How much does a Kilo of Rice actually cost?

A thought experiment.

Central Bank of Sri Lanka — Daily Price Report

According to the Central Bank of Sri Lanka, a Kilo of Rice costs about 200 LKR. A trip to the shops will confirm that they are correct.

Or are they?

⚠️Huge Caveat: Please ignore all the price statistics in the rest of this article, because it is a qualitative (not quantitative) thought experiment. While I use numbers in the following text, they are to be interpreted strictly qualitatively.

Official Value Chain

• It costs a farmer 25 LKR (to produce a Kilo of Rice)
• The middleman buys it from the farmer for 30 LKR.
• Half of the rice is lost due to damage and wastage. So, the middleman has effectively paid 60 LKR for a Kilo of Rice.
• Your retailer buys it from the middleman for 180 LKR
• You buy it from the retailer for 200 LKR

In summary,

200 (Value of Final Product) = 25 (Cost of Production) + 5 (Farmer’s Profit) + 30 (Waste) + 120 (Middleman’s Profit) + 20 (Retailer’s Profit)

Actual Value Chain

The “official” value chain described above is inaccurate, because it does not include the following factors:

• The farmer uses unsustainable farming practices. As a result, he is damaging is future ability to produce rice. For every Kilo of rice he produces, he is passing a cost of 50 LKR to his future self.
• The rice has been designed for low production cost. As a result is quite unhealthy for the consumer. As a result of eating the rice you burden your future self with future medical costs. 50 LKR for every kilo.

Hence, the final product (1 Kilo of Rice) is actually worth only 100 LKR.

100 (Actual Value of Final Product) + 50 (Future farming cost to Farmer) + 50 (Future medical costs to consumer) = 25 (Cost of Production) + 5 (Farmer’s Profit) + 30 (Waste) + 120 (Middleman’s Profit) + 20 (Retailer’s Profit)

Improving the Value Chain

• Suppose we use sustainable farming and produce healthy varieties of rice. It would cost the farmer 50 LKR, instead of 25 LKR, but we would save on future damage (+50LKR) and medical bills (+50LKR)
• Cut out the middleman (+120 LKR)
• Cut out wastage (+30LKR)
• Share the gains with the farmer and retailer.

In summary,

200 (Value of Final Product) = 50 (Cost of Production) + 110 (Farmer’s Profit) + 40 (Retailer’s Profit)

Thoughts? What have I missed? Reminder: Please heed the ⚠️Huge Caveat.