Beneath The Surface
Why are rice prices rising now?
THE recent rise in rice prices at retail level seemingly goes to challenge the popular perceptions and theoretical underpinnings. The finance adviser apparently looks disturbed, and our "bare-headed" economists are taken aback by the unexpected outcome. After the much acclaimed bumper boro harvest, the perception was that the augmented supply would help ease the pressure in the market and thus lead to a decline in the price of the staple food.
Economic theory also suggests that in the wake of an increased supply, with demand and other things remaining constant, the price would fall. In both cases, however, the underlying assumption would be that immediately after harvest, a large number of producers are forced to fall back upon distress sales to bring comfort to the consumers (but at their peril).
Unfortunately, that did not seem to have happened: within the last few days, the price rose by Tk.50/maund as various reports say. Further escalation is not ruled out by any quarter. Let us have a brief look at our marketable surplus of rice for a clear understanding of the dynamics of rice price movements.
Four or five years back, 41% of the paddy produced by rural households was marketed, and 42% of total sales occurred within one month of the harvest -- generally known as "distress sales." There seems to be little doubt that the proportion of marketed paddy increased over time as revealed in the book: Gramer Manush Gramer Arthonity Jibon Jibiker Porjalochona (by Abdul Bayes and Mahabub Hossain 2007).
In 2004, 52% of the farms participated in marketing of paddy and marketed 41% of the produce. Again, among all farms, 42% marketed within one month of harvest, and seasonal price variation was 6%.
In 2004, 36% of poor farms participated in market compared to 85% of other groups. So, an inverse relationship between farm size and marketing is in evidence. Poor farms marketed 15% of output compared to 28% for small and 56% for middle and 78% for large groups. Again, the inverse relation between farm size and market share holds true.
Poor farms generally sell two-thirds of production within one month. For small, middle and large, the shares are 59%, 40% and 27%, respectively. It is generally believed that poor farms engage in distress sales due to economic hardships and, for this reason, they cannot take advantage of market swings.
But distress sales do not seem to deprive them of the due share as the yearly variation of price is not that high. Empirical evidence seems to show that the price spread between prices received in distress sales and yearly average price hovers around 6-8%. By and large, all types of farms increased their market participation where poor sell 15-16%, small 26-27% and middle 56% and large 72-78%.
In rural Bangladesh, the surplus farmers are those having more than 0.41 ha (or approximately 1 acre). They constitute 37% of household and supply 70% of the surplus. That is, one-third of rural households are net sellers and two-thirds are net buyers. Only 14% of rural households account for 92% of food surplus and keep the market in operation. Remunerative price is required for them.
We now draw upon the 62-village survey -- led by Brac in 2008 -- to update information. In 2008 -- covering the 2007 crop season -- 57% of farms reported to have marketed 37% of MV paddy throughout the year.
However, roughly 50% marketed 20% of output within one month. This compares with about 42% sold within one month of harvest in 2004. This is a very interesting result. The proportion of distress sellers seems to have halved over time. If the trend is assumed to have continued till today, there is no reason to believe that our a priori expectation of a large supply in the market would hold true.
The reasons for which distress selling would take place in earlier decades appeared to have lost ground in the wake of alternative credit supply from NGOs, government safety net programs, remittances, growing market integration etc. But that should not lead us to conclude that bumper crop bounced back.
In fact, had there been no such harvest, price rise would spike more bitingly, further bringing down the real income of the people.
It can possibly be assumed that out of 17 million tons of boro paddy produced this year, 70% were accounted for by farms having more than 0.41ha (surplus farmers), who could sell paddy after satisfactorily meeting home consumption.
They are one-third of total farms in rural areas. The rest 30% are deficit farmers -- who have less marketable surplus -- constituting two-thirds of farms, and are net buyers of rice.
We assume that the surplus farms could have stored paddy to take advantage of the expected market swings. They are the conscious class with information on government storage, international market situation etc., and they also know that they are usually rewarded with higher price only when rice is at risk. The desperate poor might also have shelved sales for a while, and possibly enter the market with much lower amount than predicted.
As a result, the market might have absorbed less than what it should have by now. Added to this is transport bottlenecks coupled with hoarding by the so-called unscrupulous (in fact rational!) businessmen.
It seems that the rice market may not be trimmed before the next amon harvest comes home. If everything goes well, the rice market could then gain its earlier resonance. We presume that until government resumes its various programs to stabilise the market, including imports, the rice market would remain relatively volatile. Only a good amon harvest and a large procurement drive to build up a large stock could go a long way in easing the market.
Bangladeshi farmers have become more informed and price responsive over the years. It would be unwise to assume that they would flood the market with paddy when the market signals an upward trend. It would also be wrong to assume that they are as distressed as they were in earlier decades.
In such a situation, the government should cautiously step into the zone of growing rational expectation of farmers. Hopefully, next year could bring some relief from our agony. Meantime let us fasten our seat belts.
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