What is Ailing Farmer Companies of Sri Lanka in their
Transformation into Successful Business Entities? : Over view of
Policy Issues
M.S. Senanayake1
Senior Scholar, Huazhong University of Science & Techonology,
Wuhan, 430074, P.R. China.

Abstract
The formation of Farmer Companies (FC) is a strategy adapted by government totransform traditional small holder farming into commercialized businessventures. These companies are expected to address major problems faced by farmers in
the procurement of inputs, obtaining of technology, value addition to their products, andmarketing. They are also expected to demonstrate capacity to adjust to the forces of free
trade in the market economy with forward contracts generating resources to invest on
farmlands with prudent management practices. Over the past few years roles of FCs
appear to be limited only providing farm inputs rather than implementing
comprehensive business program. This paper investigates into this area in relation torelated policy issues and constraints and suggests several remedial measures to turnthem into fully fledged business entities.

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The author is grateful to Prof.Xu, Dean, Prof. Pei-Kang Chang and Prof. Peng Daiyang , School of
Economics, HUST, Wuhan, 430074 P R China, for their valuable comments on this article

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What is Ailing Farmer Companies in Their Transformation into
Successful Business Entities?
Introduction

The world economies are moving ahead with new strategies, infusing dynamism into all
spheres of production, marketing, distribution, transferring of technologies with the aidof information technologies. The Sri Lankan agriculture is yet to take advantage of thisglobalization process. It is necessary to make policy, structural and institutional
reforms in the agriculture sector to transform it into a commercialized sector. Withliberal economic policy reforms introduced in the past two decades and globalization
effects, the non-plantation agriculture sector faces many challenges today. These aremainly related to commercialization and diversification of agriculture. Here farmer
companies were introduced as a strategy to transform volunteer farmer organizations into business firms. Therefore, an attempt has made in this article to review the role of
Farmer Companies (FC) in the process of transforming small farmers from subsistence
farming into commercial farming.
Crisis in the Small Holder Sector
Presently, the agriculture sector plays an important role in the economy of Sri Lanka bycontributing 19.4% to the GDP, providing employment for about 32% of the active
population in the labor force and also 19% of gross exports in 2001(Central Bank 2002).
However the World Bank categorized Sri Lanka as a middle-income developing country,
within a per capita income of 899 US $ in year 2000. The total population of the country
is 18.7 million as estimated in 2001. Nevertheless, agriculture has become the main
source of livelihood for the rural population, which accounts for nearly 70% of the
population.
Sri Lankan agriculture sector has two sub-sectors namely plantation sector anddomestic food crop sector alternatively referred to as the non-plantation sector. Paddy is
the major crop produced by farmers in the domestic sector. In addition, pulses, coarse
grains, roots and tubers, chilies, onions, vegetables etc. produced for mainly domestic
consumption, but marketing of surplus production by farmers is a common feature.
Since gaining independence in 1948 and even before, successive governments of Sri
Lanka have made policies and strategies for the development of small-scale agriculture,
but the results achieved have not been in proportion to the effort put in. In spite ofthese development activities and investments, this sector has come to a critical stage
with no visible signs of improvements and has lost its momentum over the last 10-15
years (NDC, 1996). This is reflected from the key indicators such as low crop
productivity and out-put, low intensity of use of irrigation lands, low farm family income
and poor employment generation, low adoption of farm technologies
particularly by small farmers. Moreover the prices of all major inputs, (labor, machinery,
fertilizer, chemicals etc.) have increased by several fold resulting in a sharp increase in a
production cost of farm inputs (HARTI, 1998).
The farm gate prices of agricultural commodities produced by small farmers have not2

kept pace with rising cost of production and this has adversely affected the gradualerosion of net profits associated with farm enterprises. The frequent price fluctuations ofmost domestically produced commodities leads to wide income variations anduncertainties among producers. Therefore modern agriculture management does notproperly contribute to the country’s economic growth, protection of natural environment
and in the improvement of the standard of living among millions of small farmers. Thus
the agriculture sector has become the ‘leading but lagging’ sector of the economy in Sri
Lanka. Hence the search for policy alternatives began in earnest.
The Needs for Farmer Companies]
In the agricultural policy recommendations formulated by the National Development
Council has stated that within the open economic transformation process, to attract
Foreign Direct Investment (FDI) and new technologies, there should be a “oneorganization structure” to facilitate the whole process of investments in the agricultural
sector by building partnerships, join ventures with the foreign investors, adopting
existing incentive packages designed by the Board of Investments (BOI). Thisinstitutional framework should facilitate to get the ISO standards for the future export
agricultural products (eg. green or organic products) and encourage to build contract
farming initiatives to avert the risk of both exporters’ and farmers’ in theprocess. Further, this institution can be used to formulate policies to gain benefits
under the ‘green box’ policies of GATT/Uruguay Round negotiations. The formulation ofmulti sectoral complimentary agricultural policies should encourage land saving
technologies such as green houses and poly tunnels. It is also a measure for minimizing
agricultural externalities and encourages competition through a regulatory framework.
The policy package also recommended establishing a National Farmer Company as analternative marketing source with a limited liability structure enabling farmers’
involvement in purchasing and marketing of all agricultural commodities on acompetitive basis. (NDC, 1996).
The Ministry of Agriculture and Lands has accepted the formation and strengthening ofFarmer Companies in all districts under its “New Agricultural Policy” recognizing theviability of these companies in the transformation of traditional, small farm agriculture
into commercialized profitable economic ventures (Ministry of Agriculture and Lands,
2000, Jayaratne, 2000). Farmer Companies expected to form strong economic
organizations of the farming community to enter into partnerships with the business
community as two strong groups of the private sector involved in commercial agriculture.
These companies are also expected to address the major problems faced by farmers in
the procurement of inputs, obtaining technology, value addition to their products andmarketing. They are also expected to demonstrate capacity to adjust to the forces of free
trade in a market economy by selecting appropriate crops to produce for markets on
forward contracts, generating resources to invest on fragmented, water-short farmlands
by prudent management practices profitably.
The basic structure of the FCs were based on two pilot projects started by theInternational Water Management Institute (IWMI) in 1994 under Shared Control of
Natural Resource Project (SCOR) in Huruluwewa and Nilwala River basin areas.
The idea of Farmer Company was emphasized due to several factors.
1.
Farmer Company will find solutions for market manipulation and exploitative
behavior of private traders.

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2.
It will bring investment to farm lands by mobilizing technology and productive
resources.
3.
To give human face to open economy this was the main political slogan in 1996
election.
4.
Farmers will become shareholders of farmer companies and creates dignity of laborby moving towards dynamic production activities.
5.
Farmer Company will allow better gender relations for women with equal
distribution of shares of farmer companies (Batuwitage, 2000).
Under new agricultural policies introduced in 1996, FCs were considered as the main
institutional strategy of agriculture and irrigation development. Thus, FCs were
established in major and some minor irrigation schemes by the Irrigation Management
Division (IMD), Department of Agrarian Service, Agricultural Development Authority
and Mahaweli Development Board. At present about 85 farmer companies arefunctioning throughout the country.
Process of establishing FCs“The Farmer Company in Sri Lanka is defined as a commercialized public/ private
business firm run by farmers which is organized, managed and funded corporately by
farmer share holders themselves to provide and promote specialized technical andeconomic services and act as a legal business entity to do various businessactivities/services related to those areas for making profits.” (Senanayake 2002).
The concept of “Farmer Company” or “Peoples’ Company” is a quite new concept for thesmallholder farming sector of the country. The SCOR Project (Shared Control of Natural
Resources Project) implemented by the IWMI in collaboration with the Government of
Sri Lanka, under the sponsorship of the United State Agency for International
Development (USAID). The aim was to initiate for the first time a program to test theFarmer Company formation and operation as an organizational mode to ensure theactive participation of the small farmers in the market economy with the experiences
gained from the models developed and tested in the two pilot watersheds of Huruluwewa
and Nilwala by the SCOR.
Like formation of private business firms, establishment of FCs is not an easy task.
According to past experience of SCOR pilot project, five major stages have to be followedin the process of establishing FCs (Wijeratna, 2000).
1. Venture seeking stage,
2. Company formalizing stage,
3. Market link building /expanding stage,
4. (strategic) Planning for long-term sustainability,
5. Sustainable business operations (high degree of autonomy and self-reliance)
The structure of the FC consisted of three partners such as shareholders, board of
directors, and body of management. Number of shareholders depend on the amount ofshares issued and the board of directors select from shareholders. The body ofmanagement consists of professionals recruited by the company. The board of directors
functions as the chief executive body of the company.

4Role of Farmer Companies
Although the role and functions of farmer companies cannot be easily documented, allfarmer companies have deliberately attempted to achieve one coherent objective oforganizing small farmers for commercial agriculture and facilitate them by providing
inputs, technology and services so as to compete in local and international markets.
However it is noted that role of farmer companies depends mainly on the needs andpriorities of farmers in particular areas where companies are established.
According to experience of pilot projects and performance of ongoing farmer companies,
the role of farmer companies could be summarized under the following activities;
1.
Produce to market: Encourage farmer to produce demand driven high value
products. Thus, some FCs engaged in demand driven high quality rice varieties,
chillies and potatoes.
2.
Input supply: Many FCs involve in selling good quality fertilizer and agrochemicals at low interest rates. Thus, shareholders or member farmers get discounted
price lower than the market price.
3.
Partnerships with the organized private sector: FCs maintains regular contacts
with organized private sector to find out market opportunities. Thus many companies
made contacts with companies involved in various kind of export processing and sellingin advance.
4.
Credit supply: Many FCs provide credit facilities to members at low interest rates
and credit in kind.
5.
Mobilizing investment: Raised company capital from equity shares to member
farmers and from funds provided by the government and stakeholders. Minimum valueof each company share is Rs.10/= and it varies up to Rs.15/=. Each member shouldpurchase at least 10-100 shares.
6.
Maintain Credit worthiness: Since many FCs receive loans from commercial banks,most of the loans should be settled on time.
7.
Providing Technology: Many FCs involve in providing new technologies to improve
production efficiency of farmers. It includes provision of market information to shareholders; training share holders and members on new techniques of production; conduct
demonstrations on new high yielding varieties; and introduce low cost cultivation
methods and farming practices.
8.
Product diversification: Since product diversification is one of the most importantfactor in commercial agriculture, many FCs involve in diversifying production byintroducing value added products and high value crops.
9.
Business management: All FCs should initiate program to promote small andmedium farmers / producers for Agri-business. However, some FCs were unable toinitiate or forward business contacts due to lack of experts for marketing and businessdevelopment.
Constraints
According to past performance, role of many FCs were limited to provide production
inputs rather than implementing a comprehensive business program with a clear
vision. Many FCs have been formed without proper assessment of market opportunities
and potential products. Causes for this situation could be summarized as follows:1.
Political influences: Even though FCs were formed by government organizations,they are dominated by the politicians. Some FCs were formed by the politicians.
2.
Low participation of member farmers: It is seen that many share holders are not5actively involved in decision making, planning and program implementation.
3.
Lack of entrepreneur skills: Management of many FCs consist of political
appointees and they are not trained to bear the risk of business in order to compete withprivate sector.
4.
Lack of coordination among stakeholders: Even though, establishment of FCs is agrouping of traders, officers and farmers, these parties are not actively involved inbusiness activities.
5.
No systematic approach: Many FCs have not followed the process of establishingFCs discussed and consequently they are faced with immense difficulties in
implementing business plans.
6.
The needs and priorities: Though the establishment of FCs should based on needs
and priorities of farmers, many FCs are based on priorities of officers and implementing
agencies.
Conclusions and Recommendations
According to performance of FCs in the past 7 years , many FCs have not reached theoverall objective of organizing small farmers for commercial agriculture as anticipatedby policy makers. Still many FCs act as farmer organizations with limited funds ofshareholders. But with such a short period like 7 years, we cannot firmly say that
farmer companies have been successful or not. This has happened mainly due to the factthat officers and politicians act in their interest rather than on the needs and prioritiesof the farming communities. Therefore, we cannot create business ventures unless it
comes from stakeholders of the business. The existing system of establishing of FCs by
the government organizations should be changed. FCs should emerge from farmers andthe role of government should limited to a facilitating role.

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