Guyana_Rice_Industry

TABLE OF CONTENT Executive summary I 1. INTRODUCTION 1 1.1 Overview 1 1.2 Definition of the Problem 2 1.3 Scope of the Project 2 2. THE GUYANA RICE INDUSTRY, 1992 – 200l 3 2.1 Performance of the Industry 3 2.2 Guyana’s Export Market For Rice 5 2.3 Government Role In The Rice Industry 6 3. ANALYSIS OF THE PREFORMANCE OF THE RICE INDUSTRY 8 4. FINANCIAL CRISIS IN THE RICE INDUSTRY 10 4.1 Implications For The Guyana Economy 11 5. GOVERNMENT’S RESPONSE TO THE CRICIS 12 6. CONCLUSION AND RECOMMENDATIONS 13 APPRENDICES REFERENCES INTRODUCTION 1.1 Overview After thirty-five years of independence, Guyana’s economic base still resembles the structure inherited from its colonial past. Guyana’s agricultural based economy is largely dependent on the exportation of rice, sugar, timber, bauxite and gold for its foreign exchange generation. The manufacturing sector is still in the early stages of development. The Rice Industry is the most important agricultural activity for the private sector, being only second to sugar in importance in terms of foreign exchange earnings. It is also the largest user of agricultural land and employs approximately fourteen percent of nation’s population directly as farmers and millers or indirectly as administrators. Rice contributes in excess of US$80M annually to the economy, 12.5% of export earnings and contributes 20% of the agricultural GDP(. Rice production is a private sector institution. The vast majority of the producers are small-scale farmers with the average size of rice farms being 10 – 20 acres. It is estimated that there are approximately 15,000 farm families that depend on rice for their livelihood. In addition to the farms, there are approximately one hundred and five (105) privately owned rice mills. A few of these millers are also directly involved in rice cultivation. During the years 1992 – 1996 rice production and exports increased dramatically. This was the result of both an expansion of the area cultivated and increases in yield. Producers also received the highest prices ever for their product. Encouraged by the high prices they invested heavily in the form of equity and to a greater extent loans to expand their production, milling and marketing activities. This prosperity was soon eroded by highly variable weather patterns. The industry experienced both drought and floods associated with the El Nino/La Nina phenomenon resulting in a significant fall in the production, exports, foreign exchange earnings and income for the industry. In addition to the unfavorable weather patterns, the industry also experienced difficulties in to their export markets. These include the introduction of safeguard measures restricting the quantity of rice shipped to their main preferential market, the European Union (EU), via the Other Country Territories (OCT) route(; unfair competition from subsidized rice from major rice producing countries in their main CARICOM Market, Jamaica; failing prices for rice on the international market; and some political and economic instability following Guyana’s 1997 National Elections. As a result of these difficulties farmers and millers were unable to service their loans with commercial banks, which had reached a record G$10.6 bln in 1998 as compared with G$882M in 1993. Commercial Banks have instituted legal proceedings against many of these producers. The Courts have ruled in favor of the banks, so the Commercial Banks have foreclosed on the assets of the firms in default. The industry has since been appealing to the for Government intervention to salvage the industry. 1.2 Definition of the Problem Guyana’s Rice Industry is on the brink of collapse. Commercial banks have moved to possess the assets of many of the firms in operating in the industry. The firms have been appealing for Government intervention to save the industry from total collapse. 1.3 Scope of the Project This project will: 1. Examine the Guyana Rice Industry over the last ten (10) years, 1992 – 12001, to determine the reasons for the decline in the sector; 2. Examine the terms and conditions of credit to the sector; 3. Determine the Government of Guyana’s obligation to the industry; and 4. Formulate conclusion and recommendations for reviving the industry. THE GUYANA RICE INDUSTRY, 1992 – 200l 2.1 Performance of the Industry Rice is Guyana’s major crop after sugar and the most important agricultural activity for the Private Sector. Production, milling and marketing are almost inclusively in the hands of the Private Sector. It is estimated that some 15,000 households are involved in production and that directly or indirectly the industry provides employment for an additional 50,000 people. Rice represents a way of life for many of Guyana’s people and has deep roots in the history of the country. During the first four years of the period under review, 1992 – 1996, the industry showed buoyancy. Rice production and export increased dramatically over the 1990’s. This resulted from both an expansion of the area cultivated and increase in yield. By 1996 the area cultivated and harvested had more than doubled. In 1992 approximately 191,000 acres of land were cultivated and harvested, however by 1996 this had increased to 333,517 acres. Yields had also increased from 22.4 bags of paddy per acre to 26.1 bags per acre. Exports rose from 124,189 in 1992 to 262,265 in 1996(. Market conditions and prices for rice and its by-products were also favorable. As shown in Table 1, farmers were receiving in 1992 an average of G$1,000 per bag of paddy sold, however, by 1995 the price had increased to G$1,700. This represented a sixty-five percent (58%) increase in the price of paddy. TABLE 1: Average Prices Received For Paddy (G$ per 140lbs bag), 1992-1996 | |1992 |1993 |1994 |1995 |1996 | |Grade A |1000 |1050 |1380 |1712 |1550 | | B |950 |950 |1280 |1612 |1500 | | C |900 |850 |1180 |1512 |1450 | Source: Guyana Rice Development Board Millers, on the other hand, were also receiving substantial increases for rice and its by-products. In 1992 millers were receiving US$328 per m.t for cargo rice and US$350 for white rice. These prices increased to US$405 and US$394 respectively by 1996, as shown in Table 2. TABLE 2: Prices For Rice And Its By-Products, 1992 – 1996 |Years |1992 |1993 |1994 |1995 |1996 | |Cargo Rice |328 |296 |331 |402 |405 | |White Rice |350 |335 |335 |390 |394 | |Parboiled Rice |- |- |- |- |- | |White Broken |120 |133 |138 |176 |130 | |Cargo Broken |80 |86 |108 |151 |145 | |Rice Chips | |90 |95 |106 |100 | |Rice Bran | |40 |42 |40 |40 | Source: Guyana Rice Development Board Producers were encouraged by the favorable market conditions that prevailed and the high prices they received for their paddy and rice during 1992 – 1996. Farmers expanded their area of cultivation and millers embarked on a programme of upgrading their milling facilities. Both categories of producers borrowed heavily from commercial banks to improved their production capabilities. Given the favorable returns they were enjoying and their ability to repay these loans, the banks were only too willing to facilitate. The industry was granted credit at interest rates of 18 - 19% per annum. While the industry was able to main high levels of production over 1992, the industry began to encounter a number of difficulties from the latter half of 1996. By 2000 producers and their organizations were lobbying government intervention to save the industry from total collapse. During the latter half of 1996 the industry experienced the effects of the El Nino/La Nina weather phenomenon. The autumn crop of 1996 suffered from severe flooding caused by the La Nina weather condition, while El Nino took its toll in 1997. In 1998 exports were severely affected by the industrial strike called by the Guyana Public Service Union(. The strike occurred at a time when exporters were arranging shipments for the Caribbean, European Union (EU) and other markets(. As a result these shipments were delayed and Guyana lost its Haitian market(. On the production side, producers were unable to clear imports with the Customs and Excise Department of the Guyana Revenue Authority. The timely availability of adequate quantities of fertilizers and other inputs adversely affected the acreage cultivated for the Second Crop 1999. In 2000 the industry, once again, was affected by severe flooding resulting from La Nina. This time around both production and exports were severely affected (Appendix I). 2.2 Guyana’s Export Market For Rice The industry is essentially an export-oriented industry. About 70% of the total rice produced is exported. Therefore, much emphasis is placed on servicing these markets. Guyana major export markets are the EU and CARICOM for which it enjoys preferential access(. In addition to these, Guyana’s rice and its by-products are also marketed in the OCT and 19 other countries around the world. Appendix II shows exports as per destination. Under the Lomeʹ IV Agreement rice produced in the Africa Caribbean and Pacific countries (ACP) was given preferential access to the EU market. It allowed for rice produce in the ACP, mainly Guyana and Suriname, to be semi-milled in OCT countries before entering the EU free of duty and quotas8. Rice shipped directly to the EU attracted a 50% levy. However, in 1997 the quantity of rice shipped via the OCT route was restricted to an annual quota of 145,000 tons. The quota was further broken down into three 4 months tranches. The implementation of the restriction on the quota disadvantaged the ACP produces for several reasons. In the case of Guyana the timing of the tranches did not coincide with the harvest and processing season. Rice exported to the CARICOM market, the other preferential market, Guyana benefit from not having to pay the Common External Tariff (CET) which presently stands at 20% for rice. However, the market share in Jamaica is affected by their PL480 allocation from the United States that Jamaica uses to purchase rice. As a result Guyana’s supplies to this market have been significantly reduced. Further, with Suriname joining the Caribbean Community and now benefits from preferential access to this market Guyana’s market share has been further eroded. The FOB price of rice destined for Jamaica is usually one of the best prices that Guyana enjoys internationally. As such, most exporter of rice in Guyana targets this market. In 1999 this resulted in an over supply of rice to the Jamaica market. To sell the full consignment exporters accepted a US$40 per metric ton price reduction. The problems Guyana has been experiencing in its traditional and preferential markets have forced exporters to explore new markets. From 1997 they have successfully secured markets in the Caribbean, Central America, South America Africa and North America. These have since become very important in absorbing Guyana’s rice. It should be noted, however, that some of these markets have become available because of the domestic circumstances in the importing country. Therefore it does not guarantee that that the market would be sustained. In addition to the problems the industry has been experiencing with its preferential markets, the price for rice has declined globally. A review of the international price reveals a reduction of over US$100 per ton between 1998 and 1999. During 2000 local exporters have experienced a reduction of US$30 per tonne in the EU market 2.3 Government Role In The Rice Industry During the 1980s Guyana’s major productive sectors were influenced by government intervention and the rice industry was no exception. The government at the time owned all the rice major rice mills. They dictated what price the millers should purchase paddy from farmers, then in turn purchased all the rice at a predetermined rate from the millers. The Government’s agency then in turn exported the all the rice. In the late 1980s the Government removed the controls and placed the responsibilities of the industry under the purview of the private sector. It divested all of its rice mills leaving only one remaining under Government control. Since the advent of a market led economy, Government’s intervention in the rice industry has been at the level of research and development, extension services, flood control, drainage and irrigation, supportive institutions in the areas of marketing, grading and credit control9. The Government undertakes these responsibilities through the Guyana Rice Development Board (GRDB). The Board established by Government in 1994 to10: i) Develop the rice industry and to promote extension of the export trade; ii) Establish facilities for the conduct of research, relating to rice and extend to farmers through an established system the benefits derived from such research; and iii) Engage in such promotional and development activities that the Board deems necessary for the purpose of developing the industry. ANALYSIS OF THE PREFORMANCE OF THE RICE INDUSTRY While the domestic market is important for the industry, it is however an export-oriented industry since approximately 70% of the rice produced is exported. With the freeing up of the Guyana economy the determination of prices on the domestic market were set by the market forces. These policy changes improved the competitiveness of the market place and gave producers the incentive to invest in the industry. While Guyana has control over the production aspect of the industry it does not have any control in the international market. This is mainly because the volume of exports represents a small fraction of the world rice trade. During the 1992 - 1996 period the industry also enjoy the highest prices for its products on both the domestic and international markets. Millers were paying farmers as much as G$I,700 per 40lbs bag of paddy while they were receiving the approximately US$405 for cargo rice and US$394 for white rice per m.t F.O.B, the highest prices ever, for rice and its by-products on the international market. Developments in the export market have a direct relationship with the actions of the producers in the industry11. Producers were encouraged by the high prices and invested heavily by borrowing from the commercial banks to expand acreage cultivated and upgrade milling facilities. Huge sums were invested in the form of loans, hire purchase and other arrangements, as well as equity were invested to acquire land machinery and equipment for paddy production and rice milling, drying and storage facilities and other capital investment12. These loans were attracted commercial interest rates of 18-19% per annum. By 1996 the industry had incurred in total G$10.6bln in credit13. . Table 3 highlights the status of the Commercial Banks Loans and Advances for Paddy Production and Rice Milling activities for the period 1992 – 2001. TABLE 3: Loans & Advances Disbursed For Paddy Production and Rice Milling 1992 – 2001. |1992 |1993 |1994 |1995 |1996 |1997 |1998 |1999 |2000 |2001 | |Paddy Production |423 |437 |963 |2,263 |6,708 |4,311 |6,140 |5,443 |5,736 |5,478 | |Rice Milling |252 |405 |497 |496 |3,946 |5,097 |5110 |6,098 |5,884 |6,009 | |TOTAL |675 |842 |1,460 |2,759 |10,653 |9,408 |11,250 |11,541 |11,620 |11,487 | | Source: Bank of Guyana, Banking System Statistical Abstract Following prosperity of 1992 -1996 the industry was ill prepared for the difficulties of 1997 – 2000. Despite the floods that affected the 1996 autumn crop, the drought in 1997 and floods of 2000 caused by the El Nino/La Nina weather phenomenon the industry was able to maintain high productivity. However, due to the industrial strike of 1998 the industry suffered a shortfall in the quantity of rice exports and a decline earning. In one instance, in the case of Haiti, the customer filled the order from an alternative source at a cheaper price. Guyana’s sales to this market have since been reduced resulting in a loss in revenue for the industry. In addition to the natural disasters and the industrial strikes the prices for rice and its by-products were falling internationally. As shown in Appendix III, by 2000 the price had fallen to US$232, a price lower than that obtained in 1992. Since the bulk of rice is marketed in preferential markets, the EU and CARICOM, the industry has never achieved true efficiency. Much of the loans borrowed from the commercial banks were poorly managed. During the peak years the foreign exports and the farmers made huge profits while the millers were squeezed in the middle. The millers over competed for the farmer’s paddy thereby causing the prices for paddy to skyrocket. As a consequence a number of millers suffered heavy financial losses. On the cultivation side, farmers invested heavily in machinery and equipment. As a result the industry is now over capitalized. With the crash of the paddy prices the farming community also found themselves in financial difficulties. The advent of falling prices has also changed the entire picture in terms of viability and sustainability of the industry. The gap between cost of production, sales and returns on investment has narrowed to the extent that producers are finding it difficult to generate enough surpluses to adequately service their debts. FINANCIAL CRISIS IN THE RICE INDUSTRY The decline of the Guyana Rice Industry is the results of a combination of factors. These include: i) The introduction of safeguard measures that restrict the quantity of rice shipped to the EU via the OCT route in 1997. Prior to the implementation of these measures exporters made huge profits since the rice entered the EU market both levy and quota free. In order to benefit from the excellent returns on their investment producers borrowed heavily from the commercial banks to expand cultivation and upgrade milling facilities. The average interest rate charged on loans and advances is 18%; ii) Poor weather conditions resulting from the El Nino/La Nina weather phenomenon. During the latter half of the 1990s the industry experienced both drought and floods resulting from these weather phenomenon. In some rice producing areas farmers were unable to plant while in others farmers lost their crop. Millers competed on the local market for the reduced supply of paddy pushing up the price for the paddy; iii) Unfair competition with subsidized rice from major rice producing nations. iv) Industrial Strikes in the Public Sector during 1998 caused delays in shipment of consignments of rice to preferential and other markets. These delays cost the industry to loose its market for that consignment in one instance and a reduction in if quantity for further consignments since the customer had sourced a much cheaper supply; v) Increasing cost of production verses declining World Market prices. The cost of production has constantly increased over the past six years. The cost of fertilizer, fuel, labor, transportation and finance are the main contributor to the cost of production (Appendix). The current situation is one in which producers are heavily indebted to Commercial banks. Producer’s assets are being seized and their operations are being foreclosed or they are on the verge of receivership. Several others cannot generate the required revenues to adequately service their debts and meet financial commitments. The financial crisis in the rice industry is not acute only to the producers. Creditor are also concerned about the sizeable volume of non-performing loans. The Commercial Banks have joined with the Rice Producers Organizations in the appeal for government Intervention to arrest the decline of the industry. 4.1 Implications For The Guyana Economy The Rice Industry is crucial to the national economy and its failure could have significant economic and social consequences. It will result in: i) Significant decrease in the production of rice and higher prices for the staple on the domestic market; ii) Reduced in foreign exchange earnings for the economy; iii) Massive unemployment in the agriculture and rural sectors; iv) Increase in rural poverty; v) Reduced demand for goods and services in other commercial sectors; vi) Increased pressure on the welfare sector of the economy; and vii) Slowing down of the economic growth of the economy. 5. GOVERNMENT’S RESPONSE TO THE CRICIS In 2001 the President of Guyana appointed a Rice Committee to address the problems of the indebtedness of the Industry and to make specific recommendations14. After several meetings with the Association of Bankers, Input Suppliers and the Office of the President a 10-point proposal, known as the White Paper, was submitted for consideration15. The White Paper included proposals for the Government to: • Take over 75% of the industry’s debt; • Launch a foreign trade initiative to examine the role of the EU in the deterioration of the Guyana Rice Industry; • Examine the operations of the PL480 plan which uses US produced rice to support the Jamaican programme; • Provide short-term relief in the form of tax concessions on inputs and spares for the industry; • Assume a more active role in market negotiations. The Government response to these proposals has so far been “piece meal”. It has however, made it clear that there will be no bail out of Commercial Banks for bad lending. Instead it was considering some relief for the small farmers who were in difficulties as a result of their indebtedness to the banking sector. At a press conference held to address this issue the President stated categorically “that he was more sympathetic towards the small farmers and that if the portfolio of the loans was dissected it would be found that most of the debt resides with the ten top borrowers in the rice sector”. The “top ten” has the protection of limited liability since their operations are incorporated. The Government has since negotiated the rescheduling G$3.7B of rice debt. However, as the President reiterated, only the small farmers would benefit from this short-term measure. The Government in consultation with the Rice Committee agreed to reschedule the debt of those producers whose indebtedness is no more than G$10M. The Government has given its commitment to continue working with the Committee to effect further measures to save the industry. 6. CONCLUSION AND RECOMMENDATIONS In addition to declining market share, poor weather conditions, the industrial strikes and falling prices for rice on the world market, poor management of the Industry’s resources also played a critical role in the decline and the state of indebtedness of the Industry. Producers invested heavily in the Industry without any clear knowledge of profit maximization positions of their firms. Further, they focused primarily on meeting the demands of the preferential markets without making adequate preparation for the impart of a possible decline of these markets and to effectively compete in the international market. Guyana needs to position itself to benefit from a regime of free trade that is expected to dominate this decade. Producers must reduce cost of production and improve the quality of the industry’s output. In order to remain internationally competitive efficiency and productivity must also be a priority. Given the above conclusions it is therefore recommended that: 1) The Government In Act a one stop developmental financial institution that would provide credit at lower interest rates, guidance and monitoring for entrepreneurial initiatives in the agriculture sector. These facilities can also be extended to the forestry, mining and manufacturing sectors; 2) Government consider extending tax concessions, as far as is practical, over the next 5 years to allow the industry to recover form its state of decline, and at the same time explore with producers ways of lowering cost of production in order for them to compete favorably in the international market for rice. Since the cost of paddy accounts for 70-75% of the cost of producing rice special attention should be given to this aspect of production; 3) Government and Rice Organizations should focus on increasing market share in existing markets and expanding into new markets in the Caribbean and the rest of the world; 4) Producers take steps to improve the quality of rice produced and to deliver this product to the customer on schedule in a hassle-free environment; REFERENCE Anyadike-Danes, M. (Ed), 1995, Business Government and Society: Caribbean Writings on Caribbean Issues, Pronto marketing & Printing Brokers Co. Ltd., Barbados. Bank of Guyana, Annual Report and Statements of Accounts, 992 – 2001. Bank of Guyana, Quarterly Statistical Bulletin, 1992 - 2001 DeGroot, P., 1999, The Outlook for the Rice Industry in Guyana and the Caribbean Region. Government of Guyana, National Budget Speech, 1993 - 2001 Government of Guyana, 2001, National Development Strategy: Chapter 26. The Guyana Rice Development Board, Rice News: A Quarterly News Letter, 1995 - 2001 Guyana Rice Millers & Exporters Development Association Ltd., Annual Report, 1992 – 2001. Guyana Rice Millers & Exporters Development Association Ltd., 2000, The EU Market. Guyana Rice Millers & Exporters Development Association Ltd., 1997, The Guyana Rice Industry: Performance and prospects. Guyana Rice Millers & Exporters Development Association Ltd., 2000, The Impact of Globalization on Guyana’s Rice Industry. Guyana Rice Millers & Exporters Development Association Ltd., 1999, The Impact of the Problems in the International Market & The Recent Industrial Strike on The Rice Industry. Sankar, B., 1996, The Regional Rice Industry – Policies & Priorities & Agenda. ( Bank of Guyana Half Year Statistical Bulletin, (June 2000). ( An OCT country is a former European colony that still maintains a significant relationship with that European country. These countries in the Caribbean include Montserrat, Curacao, Bonair, Turks & Caicos, etc. ( Guyana Rice Millers and Exporters Development Association Ltd., Annual Report 2000/2001. ( The Industrial Strike lasted fifty-seven days. Government agencies such as the Customs and Excise Department of the Guyana Revenue Authority had participated in the strike action. ( GRMEDA, The impact of the Problems In The International Market and the Recent Industrial Strike on the Rice Industry, (July 1999): 10. ( A major customer in Haiti could not wait for supplies from Guyana since the market was desperately in need of rice. Haiti sourced the much need rice from Argentina at a cheaper price. ( Guyana’s major markets within CARICOM are Jamaica and Trinidad & Tobago. Jamaica is the single largest market for rice, being surpassed only by the EU as a whole. 8 This became know as the OCT route. 9 Through the Rice Development Board Act of 1994 that established the Rice Development Board and entrusted all Government’s responsibilities, as stated above, for the rice sector therein. 10 Act No. 15 of 1994: Guyana Rice Development Board Act 1994. 11 GRMEDA, The Impact of the problems in the International Market and the Recent Industrial Strike on the Rice Industry, (July 1999): 3-4 12 GRMEDA, The Impact of the problems in the International Market and the Recent Industrial Strike on the Rice Industry, (July 1999): 4. 13 It should be noted that some of the millers were recipients of capital loans prior to 1992 under the IDB 154 and other programmes 14 Two years earlier a Committee was formed by the Minister of Agriculture to identify the problems of the industry and to make proposals for their resolution. A submission was made to the Minister but no positive action was taken, 15 GRMEDA, Annual Report 2000/2001; 8.