Sri Lanka’s agricultural sector employs 25% of the country’s workforce, yet contributes only approximately 8% to the national GDP, facing many significant inefficiencies within the value chain. Price volatility and value leakage are driven by a disintegrated midstream, among other gaps.
In an interview with The Sunday Morning Business, Agribusiness and Value Chain Specialist and Consultant at the International Fund for Agricultural Development (IFAD) and Asian Development Bank (ADB) Nilushana Sooriyaarachchi highlighted the potential for value chain upgrading through more market-driven farming models, risk-sharing financial mechanisms, stronger policy implementation, and integrated producer-public-private partnerships.
Following are excerpts:
How do you view Sri Lanka’s current agricultural value chain and market coordination, especially when it comes to the intermediary segment?
A value chain consists of three main segments, which are upstream, midstream, and downstream. The upstream segment includes farmers; the midstream covers intermediaries, aggregators, collection, storage, and logistics; and the downstream segment includes processing and activities closer to the consumer, such as marketing.
In the Sri Lankan context, while this value chain is commercially significant, its structure remains highly fragmented. While the necessary actors are there, they mostly operate in isolation. This lack of coordination and partnership is especially visible in the midstream.
On the supply side, production is dominated by smallholders, who make up nearly 80% of our output. These farmers operate on a very small scale, with average landholdings being mostly less than one hectare. While productivity can be high in certain areas, the overall scenario is uneven and impacted by weak post-harvest practices. Meanwhile, the demand side is becoming increasingly differentiated and requires high standards of quality, consistency, and traceability.
Thus, the key challenge is the disconnect between these segments. Farmers have actually improved significantly by adopting better inputs (seeds, fertilisers) and micro-irrigation systems, although these are mostly confined to small pockets.
The midstream actors however, have not kept pace with these upstream developments. As a result, value creation is heavily concentrated downstream, causing a power imbalance.
If we can improve the midstream, we can bridge the gap between production and consumption. Regional economies like Thailand and Vietnam have done this successfully. We still struggle to convert our supply into reliable, market-ready products. Hence, this gap needs deeper focus.
As you mentioned, value leakage is most prevalent in the midstream. Why does this happen at this scale in Sri Lanka?
This is mainly due to post-harvest losses. Statistics indicate that between 20–40% of the harvest is lost, especially in fruit and vegetable chains. These losses take place during harvesting, grading, and packing, and due to gaps in the cold chain. A study by the Department of Agriculture in 2025 valued these losses at approximately Rs. 180 billion for fruits and vegetables alone, which is nearly 500,000 MT of wasted produce.
Inefficient aggregation and transport also contribute heavily to this leakage. Our systems have multiple handling points and many intermediaries. These points are minimised to protect the product in a coordinated value chain. The more hands a product passes through, the higher the risk of damage and the higher the transaction costs. This lack of coordination directly diminishes the final quality of the goods.
Another major factor is information asymmetry. Most farmers cultivate crops without a clear understanding of market demand, which is not properly trickled down to their segment. Without data on required quantities or real-time pricing, they lose their bargaining power.
Additionally, there is a notable absence of primary processing at the rural level. Most production clusters simply aggregate and sell raw goods. If these clusters could move into basic value-addition activities like grading, sorting, and cleaning, they would retain more value at the source.
At present, that potential income is lost to the farmer and captured by others later in the chain. While some small-scale efforts can be seen in Sri Lanka, they are too isolated to make a broad impact. Thus, addressing post-harvest loss, transport efficiency, information gaps, and localised processing is essential moving forward.
Which aspects in Sri Lanka have the best potential for value chain upgrading, especially when it comes to the export market?
Sri Lanka is a resource-rich nation with great potential. However, we are not yet fully realising the value of these assets.
For example, in horticulture, crops like banana, mango, and pineapple have massive domestic and export potential. The question is whether we are using the right processing technologies and quality systems to meet the specific requirements of international markets. Reducing the Rs. 180 billion lost annually to post-harvest inefficiencies would significantly upgrade these value chains.
It is true that we are seeing some progress, particularly where exporters are integrating backwards into production and processing. When farmers move into processing or processors invest in cultivation, power dynamics shift and margins improve through better control over quality and supply.
Spices and herbs are another major opportunity. Our products, especially cinnamon, are world renowned for their superior quality. We produce 90% of the world’s true cinnamon, but we mainly export raw sticks. We could double or triple our export revenue by moving into high-value formats like essential oil extraction for the perfume and pharmaceutical industries.
Coconut is another example. Last year, the sector earned about $ 1 billion, but this could be much higher if we moved beyond raw material and standard oil. There is growing global demand for coconut sugar, fibre products, and pasteurised coconut water.
Our inland fisheries are another neglected resource. We have the capacity for large-scale aquaculture, yet they are not currently oriented as commercial value chains. Because these sectors involve so many smallholders, upgrading them would promote inclusive growth. It would balance the power within the chain, ensuring that the benefits of the industry are shared more fairly.
How effective are models where the value chain is anchored by market-driven processors or exporters when it comes to reducing price volatility and transaction costs for smallholders in Sri Lanka? Are the current models effective?
Currently there are various farming models operating in the country, but only a few are fully effective, while most remain only partially so. Traditional spot market selling through collectors leaves farmers vulnerable and leads to extreme price volatility and high transaction costs.
Therefore, more effective models include contract farming and buyer-linked arrangements, where a processor or exporter has a greater role in the process.
Contract farming can benefit from flexible pricing mechanisms. Usually, a fixed price is set before cultivation, but if the market price rises by the time of harvest, farmers may break the contract to sell elsewhere. If the model includes a flexible price mechanism, perhaps a 10–20% margin around the agreed price, it could function much better with greater compliance and trust.
Also, in these models, these buyers provide inputs, knowledge, and extension support while helping to determine fair pricing. In these cases, the value chain is anchored by market-driven processors or exporters, creating a more holistic model. This provides for better quality control from the start, and providing quality inputs like fertiliser and seeds on a credit basis is a key part of why these models work well.
For instance, in the Sri Lankan maize sector, companies operate their own systems. They provide technology and inputs while monitoring the cultivation, harvesting, and post-harvest management over several months.
Another potential model is farm organisations. However, in Sri Lanka, many of these organisations are driven by politics, which is a major issue. A viable model would be an effective farm organisation that handles aggregation and primary processing while linked to a private company through a contract. While these models do exist in Sri Lanka, they require streamlining.
That being said, the success of any model depends on governance and service delivery. This is why the processors and exporters must take more ownership of the value chain by focusing on input services and quality control.
When it comes to smallholders specifically, how can value chain finance be better deployed to de-risk Small and Medium-sized Enterprises (SMEs) and smallholders without increasing dependence on subsidies?
There is a serious need to build awareness around this issue as a culture of dependency on subsidies has developed in Sri Lanka. While these supports have their place, they can diminish a farmer’s sense of ownership and lead to the expectation that the State must also purchase all their produce, which is not a sustainable system.
This is where value chain finance should be deployed in a more holistic manner. For example, if buyers are involved in contract farming, they can provide input credits. Through a buyback mechanism, inputs like seeds, fertilisers, and agrochemicals are provided on credit and the costs are simply deducted from the value of the harvest. This is a practical model that reduces the overall risk for everyone involved.
It is important that we look at financing models that prioritise risk sharing. Banks mostly try to eliminate as much risk as possible, which is difficult in agriculture. Risk sharing through blended finance mechanisms, such as partial risk guarantees, could help.
Banks tend to have a great fear of lending to the agricultural sector because it is volatile and weather-dependent. However, in a buyer-backed contract-farming model where the payment for the harvest goes through a bank account, the bank can have much more confidence. It can automatically deduct the loan repayment when the harvest money arrives and release the balance to the farmer.
From a policy perspective, the Government should move away from focusing only on subsidy-based arrangements and instead work to attract private investment into the sector. The goal should be to crowd in finance by acting as a mediator and providing the guarantee mechanisms that allow commercial banks to lend to farmers and organisations with more certainty.
Overall, it is about distributing risk among all actors, rather than letting it weigh entirely on one actor.
You mentioned the need for policy realignment in finance models. In addition to that, how aligned are current policy and regulatory frameworks with inclusive business models that integrate smallholders into commercial value chains? How should they be framed to attract viable Public-Private Partnership (PPP) structures?
In the context of the value chain, policy alignment is about creating an enabling environment. While the intent behind Sri Lankan agricultural policy is generally very supportive, the gaps lie in actual execution, which is mostly fragmented.
This gap exists because responsibilities are scattered across multiple agencies with overlapping mandates, which impacts effective implementation. This needs to be addressed.
We also face issues with inconsistent enforcement of food safety and quality standards, which can change frequently. Moreover, while SMEs are the main link to smallholders, they don’t receive adequate incentives. Since these small businesses do the heavy lifting in terms of farmer engagement, they need more direct support.
Inclusive business also requires policy coherence across agriculture, trade, and finance. When these areas are aligned, there will be more viable products that the private sector will be much more willing to invest in.
In addition to that, regarding partnership structures, we should move beyond only relying on the traditional PPP model, which mostly treats farmers merely as beneficiaries. Instead, we should view farmers also as integral partners of the partnership. This approach looks at producer-public-private partnerships, leading to a clear demand-driven, market-led partnership.
In many current setups, projects are designed with a specific model and then imposed on the community, making them supply-driven rather than market-driven. If farmers are embedded as true partners, the entire arrangement becomes market-led.
The role of the Government in these partnerships is to build confidence, provide necessary infrastructure, and mediate to reduce risk. This helps the private sector to act as a co-investor rather than just a buyer as it is important that the private sector invests in the partnership itself to ensure long-term impact.