“Hybrid rice has transformed lives of the farming community in Sindh”
Rice is back in business: Pakistan's rice exports have staged a phenomenal comeback, growing by over one-fourth in first half of ongoing fiscal year. Basmati – pride of Pakistan’s paddy – is also regaining its lost sheen in the global market.
But are the long-term problems faced by the exporting sector resolved? To find out this and more, BR Research sat down with the chairman of Rice Exporters Association of Pakistan (REAP), Shahjahan Malik, in Lahore.
Malik was an investment banker in his past life but has since been associated with the Guard Group of Companies, where he is the Senior Executive at Guard Agricultural Research & Service (Pvt.) Limited.
As part of Guard family, he has an in-depth understanding of the structural challenges endemic to the paddy business. But as young blood, he also brings energy and appreciation for the evolving face of agriculture in Pakistan.
Below are the edited excerpts of the conversation:
BR Research (BRR): Official estimates for 2019-20 kharif season suggest that crop yield has declined. Do you agree?
Shahjahan Malik (SM): Yes. Many places saw pollination failure due to extreme heat. This means that while the crop showed no obvious signs of defect, the rice husks were empty.
Fortunately, underlying trends may help ensure that total output does not decline. One, over the past several years, growers in Sindh’s traditional IRRI areas have been switching over to higher yielding hybrid varieties. And two, acreage in Punjab has exceeded expectations. Together, the two factors indicate that market outlook is stable.
BRR: But is it not correct that Sindh saw successful introduction of Basmati varieties over the last decade?
SM: Yes, but basmati plantation in the province has been very limited, averaging under hundred thousand hectares.
BRR: Does Sindh’s basmati command equal recognition globally as varieties from the traditional Gujranwala belt?
SM: Although the GI (geographical identification) law is yet to be enforced – and it is one of the top priorities on REAP’s agenda – some of Sindh’s basmati growing regions shall be included.
BRR: Does that not risk diluting basmati’s brand equity considering Sindh’s basmati growing regions are not contiguous with the traditional belt that begins from Haryana and Indian Punjab all the way to basmati heartland of Hafizabad and Sialkot on this side of the border?
SM: No, because India has followed a similar strategy. Beginning from Jammu in the north-west to Uttar Pradesh, rice grown in seven states have received GI tagging.
While it is correct that historically basmati has been synonymous with Punjab, the reality is far more nuanced. Over two hundred thousand tons of basmati is exported to EU annually, which has very low aflatoxin tolerance levels. Because of Sindh’s dry climatic conditions, basmati grown in the province has negligible aflatoxin incidence, and is thus best suited for EU market.
BRR: But how exactly will the basmati area be defined under GI law to ensure that Sindh’s basmati does not face restricted market access?
SM: Contrary to popular perception, basmati growing regions need not be contiguous with traditional belt to qualify under the proposed GI law. It must fulfill technical criteria beyond just purity of seed variety (DNA) and germplasm. These include irrigated land and photoperiod sensitivity; that is, hot days and cold nights in summers/cultivation period.
Therefore, Super Basmati is a registered DNA product in EU with duty-free market access. In contrast, while other countries have tried growing basmati using pure seed variety, they have had limited success due to lack of enabling climatic conditions. ‘Texmati’ – short for Texas basmati - is one such experiment, which has failed to gain market traction.
BRR: Are all domestic rice millers also members of REAP?
SM: For years ago, REAP’s mandatory membership condition for rice export was unvalidated. However, 95 percent of total exports are still made by 800+ active REAP members. In addition, domestic industry also includes close to 2,500 shellers – which serve as suppliers to millers.
BRR: Is there any information available on installed rice milling capacity and average utilization levels in the country?
SM: Capacity is not the issue for the industry; even if the output were to grow by hundred percent, domestic mills will be able to process and export most of it easily.
This is because industry dynamics are unlike any other: one, rice processing machinery is not very expensive, and there are no regulatory barriers to entry on setting up of a rice plant. Two, Pakistan’s primary rice exports are non-basmati varieties, which enjoy very high market acceptance.
BRR: Ten years ago, a major chunk of Pakistan’s rice export earnings was accounted for by basmati. What changed?
SM: This transformation came about ten years ago as a result of hybridization. Hybrid rice is a Chinese innovation – based on traditional IRRI-6 varieties - which became very popular here upon introduction. Domestically grown hybrid varieties are also very competitive in export market.
BRR: That the industry could easily process twice the current output levels points to surplus installed capacity. Do you believe the industry would do well if milling capacity were to undergo consolidation? The country – for example – only has 80 sugar milling units, yet many of these have been struggling to remain profitable due to low utilization levels?
SM: The industry dynamics are not comparable. Setting up a rice sheller plant requires no more than Rs 10-20 million investment, in addition to five kanals of real estate. In contrast, sugar milling is a license-controlled business that requires capital expenditure of anywhere between half to two billion rupees.
BRR: Does the 80-20 rule hold viz market share of major players?
SM: Yes, but I can only to the extent of export market. For example, $200 million – or ten percent of total exports are accounted for by the largest player – Garibsons. Similarly, several players such as Matco, Meskay & Femtee, and Guard (among others) each contribute between $50 - $75 million worth of exports.
BRR: Is the market share segmented variety-wise?
SM: There is a bit of both. For example, the largest exporter is mainly concentrated in IRRI - $190 million with remainder earnings from basmati processing. There are also several pure basmati exporters.
BRR: What is the extent of advantage in export markets enjoyed by rice millers of Sindh viz. proximity to seaport?
SM: Ninety-nine percent of the credit goes to the hybrid revolution. Not only does it have twice the yield of traditional IRRI varieties, it is also most suited for Sindh’s agro-climatic conditions. The market is very price competitive; few Punjab-based IRRI millers can manage to export the variety, as they immediately get priced out because the margin is no more than $5 per ton, which is not at all sufficient to cover transportation cost.
BRR: Between FY11 and FY17, basmati export volumes declined to less than half, even as both area and production of basmati grew by over 40 percent. Surely, basmati’s decline in export market cannot be attributed to success of hybrid rice.
SM: That’s correct. Basmati export volumes over the past five years have been struggling due to increasing competition from across the border. Research and development in India is very high; ten years ago, it introduced a variety called 1121, which today commands eighty percent share in international basmati trade.
Global basmati market size is close to four million tons per annum, of which 3.2 million tons is commanded by India, while the remainder is exported from Pakistan. Of the total pie, three million tons is 1121 variety, which did not even exist ten years ago.
Over the past four years, Pakistani growers have been able to import this variety and plant it on a commercial scale. But the country continues to lag on the curve. For example, India has already managed to successfully commercialize new varieties such as 1401 and 1509. Pakistani growers are forced to smuggle varieties across the fence, which is no way to survive in a competitive export market. Thus, R&D is key.
BRR: In the case of other crops such as cotton and maize, major resistance has been seen by regulators in allowing immediate commercialization of imported varieties without national trials. What is the status of varieties imported from India from irregular channel?
SM: When 80 percent of export market is dominated by 1121, what exactly can the regulator do stop commercialization? Specially, when the failure to invest in R&D also lays with government research institutes that have the carte blanche to license seed varieties. Of course, to save face, they rename these varieties. But that’s as far as they can go without further hurting export growth prospects.
BRR: Does that mean the role of government has been supportive, at least so far as retrospective approvals are concerned?
SM: Not exactly. In the past thirty years, most of the R&D in domestic rice varieties has come from private sector. Whether it is hybrid rice or super basmati, most of the successful innovation have been made by REAP members. Government research institutes – to put it kindly - have only made modest progress. In fact, private sector R&D faces competition from government research institutes, as hindrances are often created in approval of new varieties in the race for credit.
BRR: But government seed organizations champion the noble cause of distributing improved varieties to growers.
SM: Yes. By distributing the low-yielding varieties developed/patented by government backed research institutes. For example, the Kala Shah Kaku Research Institutes sits on the board of Punjab Seed Corporation, which in turn often refuses to give approval to varieties developed by private sector.
BRR: Is lack of IP protection holding back investment in R&D?
SM: The government has come up with Plant Breeders’ Rights Act, but ground realities are not very promising so far as successful enforcement is concerned. In the case of hybrid rice, the problem takes care of itself; growers cannot save the seeds and must buy fresh batch every year from the seed company.
In the case of open-pollinated varieties, the incentive is very low. Once the variety is successfully commercialized, anyone can copy it. This was the case for Super basmati as well.
BRR: As an environmentally-aware entrepreneur, how would you comment on increasing acreage under rice in water-scarce Sindh, especially the southern Sindh belt where salinity levels are already high?
SM: The one-word answer is: hybrid rice. It marks a watershed moment in transfer of crop-technology from China to Pakistan. The variety is drought-, heat- and salinity-resistant; and has had a substantive impact not only in terms of crop output but also as a force of socio-economic transformation for poor farmers of Sindh. Overnight, it has increased farming incomes by a factor of two and three times. In fact, we were awarded Sitara-e-Imtiaz for its commercialization.
BRR: It has repeatedly been noted that post-harvest losses are very high for domestic rice because non-customized wheat harvesters are used for paddy as well. However, rice harvesters appear uneconomical for a crop largely dependent on subsistence farming. Is there a business case for commercialization of rice harvesters?
SM: Rice harvesters have been successful in countries which two to three rice crops in a year, such as Vietnam, Thailand and Myanmar. Because Pakistan’s rice crop is primarily irrigation dependent, we cannot afford intensive multi-season rice cropping.
REAP has made several presentations to Advisor to PM on Commerce, arguing for an incentive program for commercialization of rice harvesters. Our estimate suggests that at an average 60-70 days harvest period, combine harvesters can add 365 thousand tons of output that would translate into incremental exports of $130-$140 million per annum.
Rice exporting sector has so far fared well with limited government support or intervention. However, it must be appreciated that any service-oriented firm in the rice harvester business cannot survive with some level of initial support because rice harvesters are capital intensive and will stand idle for the remainder three-hundred days of the year. That will, in effect, increase cost of harvesting for the grower, which will in turn hurt competitiveness of domestic rice in export market.
BRR: Pakistan’s rice exports – including basmati – are highly commoditized. Is there any value-proposition to be found in investing in brand development, and whether the same can command a higher unit price internationally?
SM: Traditional family-run business mindset has held back investment in brand development, which hurts our ability to command a brand premium. Subcontinent-based traders from Dubai and elsewhere are already doing this – importing commoditized rice from Pakistan, repackaging and rebranding it, and exporting onwards to EU and North America for a higher unit price.
There are no Pakistan-specific challenges in creating brands; traditional domestic investors have a penchant for instant returns, which means little attention has been paid to branding. Commoditized trading also allows offloading huge volumes to major buyers such as governments in Middle East, thus serves as an excuse.
I strongly believe that if Pakistan’s rice exporting sector invests in R&D and brand development – and is provided enabling environment by the regulators for the same – our potential to increase rice exports can be transformative.