Beneath The Surface
Why is the price of rice still so high?
WHY did the rice price not fall after a bumper boro harvest? We all have been hunting for an answer to this crucial question that made policy makers perturbed and astonished academicians. Historically, harvest sales led to an augmentation of supply in the market to reduce price down in the post-harvest period.
Harvest sales are done mostly by the poor farms that are in dire need of immediate cash in hand to pay debt or meet other needs. Economists have traditionally termed them as "distress sales" which, allegedly, robs farms of the good returns had the products been permitted to pile up for few more days.
Why were farmers not responsive to market signals? An appealing answer to this question was given by Brac executive director, Mahabub Hossain, and his co-researcher in a recent seminar hosted by Brac Development Institute (BDI). Presided over by BDI director, S. Hashemi, the researchers ran through household level marketing behavior for last two decades. Allow me to submit a summary of the deliberations in that seminar.
Rural households have small marketable surplus -- the residual after meeting home consumption. The increase in domestic production may not have been of an order to meet the demand-supply gap for urban population. The overall picture is that roughly 35% of the production of rice enters into the market. It is indeed much higher than late 1980s when the share was only 26%.
Rice is a strategic commodity and its supply responsiveness should not be compared with other commodities. However, about three-fourths of rural households are deficit households and roughly a little over one-tenth -- owning more than 1 hectare of land -- are surplus farmers. So, a rise in price is good news for 12% of rural households and a bad news for 70%.
Second, farmers have substantial stockpiling capacity. As the researchers pointed out, 12% of the production is stored in lean period (before amon harvest) and 22% in peak period (one month after boro harvest).
It is, thus, no wonder that surplus farmers withhold sales in the face of surging prices in the international market that pass through the domestic market. Even the deficit farmers do the same thing, fearing that they would have to buy back rice at a much higher price. It is wise to sit on small stocks till the cloud disappears.
How do they then manage their cash requirements? The researchers reported three ways that of meeting the post-harvest cash crisis. First, it appears that flow of remittances increased the resilience of farms. In 1988, the share of remittance to household income was barely 6% that increased more than three folds to account for 19% in 2007. Even households with only homestead land reaped a reward from remittance: from 3% in 1988 to about 22% in 2007! Quite obviously, remittances lessened liquidity burden.
Second, rural households now have more access to credit than before. For example, credit constituted 6% of household income in 1988 and about 37% of households had access to credit. By 2007, the shares, respectively, stood at 12% and 45%. Thanks to the NGOs, poor households had benefited from their credit programs. But, admittedly, credit per se might not have masterminded stockholding capacity -- since credit is also costly in terms of interest rate and installment payment -- but could have signaled a support in case serious crisis crops up.
Finally, the seasonal variations in prices narrowed down substantially between 1988 and 2007. For example, in 1988, the price spread between harvest and yearly average price of paddy was 10-13%. By 2007, the spread stood at roughly 6-7%.
Thus harvest sales are no more "distress sales" as sellers do not lose significantly from such sales. Again, it has been observed that both large and small farms participate in harvest sales. It may be noted that growing integration of markets -- thanks to infrastructural and communication development -- contributed to narrowing down the price spread between comparable periods.
By and large, it seems that harvest sales dropped significantly fueled by two developments: back up measures for meeting crisis for the poor (credit and remittance) and stockpiling capacity of the large land owning groups. Both rich and poor are performing on price expectations. Now that the international price of rice dropped from $1,000 per ton to $550, the calculus of stockpiling might need a revisit and domestic price might face a marginal decline through disposal of held up stocks.
Between 1988 and 2004, paddy prices increased marginally while prices of other crops shot up significantly. Thus growers of paddy were penalised and those of other crops were rewarded for a pretty long time. It is only since 2004 that paddy prices began to rise at par with other commodities: from Tk.288 per maund in 2004 to Tk.500 per maund in 2007 (improved variety).
Still, relative price of paddy is low compared to others and hence the terms of trade go against paddy producers. But very high price of rice hurt the vast majority of poor for whom rice is the dominant source of calorie and rice alone accounts for half of their budget. A 50% rise in rice price would remove up to 25% of the total budget.
One important implication of high rice price is on poverty levels. The researchers observed a monotonic decline in income-based measure of poverty levels between 1988 and 2004 -- from 64% to 43%. Against this improvement during about 20 years, poverty rose between 2004 and 2007 from 43% to 47%!
Self-assessment criteria also bear that out as both landless and land-owning households indicated substantial improvement in economic conditions. But when asked about the change between 2006 and 2007, majority reported their deterioration in economic condition. Is the deterioration due to abnormal rise in rice price? Possibly it is, because 71% of landless and 64% of land-owning households adduced the deterioration to high prices.
The policy implication is that the very poor should be protected through safety-nets and social protection. The fixed income groups should be helped through wage adjustments. But on all counts, paddy prices should not be allowed to reach a level that induces disincentive to farmers.
In fact, one of the ways to help producers is to reduce the costs of inputs. And that has to do a lot with improving efficiency in delivery mechanism and procurement of inputs. The government should play a more active role coming out of the cave. And in the long run, more investments in science and technology in agriculture should satisfy the two opposing groups: consumers and producers.
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