machines: for 25-50 net bags: More advanced: foil bags 2-5 kg (only upon demand of retail)

Investment approx. € 800 /m2. Assume average size 2,500 MT. Investment approx. € 2 mln Scope for a minimum of 10 units exist Total: € 10 mln

Given the massive importation of potato, onion, and chillies in the off-season, the construction of storage facilities for the storage of these crops for 3-5 months may be interesting.

4 Freezing factory for tropical vegetables with frozen storage capacity for potatoes, carrots, beans, broccoli, cauliflower & cabbage ):

✔ IQF or Blast Freezer capacity in the range of 1 MT/hr

✔ Freezer storage capacity 500 MT at -20°Celsius

5 units x 500 MT IQF Investment: € 1.2 mln per unit.

Need to identify investors who are interested.

5 Freezing factory for vegetables with frozen storage capacity (broccoli, cauliflower, green beans, bell pepper, corn, carrot):

✔ IQF Freezer 3-5 MT/hr

✔ Freezer storage capacity 1,000 MT at -25°Celsius

✔ Packing line for small packs 100 to 200 g for sales through retail

Investment in 1 unit approx. € 3 mln Scope for a minimum of 2 units

If it serves the local market, it may be interesting. Export demand for frozen vegetables is increasing.

6 Ready-to-eat foods, like vegetable curry, mixed mea, and vegetables, etc.

8000 packets per day. € 1.1million

It is a new technology with a niche market. Also very convenient for defence forces.

7 Dehydration (10-ton raw material to 1 ton finished product).

Approx. 600,000- 1million euro/unit. Depends on equipment from India/Turkey /Europe. 2-3 units would be ideal.

The 2nd quality after fresh exports and vegetables which are not exported from 1st quality can be dehydrated with a premium price for export. High demand for good-quality products in Europe/US. Low storage space/low




Justification

transport cost/and long shelf life up to 2 years.

8 Aroma recovery: Innovative - Small and medium scale unit from 500 kg 2,000 kg /day final product

Approx. cost € 200,000 to €1,000,000. This is excluding extraction of puree for the aroma recovery process. The fruit juice or puree after recovering aroma can be processed as juice or concentrates.

2nd quality fruits during main season can be processed into fruit puree/concentrates, together with extraction of flavour /aroma which is an additional income for the processor. Local market as well as export market possible for aroma/flavours in bakery items, confectionery, ice-creams, fruit flavoured drinks, etc.

9 Potato chips: Innovative but for local market (Spice flavoured chips /puffed crisps etc. g-Pringles/Lays brand)

€ 200,000 for 5,000 kg per day packing in 100 gms/200 gms /500 gms family pack etc.

Medium quality potatoes can be the raw material. Some varieties are not recommended for this.

10 Herbs/vegetables freezing: Innovative for the export market (300 to 400 kg per day finished product). No. of units depends on the investor interest as it is a niche market product which many people have not tried.

€ 600,000 to 1000,000/unit. Depends on the type of technology used, e.g., dehydro freezing, freeze drying, blast freezing, vacuum freezing, etc.

Very high demand for good quality products in Europe, the US, India, and the Middle East due to health benefits and are more organic.

11 High quality juice of tropical fruits (organic). Can be packed in pouches, cans, PET, glass bottles, etc.

€ 500,000 for 2-3 tons per day processing.

Has good local market demand. Also export demand for Middle East countries and Europe. Fruit drinks with small pieces and cells (orange,) is a new trend in fruit juice packing.




Justification

12 Fresh cut/packed fruits & vegetables for retail and HoReCa/ Fruits are used also in bakery, confectionery, ice creams and smoothies.

€ 150,000-200,000 Normal fresh fruit packing facility with peeling, cubing and tray packing facility.

Low investment with minimum process time. Products are sold on a daily basis as it is not stored for more than a day.

13 Fruit and vegetable canning for the local and export market.

€ 500,000 for 4-5 tons per day processing.

One of the most successful technologies used in fruit and vegetable processing with 2-3 years of shelf life. More of 2nd quality fruits and vegetables can be packed in cans. Local and export demand. It is a convenience food for defence forces.

14 Potato Flakes and starch, onion flakes, powder, etc. Fresh potato packing.

€ 2.5 mln for potato flakes, € 200,000-300,000 for potato starch and fresh packing in poly bags.

All 2nd and 3rd grade potatoes or onions can be converted to dry products as value addition, to minimize wastage of raw materials. Starch is in high demand in local markets, the textile industry, food industry, etc. Flakes have a demand in the African region.

15 Starch production from Cassava, potatoes. Capacity 10 tons per day.

€ 200,000-300,000


Some specific investments deserve further analysis:

1. Installation of (five) small vegetable processing/drying/canning units for the small and medium scale investors to process beans/jackfruit/mixed vegetables in brine/baked beans in sauce/processed peas in brine, tomato puree finished products in drums and stored in cold store for up to 3 months, supplies to supermarkets, hotel chains, restaurants, etc.

2. To promote fresh exports a central packing facility and cold store around the airport would be ideal. With a grading, selection and packing unit, the facility can be hired to vegetable exporters. This could increase the volume of fresh exports. A cold chain facility is required to transport the fresh produce from the production area to the packing facility at the airport. The large scale exporters do not need this facility as they already have their own reefer trucks and packing facilities.

3. The cold room facility at the Colombo International airport has only 10% capacity of its requirement for fresh exports. The facility is mostly used for imported fresh produce



and other frozen products. The upgrading of this facility with more capacity could support exporters of fresh produce.

4. Packing fresh vegetables as ready-to-eat salads. This facility needs only cleaning, sorting, cutting and packing conveyors to pack it in trays. The packed product is kept under a low temperature below 5 C. This is to supply to supermarkets, restaurants and tourist destinations.



TAMAP Sri Lanka

VALUE CHAIN DEVELOPMENT STUDY - VEGETABLES

ANNEXES


Page | 1

Annex 1: Innovated value chain for vegetables


Page | 2

Annex 2: HACCP Chart


Page | 3

Annex 3: Dehydration – Cabinet tray drier


Page | 4

Annex 4: African bird’s eye chilli dried in tray drier. (Kigali, Rwanda)

Annex 5: Solar drier for chilli drying (Kigali, Rwanda)


Page | 5

Annex 6: Temporary storage facility for dried vegetables and spices. (Kigali, Rwanda)

Annex 7: Layout for food processing (Marshall Fowler Engineers) Kenya.

TYPICAL LAYOUT FOR FOOD PROCESSING PLANT FOR CANNING, IQF, MEALS READY TO EAT PRODUCTION.

TOTAL PROCESSING AREA - 15000 sq. ft. Storage – 10000 Sq. ft area. All other utilities such as the boiler, water supply, power supply, generator, air compressor, cold room facilities are required in this system.

EQUIPMENT AND MACHINERY

Washing /Sorting Area. Zone

1W – Drum Washer.

2W – Washer Spray/ Turbulent

3W – Conveyor – sorting / cleaning/peeling.

4W – Peeling and cutting/slicing

Magnetic metal detector

5W – Blancher

6W – Cooler

1- Individual Quick Freezer (IQF).

2- Packing line

2A - FFS Machine for IQF

IQF Freezer

Production /Feeding line IQF

C – Canning Line


Page | 6

1C – Hand Std filler for Vegetables and Fruits

2C – Brine/Sauce Filler.

3C – Exhauster

4C – Can seaming M/C

AC – Autoclave /Sterilizer.

J – Juice Line

1J – PHE (Plate Heat exchanger)/Pasteurizer.

2J – Holding tank

3J – Rotary filler for juices, puree, paste, etc.

4J – FFS M/C.

Annex 8: VACCUM TRAY DRIER


Page | 7

Annex 9: Layout of cold storage


Page | 8

Annex 10: Vegetable and fruit processing and canning line layout