Beneath The Surface
Procurement price for paddy
Policy makers and politicians everywhere in the world are faced with almost the same kind of problem: being fair to the farmers without being unfair to consumers, and vice versa. That means, farmers should get a fair price for their produce, say for paddy, without raising the price of rice too much to make it unaffordable for poor consumers. In Bangladesh, the problem has become more acute now because the amon crop was almost totally destroyed by two consecutive floods.
In my second year agricultural economics class, I tell my students that a bumper crop may be a curse for farmers if they do not reap home a rewarding price for the paddy they produce. As supply is augmented in the market following the harvest, prices tend to fall and farmers get deprived. And it is alleged that historically Bangladeshi farmers have been robbed of their due shares through the provision of a price not in consonance with the cost of production.
There are newspaper reports galore on the prospect of a bumper boro harvest. As we notice, the government is gearing up its operations for procurement of paddy directly from farmers to build up the stock and arrest substantial swings of prices. What should the procurement price be to keep both producers and consumers on an even keel? Allow me to suggest a procurement price by drawing upon a Brac-sponsored survey of households in 62 villages in Bangladesh.
Although available data relate to the 2006 boro season, we shall make some adjustments on the cost escalation as perceived by stakeholders in 2007. For example, we may assume that the wage rate increased by 50 percent over the preceding year. It should be noted that the submission below is for a sharecropper who pays 6 maunds of paddy per bigha as rent to the land-owner.
The total cost of cultivating an acre of land (100 decimals) is estimated to be Tk.28, 000 for the ongoing boro crop. This includes costs of (a) material inputs like seed, fertilizer, pesticide; (b) capital services like irrigation, machine rentals and (c) human labour (both owned and hired). For the sake of brevity, we have also included the opportunity cost of land -- a factor not much accounted for -- and the imputed the cost of family labour.
Assuming the yield of paddy at 2,200 kg /acre, the unit cost comes to Tk 500 or so per maund (40 kg). A 40 percent profit over the unit cost would give a farmer Tk.700/maund. That is, if the government takes a decision of providing a profit margin of 40 percent, the procurement price should be set at Tk.700 per maund. In fact, this amount should keep farmers satisfied. A 30 percent profit would lower the requirement level, and higher would raise it.
But one needs to add the cost of conversion of paddy into rice so that the burden on the consumers could also be counted. As we mentioned before, the purpose of the procurement price should be to appease two opposing sides: producers and consumers. The Tk.700/maund mark that we mentioned before is for paddy and not for rice. Since rice is roughly 60 percent of paddy, it is, in fact, the price of 26 kg of rice. That is, at Tk.700/maund for paddy, price per kg of rice comes to about Tk.27/kg at growers' level. Adding another 20 percent for milling and marketing margin, the retail level of price of rice is estimated at Tk.24/kg.
Given the exorbitant price level at the moment (Tk.30-34/kg), a price level of Tk.24/kg should satisfy consumers. Thus, a procurement price of Tk.700/maund, according to the estimates based on a BRAC-survey data for 62 villages, seems to be only the price to drive solve the dilemma of policy makers: fair to farmers without being unfair to consumers and vice versa.
But the calculation made above does not drive out the million-dollar question looming large on the horizon: will the government be able to procure at that price at the right time and from the right producers? Although our past on this score pushes us to be pessimistic, we still pin hopes on a good outcome. And hope is the only medicine in a world of despair. Given the international market condition, a healthy stock of food grain is a sufficient condition for food security. We cannot afford it to be otherwise this time.
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