A measure of marketing price transmission in the Red Onion Market of Sri Lanka
Abstract
In the past there were several protectionist trade policies to safeguard the local onion production. This study examines their impact by means of nominal and effective protection rates and competiveness in resource utilization by competitiveness coefficient. There is a long-run co-integration relationship between the farm and the retail prices marketing margin resulting from this long-run relationship cause asymmetric short-run dynamic adjustments between the farm and the retail prices Welfare distribution among stakeholders is measured by classical welfare analysis. The analysis indicates that both big and red onion producers are noticeably protected by the trade policies and receive returns greater than they would get under a free market condition. Trade policies benefit consumers over producers. Gains to the nation are substantial.
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Introduction
Sri Lanka imports annually about 34,000 metric tons (mt) (DCS, 2009) of large onion valued at approximately Rs.300 million. If the country is to be self sufficient in onions, local production must be increased by about 400 percent. Cultivation of the crop, which has specific environmental requirements, is presently restricted to a few agro-ecological regions of the dry zone. It should be possible, however to cultivate adapted varieties, fertilizer and water management.
Onion is a vital spice crop in Sri Lankan economy. Tw o types of onion are grown and consumed in Sri Lanka: the big onion (Allium cepa L.) and shallot called red onion ( A. cepa var. ascalonium), which are close substitutes in local cuisine. Sri Lanka is near self-sufficient in red onion, importing only 10 % of the requirement. However, about 70 % of big onion requirement in imported at a cost of around Rs. 6 billion. Government, is therefore striving to achieve self-sufficiency in big onion by year 2015. Thus, onion production is under continuous surveillance and, protectionist trade policies are continuously modified and implemented to promote and safeguard the local cultivation. Sri Lanka grows big onions only seasonally and harvests 90% of its local production in the months August to October, before the October rains. Therefore, in order to help the local onion producer, the government slaps an import levy in usual practice to avoid oversupply.
Big onion is an important cash crop cultivated in Sri Lanka. Local production of big onion, which is approximately 81,707 MT per year, is not sufficient to meet the annual demand of big onion approximately 203,993 MT per year (DCS, 2009). Unavailability of good quality seeds of recommended varieties in adequate quantities is considered as the main constraint for increasing production of big onion in Sri Lanka (Mettananda, 2006). Furthermore, the quality of the imported big onion true seeds is not up to sta ndard as they reach the country through illegal routes due to export restrictions in India (Edirimanna, 2003). Poor germination and blubbing, high thick neck percentage and low yield are characteristic to such seeds (Edirimanna and Rajapakshe, 2003)
Conclusion
The purpose of this study is to examine the relationship between the farm and the retail prices in the Sri Lankan red onion market. We established three hypotheses and obtained several important empirical findings. Firstly, there is a long-run cointegration relationship between the farm and the retail prices. Secondly, the marketing margin resulting from this long-run relationship may cause short-run dynamic adjustments between the farm and the retail prices, which results in the asymmetric causality.
This implies that the marketing margin is an important factor when analyzing the causality in the farm and the retail markets . Because of this, we constructed a nonlinear threshold model to fully understand the effect of the marketing margin. Thirdly, when the marketing margin is low, the market operates freely; when the marketing margin is high, the government makes necessary interventions in the market to prevent excessive rises in the rice prices. When intervention occurs, the market system no longer operates.