The average auction price rose to 33,006 rupees for a thousand nuts on October up from 29,069 a week earlier.
The top price rose to 35,510 rupees from 31,100 rupees a week earlier.
From early September the average farm gate price of coconut has gone up from 25 rupees (25,107 rupees per 1000 nuts) to 33 rupees a nut last week. Before the auction retail prices were around 40 to 42 rupees.
The auction prices are expected to translate to the retail market over the next few days.
State induced Volatility
In Sri Lanka staple food supplies are insecure because of heavy state intervention in markets, and prices can also be more volatile as well as higher than the rest of the world.
The high volatility in coconut prices comes from state interventions that block market forces from working due to excessive agriculture protection.Because of high import taxes even rice, a staple food, can shoot up above world market prices. Meanwhile the state also blocks access to close substitutes like wheat with high import duties.
Sri Lanka's poultry farmers have also been hit by high prices of maize, which is a key feed ingredient as imports have been blocked to 'help maize farmers.'
Protein prices including fish are now at record highs. Sri Lanka's city retail shops even ran out of chicken amid price controls a few months ago, a phenomenon not seen since the 1970s.
Coconut is another staple whose prices are high and volatile due to taxes on close substitutes.
Though fresh coconut imports (estimated to be about 10 to 12 Sri Lanka rupees a nut in Indonesia) is banned due to fears of disease, supply shortfalls can be eased through the import of coconut or other edible oils, which releases more fresh coconuts for consumption.
Sri Lanka taxes vegetable oils, a close substitute to coconut oil, to 'help the farmer'.
Sri Lanka is estimated to consume about 150,000 metric tonnes of edible oil a year. Of this about 30,000 is made with coconut. The rest is imported mostly in the form of palm oil.
But palm oil imports are now estimated to be taxed around 60 percent with a complex series of 30 percent import duty, cess, port and airport levy, social responsibility levy, value added tax and a business turnover tax.
In the world market, metals, gold, mineral and food commodity prices are rising mostly due to loose US monetary policy which is weakening the dollar. Palm kernel futures have rise steeply over the last 8 weeks.
On October 22, January Malaysian palm oil futures - which are a proxy for palm olein - hit 966 dollars a tonne, up 18 percent over eight weeks according to Bloomberg newswires data. Average fresh coconuts at the Colombo auction have risen 23.4 percent over the same period.
Rotterdam palm kernel oil - which is similar to coconut oil - is now at around 1,400 US dollars a tonne, or about 155 rupees a kilo. But in Sri Lanka coconut oil is sold at around 240 rupees a kilo wholesale, from mills.
According to industry officials the landed cost of the cheaper palm olein is around 210 rupees in Colombo with taxes.
When palm oil prices rise, the high taxes amplify the increase. This boosts profits of coconut mills, which buy more fresh coconut to make more oil, driving the price of fresh coconuts even higher, creating a self feeding vicious cycle that increases price volatility.
The high prices also hurt value added exports such as desiccated coconuts, which compete against countries like Indonesia and Vietnam where nuts are cheaper.
From time to time, when desiccated coconut exporters are threatened with going out of business, like many of Sri Lanka's poultry farmers were put out of business earlier, the government reduces taxes on imported edible oil.
Even without a global commodity bubble like which is now developing, Sri Lanka has a lean season for coconuts.
From May to October the crop is high, leading to the build-up buffer stocks when prices ease which are then sold at higher prices during the lean season.
Industry officials say in the old days both producers and dealers used to build up stocks during the high season when prices eased. The practice also kept prices from falling too much.
But with the high taxation of edible oil, buffer stocks had disappeared because the surplus is diverted to coconut oil, which is higher priced in Sri Lanka than the rest of the world. This had also made fresh coconut prices more volatile.
Out of the 2.8 billion nuts produced in Sri Lanka each year about 2.0 billion is estimated to go for cooking and pol sambol, a type of salad dish.
Sri Lanka had been producing about 30,000 tonnes of coconut oil a year, consuming about 270 million nuts at the rate of 9,000 nuts on average to produce a tonne of oil.
But by last year oil production had increased to an estimated 75,000 tonnes, consuming 600 million nuts, putting pressure on Sri Lankan coconut prices. Last year Sri Lanka had produced 2.76 billion nuts.
Ad hoc tax changes make the future unpredictable for all market participants and consumers.
Though Sri Lanka is a nominally a democracy there is little evidenced-based policy making through transparent public hearings.
The Treasury has taken a step in the right direction for this year's budget by appointing a commission to look into taxes, making the process less arbitrary.
But import duties in particular are secretly hatched and unleashed on a sleeping population arbitrarily by mid-night gazette.
Of late the interests of the farmers have been elevated above those of the rest of the population, especially the urban poor who have no organized voice.
Ideally, producers, who are generally with means, should be forced to compete with imports, and taxes if any should be low, steady and fair.
While low and stable taxation regime gives stability and predictability, a tax formula which is changed periodically on a transparent set of criteria including seasonality after taking into account the interests of all stakeholders could also make taxation less arbitrary.
According to central bank data the average cost of production was 9.10 cents a nut in 2009. It is generally agreed that a price of about 20 rupees a nut is enough to keep farmers happy and value added producers in business.