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The rice business

Lack of understanding of the rice industry as a business. Many researchers have little appreciation of the rice industry as a business. It has been shown that the consumers have their preferences, which the processors seek to satisfy. The farm production sector supplies the raw material to the processors. This supply and demand system is however often distorted by political policy. The consumers demand a steady supply of good quality rice products at reasonable prices, the farmers want the highest prices for their harvest, and the processors and traders have to make a living in between. Meanwhile the government's policy is to import cheap rice for consumers, maintain a high local farm gate price for paddy, and leave the processing sector to the market forces. This uncertainty provides little incentive for the private entrepreneurs to invest in more efficient processing technologies. Big business has shied away from the rice processing business in countries like the Philippines, and therefore public sector research has to provide the small entrepreneurs with the technology.

Opportunities in the rice business. To illustrate the rice business, let us analyze the case of a typical Filipino rice farmer and private sector processing enterprise.

Rice farms in the Philippines are covered by the agrarian reform law, and the law has effectively dismantled the feudal landlord and tenant relationship, where the landlord owns the land and the farmer is a sharecropper. The average land holding is about 3 hectares, and the average scale of rice farming for most of Southeast Asia.

The farm gate price of freshly harvested wet paddy ranges from $0.17 per kilo to $0.31 per kg depending supply and demand of rice in the market. Paddy pricing is very speculative, and when business intelligence indicates a shortage, prices of paddy at harvest shoot up. The farm yields of farmers also varies widely, but a farmer planting the high yielding variety and following recommended practice can easily produce 4 tons per hectare. The gross value of his production at an assumed $0.21/kg is therefore (4 tons/ha x 3 ha. x $0.21/kg x 1000) $2520. It is estimated that it costs the farmer $359 per hectare to grow rice, or $1077 for the 3 hectares. The farmer therefore nets $1443 in a cropping season of 4 months.

A local trader assembles the harvest of farmers in an area and delivers the same to the processor. For his effort, the trader charges $0.013 per kg, or $156 for the 12 tons of paddy. The price therefore of wet and dirty paddy delivered to the processor increases to $0.223 per kg, or $2676. The average moisture of wet paddy during the wet season is 24% wb and has a purity of 95%. A kilogram of paddy at 24% wb weighs 0.868 kg at 14% wb after removing the 5% impurities, there is only 0.825 kg of clean and dry paddy out of one ton wet paddy. The effective price of paddy to the processor is therefore ($0.223/0.825) or $0.27 per kg of clean and dry paddy. On the average a good commercial mill working with good HYV paddy will yield 65% rice of which 80% is head rice, 17% is brokers, 8% is rice bran, and the remainder is the hull.

From 0.825 ton of clean and dry paddy, a miller will yield 536 kg of ungraded milled rice, and 66 kg of bran. The average wholesale price of HYV ungraded rice is estimated at $0.46 per kg. Rice bran sells at $0.09 per kg. Rice hull has no commercial value, although some processors use it as a source of thermal energy. The processor therefore grosses (536 kg x 0.46) + (66 kg x 0.09) or $252.50 per ton of paddy bought. If he bought all of the 12 tons of the farmer, he makes gross of $3030. The cost of paddy was $0.223 per kg., $223 per ton, or for the 12 tons $2676. Add to this the cost of processing and marketing estimated at $0.025 per kg of paddy bought, or $25 per ton of paddy bought, or $300 for the 12 tons of paddy. The processors' net before taxes is therefore (252.50 - 223 - 25) or $4.50 per ton of paddy bought, or $54 for the 12 tons.

A small processor with a 1 ton per hour mill, operating 8 hours a day for 200 days a year can process 1600 tons of paddy. His net sale if he operates at 100% capacity on an 8 hour day, would therefore be $7,200. Many mills operate 12 hours daily.

Shares in the Value of the Processed Milled Rice. Another way of viewing the rice business is to look at the shares of the different players. Using the farmers 3 hectare farm as base where he harvest 4 tons per hectare, or 12 tons of paddy, the ex-plant value of the rice is shared as follows.



Farm gate value of harvest



Cost of Farm Production



Net to Farmer



Traders' Fee (Cost of Paddy to Processor, $2676.00)


5.1 %

Cost of Processing/Marketing



Processor's Net






The farmer gets 47.6% of the processed value of his harvest while the processor only gets 1.8% of the market value of the farmer's harvest. The farmer's income is limited by the size of his land holding while the processor's income is limited only by his plant's capacity, and his capital to buy paddy. The 12 tons is only 0.75% of his 1600 tons processing capacity. Note that the cost of processing was based on the plant operating at 100% capacity, single shift.

Farmer based Processing and Marketing Cooperatives. Farmer groups are encouraged by many governments to form cooperatives to engage in rice processing and trading. The idea is that farmers benefit from the profits of value added activities. Some countries have succeeded with cooperatives where others have failed. Some of the difficulties relate to appropriateness of technologies used, organization, and management of resources. The lack of technical and financial systems and procedures to safeguard against a conflict of interest between the farmers and their enterprise has been a primary cause of business failure.

If the 3-hectare farmer was member of a cooperative engaged in processing and marketing, and he delivered all his harvest to his Coop, he would get a rebate of 1.8% of the ex-plant value of his harvest. Not much for all his trouble. From a Coop Plant Manager's perspective, to operate a 1 ton per hour plant, and assuming a farmer's a marketable surplus is 30% of his harvest, the plant has to obtain his 1600 tons from 445 farmers, or a farming area of 1 335 hectares.

V. Balasubramanian (IRRI) says that cooperatives should be based clearly on needs expressed by members and should be managed by professionally trained people. He feels very strongly that failure of cooperatives in many countries is due to faulty financial management and political interference. He suggests that farmers participate in a cooperative venture using "units of riceland" as equity pledged to the cooperative. Farmers are offered a number of landshares depending on the extent of their riceland. Farmer shareholders work in the cooperative in different capacities depending on their qualification and experience, and they are paid as workers. Profits are shared based on the number of landshares. Farmers may sell or transfer their landshares as they wish to fulfill their social obligations. The cooperative is to managed by professional managers and engineers. Such concepts or their variations are being explored in the Philippines.

An integrated production post-production system. There are efficiencies that can be attained with a market oriented, and integrated post-production system. Fragmented farms are consolidated under a single management, where the farmers are guaranteed an income no less than what they get as independent farmers. Farm production can be mechanized, and scheduled to enable the associated processing complex to have a steady supply of raw material whose quality is assured. The market's preference and demand can be met. Under such a scheme, the management group provides the financing and the technology.

Consumer Market Orientation. Different consumer groupings depending on their economic status have their distinct preferences. In the Philippines, for example, where the high yielding varieties dominate in the market, it has been found that restaurants prefer the fluffy grains, and the rural consumers prefer the more sticky varieties. Fluffiness or stickiness depends on amylose content, and consumers associate this trait with rice. The Philippine rice consumers' quality criteria in order of importance are variety, purity, whiteness of polish, extent of broken grains, and presence of contaminants such as paddy seeds, weed seeds, stones, and yellow grains. There exits a set of official grades and standards, but the trade follows more informal and subjective guidelines. In the export trade, buyers set their own specifications based on their market. Prices are diverse depending on the quality of the milled rice. In the Philippines for example, the National Food Authority's imported rice for mass distribution is priced at $0.39 per kg, and the premium grade intended for the higher end market is priced at $0.51 per kg. Packaged, and graded rice for the class-A markets is priced in the supermarkets at $0.77 kg. With this price spread, It should pay to produce the highest quality rice.

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