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Market based price support program: an alternative approach to large scale food procurement and distribution system
Food Policy, Vol. 22, No. 6, pp. 475–486, 1997 1998 Elsevier Science Ltd. All rights reserved Printed in Great Britain 0306-9192/98 $19.00 + 0.00
Pergamon
PII: S0306-9192(98)00010-4
Market based price support program: an alternative approach to large scale food procurement and distribution system M. Mahmud Khan* Health Economics Programme, Center for Health and Population Research (ICDDR, B), Mohakhali,Dhaka, Bangladesh and Tulane University, Louisiana, USA
A.M.M. Jamal Department of Management, Southeastern Louisiana University, Hammond, Louisiana, U.S.A. In most developing countries of the world, large scale public food procurement and distribution systems (PFDS) have become too expensive for the country governments to support from their own resources. Despite high financial and administrative costs of the programs, the degree of seasonal price stabilization and price support achieved through the activities remain quite low. Using the Bangladesh PFDS as a case study, this research indicates that considerable improvements in price support can be achieved by providing credit to the farmers immediately after the harvest. If the government procurement is reduced by 50 per cent in Bangladesh, and providing 150 per cent of the cost of running PFDS as credit, Bangladesh can improve the farmers’ income and achieve better stability of cereal prices at a cost less than one-third of the current costs of the PFDS. 1998 Elsevier Science Ltd. All rights reserved Keywords: price support, food procurement
Introduction The demand for basic foodgrains remain more or less stable with changing prices of the commodities (Abedin, 1985; Alderman and Braun, 1984; Behrman, 1966; Chowdhury et al., 1993; Krishna, 1962; Quasem, 1987). One consequence of this price insensitivity is that even a minor change in production and availability creates wide fluctuations in the market price. A bumper harvest is often associated with quite low market prices. In some cases, prices decline so drastically that recovering the cost of cultivation becomes virtually impossible. To protect the farmers from price variability, policy makers often implement price support schemes. The support price for agricultural commodities, in theory, not only reduces the varia-
*Corresponding author: Fax: + 880-2-886050; E-mail: [email protected]
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bility of farm income but also encourages a higher rate of agricultural growth. Therefore, supporting agricultural prices can be viewed as an important developmental policy tool as well. However, price support makes poor households more vulnerable to food and nutritional stress. An increase in food prices reduces the purchasing power of poor households much more adversely than that of other higher income households. Therefore, with price support, it is important to devise a program to protect the level of food consumption of extremely poor members of the community. The food procurement programs, although widely used and being in operation for more than half a century, failed to provide adequate price support for agricultural products (see Islam, 1980). Usually, the schemes are expensive to implement and require high levels of budgetary allocation. Actual market procurement of agricultural commodities is only the first step towards the effective implementation of a price support program. The commodities procured need processing before transporting to storage facilities. The program must also maintain the warehouses on a regular basis and protect the stocks against climatic conditions, pests, rodents, and theft. In fact, loss of food due to mismanagement, theft and corruption often exceeds 15 per cent of total food procured in many developing countries. Apart from these direct monetary and real costs, the interventions often fail to achieve the intended objective of price support. The degree of price support provided by procurement programs appears to be too small compared to the costs incurred. The purpose of this paper is to propose an alternative, market-based approach for providing price support of basic foodgrains. The advantages of a market-based program are many. The role of the public sector can be reduced to a minimum and most of the administrative, management and storage-related functions can be transferred from the public sector to households and other private entities. The implications of adopting a market based approach will be examined carefully in this paper using the Bangladesh food sector as a case study. Before presenting the case for a market-based system of price support, an attempt will be made to examine the role of the public food system in supporting agricultural prices and protecting the vulnerable groups in Bangladesh during the past 20 years. We have also examined how the governmental expenditures in the program benefited the different social groups involved. Such an analysis helps identification of political forces likely to oppose a change in the public food procurement and distribution system.
Food production and domestic procurement for price support: the Bangladesh case Domestic food procurement in Bangladesh prior to 1977 was basically guided by the following two objectives: (a) to ensure an adequate supply to meet the food requirements of the public food distribution system, and (b) to prevent smuggling of foodgrain across the border (Islam, 1980). Although price support and price stabilization were mentioned as important objectives of food procurement, the Bangladesh government was basically concerned with achieving the target procurement level rather than trying to achieve a target market price. Relationship among production, procurement and food imports Food procurement per year in Bangladesh varied from as low as seven thousand tons to more than one million tons over the past 20 years. During 1980–81 and 1981–82, percentage of net food production procured reached a record level, more than 7.5 per cent of net production.
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However, the average procurement rate was about three per cent of net food production since 1972-73. As mentioned earlier, the objective of the food procurement before 1977 was to prevent smuggling and to generate a target quantity of food to be used by the PFDS. Therefore, it is not surprising that over the period 1958 to 1971, a high proportion of total procured foodgrain was obtained from the border areas. Moreover, foodgrain procurement was below 10,000 tons in five of these 12 years and only in 1958–59 and 1963–64 it crossed the 100,000 level (Islam, 1980). After the mid-70s, the procurement program started emphasizing its role as a price support instrument. For effective price support, the quantity of food procured should change due to changes in surplus food production, i.e., production over and above the minimum customary consumption level. Assuming 120 kg of rice equivalent as the minimum requirement of an individual per year, the surplus was estimated for all years since 1972–73 (see Table 1). Using this estimate of surplus foodgrain as the independent variable, a simple bivariate regression1 indicates that one per cent increase in surplus production increases procurement by 0.7 per cent. Table 1 Net food production, domestic procurement and food imports in Bangladesh, 1972–1994 Year
Net food production (’000 tons)
1972–73 1973–74 1974–75 1975–76 1976–77 1977–78 1978–79 1979–80 1980–81 1981–82 1982–83 1983–84 1984–85 1985–86 1986–87 1987–88 1988–89 1989–90 1990–91 1991–92 1992–93 1993–94
9018 10646 10102 11511 10500 11796 11726 11591 12999 13523 13185 13825 14182 14512 14475 14851 14814 14909 17235 17344 17563 17255
Population (millions)
74.27 76.40 78.46 79.90 81.80 83.70 85.60 87.70 89.95 92.16 94.43 96.75 99.13 101.57 102.94 104.37 106.86 109.00 110.12 112.00 114.00 116.00
Food Quantity of Quantity of Percentage of production food procured food imported net production per capita (in ’000 tons) (in ’000 tons) procured (kg/person/yr) 121.42 139.35 128.75 144.07 128.36 140.93 136.99 132.17 144.51 146.73 139.63 142.89 143.06 142.88 140.62 142.29 138.63 136.78 156.51 154.86 154.06 148.75
52 71 138 415 316 530 355 256 1017 1033 302 192 270 344 349 190 376 416 985 1020 232 170
2782 1651 2260 1440 810 1849 1147 2812 902 1076 1256 1843 2059 2590 1202 1763 2911 2138 1877 1563 828 653
0.58 0.67 1.37 3.61 3.01 4.49 3.03 2.21 7.82 7.64 2.29 1.39 1.90 2.37 2.41 1.28 2.54 2.79 5.72 5.88 1.32 0.99
Note: food production includes production of both rice and wheat. 1
The following regression model was estimated: log(PR) = 0.5636 + 0.7074 log(SQ),
R2 = 0.44
(0.187) where PR = quantity of foodgrain procured in tons of rice equivalents in a year and SQ = output over and above the requirement defined by 120 kg of rice equivalent per capita per year.
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It is interesting to note that in a multiple regression model, food imports show very weak negative impact on food procurement and net production shows no impact at all on total foodgrain available for public distribution. Production and procurement of foodgrain by geographic region is reported in Table 2 below (see Thomas, 1980). Note that the percentage of food production procured deviated significantly from one region to another. Most of the grains were procured from Rajshahi, an area located in the north western part of the country. However, a simple log–linear relationship using the data from 20 regions of the country (former districts) indicates that the procurement rate depends on foodgrain production per capita, percentage of land owned by large farmers (defined by more than 7.5 acres of land ownership) and number of large farms as percentage of total farms in the region.2 The regression result implies that if production per capita increases by one per cent, procureTable 2 Food production and procurement by district in Bangladesh District name
Average production in thousand tons Rice prodn. 1988–89
Dinajpur Rangpur Bogra Rajshahi Pabna Kushtia Jessore Khulna Barisal Patuakhali Jamalpur Mymensingh Tangail Dhaka Faridpur Sylhet Comilla Noakhali Chittagong Chittagong HT
748.00 1494.67 773.00 920.67 452.00 336.00 729.00 654.33 789.33 494.67 533.67 1679.67 476.67 728.00 610.33 1133.67 1056.00 717.33 855.67 104.67
Wheat prodn. 1988–89
99.63 134.93 51.60 103.80 84.53 88.30 77.97 8.93 8.17 0.17 36.30 41.23 44.63 63.73 67.70 10.47 134.97 2.17 0.17 0.00
Total rice and wheat
837.67 1616.11 819.44 1014.09 528.08 415.47 799.17 662.37 796.68 494.82 566.34 1716.78 516.84 785.36 671.26 1143.09 1177.47 719.28 855.82 104.67
Average procurement in 1985–89 74.93 52.57 64.37 40.27 15.67 3.93 10.07 1.30 1.67 2.13 0.90 8.93 3.20 1.07 2.37 9.50 5.43 0.43 1.00 1.77
Source: GOB, 1989.
2
log PR = 5.0947
⫺ 7.4927 log T (2.10)
+ 1.8291 log Q (0.71) R2 = 0.667
+ 5.6983 log L (1.32)
where PR = quantity procured as percentage of total foodgrain production, T = percentage of total agricultural land owned by large farmers (more than 7.5 acre owners), Q = production of foodgrain per capita (kg/person/year) L = number of large farms as percentage of total farms. All the coefficients of the model are of expected signs.
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ment tends to increase by about 1.8 per cent. Given the land area under the control of large farmers, the higher the number of farmers in the region, the higher is the level of procurement. An increase in the percentage of large farms by one per cent increases food procurement by more than 5.0 per cent. However, given the number of large farms, if the land area under the control of large farms increases, procurement of foodgrain tends to decline. The relative number of small farms have no impact at all on the procurement rates. This may be due to the fact that the large farmers, especially the very large ones, allocate a smaller proportion of their land to labor intensive foodgrain cultivation and therefore, foodgrain marketing among large farmers declines as the average farm size increases. The number of large farms has a positive impact on procurement rates as they offer a higher proportion of their production for sale in the market. Procurement and market price of foodgrain In Bangladesh, rice is the most important foodgrain procured by the government. In 1991–92, rice constituted about 93 per cent of total domestic food procurement (IFPRI, 1992b). Therefore, the analysis should concentrate on market and procurement prices of rice. The marketing structure in Bangladesh is pyramidal with thousands of farmers at the base. The price observed at this lowest level is usually termed as the grower’s price. The traders buy the rice from the growers and sell them to millers and other intermediaries for further processing. The market price received by the traders must include the cost of transportation and trader’s margin. The millers sell the processed output to wholesale houses which in turn sell the grain to retailers. Therefore, at each step of the marketing chain, cost of handling, processing and trade margin must be added to the purchase price to obtain the final selling price of rice. Unfortunately, we have no direct data on price received by the millers in Bangladesh. Harvest price of paddy and wholesale price of rice are published regularly by the Bangladesh Bureau of Statistics (GOB, 1979; GOB, 1989; GOB, 1995). As expected, the wholesale price is quite closely related to the grower’s price. In fact, the mean of the ratio of wholesale price to grower price for the period 1980–81 to 1986–87 was about 1.23. The 23 per cent spread between grower’s price and wholesale price appears quite consistent with a competitive market scenario. A recent study found that the trader’s margin in Bangladesh was about six per cent (Chowdhury, 1988). Assuming that the processing of paddy adds another five per cent to cost, the price paid by millers after allowing for the costs associated with these two factors alone increases the grower’s price by 11 per cent. The IFPRI study found that the cost of processing was about 5.6 per cent of grower’s price (IFPRI, 1992a). Adding six per cent to the original price for incorporating the cost of handling and trader’s margin at each stage, the wholesale price should be around 23 per cent higher than the grower’s price. It is interesting to note that the procurement prices remained below the wholesale prices for all the years over the period 1972–73 to 1986–87. Therefore, unless the seasonal variations are strong enough, the wholesale businesses should not be interested in participating in the procurement program. In certain years, even the grower’s price (expressed in rice equivalents), on the average, remained above the procurement price. The fact that the government carried out voluntary procurement in those years as well, it must be true that the seasonal and spatial distribution of prices were such that at least some traders, millers and farmers found it to their advantage to participate in the procurement program. To test the impact of procurement price on the quantity of food procured in the country, we have estimated a number of linear and log–linear models with procurement (PR) as the
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dependent variable. Procurement price as a percentage of wholesale price (PP) and surplus output (SQ) were entered as independent variables. The best empirical model3 implies that a one per cent increase in the relative procurement price increases food procurement by 2.8 per cent while a one per cent increase in surplus output increases procurement by 0.44 per cent. The fact that the procurement price remains more than 10 per cent below the average wholesale price in almost all years since 1972–73 does not necessarily imply that the procurement failed to provide any price incentives or price support to farmers (see Islam, 1980, who considered it a sign of failure). In fact, the policy of keeping the procurement price below the wholesale price is fully consistent with the idea that food grains should be procured from small traders and actual growers (Ahmed, 1981). In the regression result, the price ratio is found to be statistically significant, implying that the procurement program did have some impact on the market price of food grain. Welfare economics of food procurement in Bangladesh Procurement programs generally increase the demand for foodgrain in the market. This increased demand should increase the price received by the growers, even though actual procurement takes place at the millgate or at important market points. Therefore, the growers’ price already incorporates the impact of the procurement efforts. In other words, the growers’ price would have been even lower if there was no government procurement of food grain. To estimate the impact of foodgrain procurement on growers’ price, the market equilibrium is analyzed using a simple demand-supply framework. In Fig. 1, S represents total foodgrain supply. The supply function includes only the actual market offer excluding the foodgrain retained for self consumption or speculation purposes. Similarly, the demand function reflects the market demand. The demand function without any procurement is D1 and the equilibrium
Figure 1 Market for cereals (rice and wheat) with and without a public food procurement program 3
The following log–linear model performed better than other linear and semi-log models: log(PR) = ⫺ 9.6866
+ 2.8018 log(PP) (1.069)
+ 0.4418 log(SQ) (0.189) R2 = 0.618
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market price without procurement should be at P0. If Q is the amount of food procured, the demand function will shift to the right by the same amount. Let the new demand function with procurement be D2. The market price (growers’ price) should increase to P1 due to this demand shift. If the demand and supply elasticities are known, the market price impact of the procurement can be estimated with the help of a simple formula.4 Using the estimate of price elasticity of marketed output for Bangladesh (about 4.0 calculated from Quasem, 1987), we have derived the value of a, the increase in the marketed supply of foodgrain due to procurement, for the years 1977–78 to 1990–91. Table 3 shows the net output of rice, quantity procured, growers’ price, value of a, and per cent change in quantity. The table also indicates what would have been the price implication (growers’ price) in the market in the absence of the procurement program. Note that the price effect is quite significant. Except for the year 1987–88, growers would have received a price more than 10 per cent below the price they received if no procurement was carried out. During the years 1983 to 90, the price support effect was more than 13 per cent on the average. Since the rice sector is 30 per cent of the rural economy (estimated from detailed GDP table of Bangladesh, reported in GOB, 1989), this should increase the income of the rural population by four per cent for the procurement program alone. The above estimation procedure assumes that the distribution of imported and procured food
4
In Fig. 1, a vertical line from the after-procurement equilibrium point E intersects the horizontal line at P0 in between D1 and D2 into two sections: a and b. It is easy to prove that the value of a can be written as: a=
Q0·ηs ηd + η s
where = price elasticity of x, ηx x = demand or supply. Note that the value of Q0 is known and some micro-economic studies provide estimates of price elasticities of output and demand. We need an estimate of supply elasticity to derive the value of a. To calculate the price effects, we also need an estimate of market offer rates. Quasem, 1987 reports that the marketing rate of foodgrain for small, medium and large farm size groups were 26, 30 and 26 per cent, respectively, in the mid-80s. Since the percentage of small and medium farms in Bangladesh is about 70 and 25 (GOB, 1989), the average marketing rate for the country should be more than 25 per cent. In this analysis, we have assumed an average marketing rate of 25 per cent. The marketed output M can be defined as M = Q ⫺ C, where Q is net output, C represents retained output for consumption and precautionary purposes. Using the methodology followed by Yotopoulos and Nugent (1976), it can be shown that the market supply elasticity can be approximated using the following equation: ηMP = ηQP·
冉 冊
Q Q ⫺ ⫺ 1 (ηCP + ηCI) M M
where = price elasticity of marketed output, ηMP = price elasticity of production of the foodgrain, ηQP = price elasticity of output retained, ηCP = income elasticity of output retained. ηCI In this derivation we have defined change in farmers’ income by valuing the net output of the foodgrain under consideration. Note that, the last expression within brackets will be very small. The price elasticity of retained output is a small negative number and the income elasticity of retained output, especially foodgrain, is a small positive number. Therefore, we can ignore the second term of the right hand side of the equation and the price elasticity of marketed output can be approximated by multiplying price elasticity of production and the ratio of total to marketed output.
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Market based price support program: M.M. Khan and A.M.M. Jamal Table 3
Price implications in the rice market in the absence of rice procurement in Bangladesh
Year
Net prodn Quantity (in 000 tons) procured
Grower’s price Tk./maund
Value a proc*es/ es + ed
Market supply at 25% rate
% change in quant.
1977–78 1978–79 1979–80 1980–81 1981–82 1982–83 1983–84 1984–85 1985–86 1986–87 1987–88 1988–89 1989–90 1990–91
11796 11726 11591 12999 13523 13185 13825 14182 14512 14475 14851 14814 14909 17235
125.18 153.31 171.13 168.24 193.42 202.11 243.39 290.96 255.64 334.36 347.72 363.37 381.54 404.45
326.15 218.46 157.54 625.85 635.69 185.85 118.15 166.15 211.69 214.77 116.92 231.38 256.00 606.15
2949.00 2931.50 2897.75 3249.75 3380.75 3296.25 3456.25 3545.50 3628.00 3618.75 3712.75 3703.50 3727.25 4308.75
11.06 7.45 5.44 19.26 18.80 5.64 3.42 4.69 5.83 5.93 3.15 6.25 6.87 14.07
530 355 256 1017 1033 302 192 270 344 349 190 376 416 985
% change in price
⫺ ⫺ ⫺ ⫺ ⫺ ⫺ ⫺ ⫺ ⫺ ⫺ ⫺ ⫺ ⫺ ⫺
27.65 18.63 13.59 48.15 47.01 14.10 8.55 11.72 14.59 14.84 7.87 15.62 17.17 35.17
Source: GOB, 1989 and GOB, 1995. es: elasticity of supply ed: elasticity of demand
does not affect the demand or supply curves significantly. If the distribution pattern of the imported and procured food is well-targeted towards extremely poor households, who have very limited participation in the food market due to lack of purchasing power, the demand and supply should remain stable even after the re-injection of the procured food into the system. However, leakage to the private foodgrain market has become important, especially in recent years, with the decline of offtake in urban rationing. The average procurement and growers’ price of rice for the years 1983 to 1990 were Taka 6233 and Taka 4367 per ton respectively. Since most of the foodgrain is procured at the millgate, an effective price support program at Taka 6233 per ton for the millers implies that the price received by the growers should have been about Taka 5327, excluding all trader margins and costs of transportation and storage. However, the growers received a price of only Taka 4367 per ton. At this price, a procurement price of Taka 5109 per ton (Taka 4367 × 1.17) at the millgate should be enough to provide the millers all the additional costs of transportation and normal profit. During the period 1983–90, government procured 305 thousand tons of rice per year on the average. Therefore, the monetary transfer to millers over and above the cost of processing and normal profit was about Taka 293 million per year. The governmental procurement program could easily save this money by lowering the procurement price. Fig. 2 shows the size of the millers’ excess profit. This excess profit encourages corruption and may have benefited the politically powerful players involved in procurement rather than the farmers. The figure also shows the mean values of food procurement, marketed output, and the quantity of market supply for the years 1983–1990. Note that the growers’ monetary income from rice marketing increased by about 21 per cent due to the presence of governmental procurement although their total income (value of total output) increased by only four per cent. In monetary terms, grower’s market income from rice increased by Taka 2775 million, as shown in Fig. 2. Since the number of farmers receiving price-based benefits due to procurement is much larger than the number of millers and traders involved, additional income per capita for the millers, traders and the public officials should be much higher than the per capita additional
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Figure 2 Income gain by farmers and excess profit of millers due to the presence of public food procurement system in Bangladesh
income of farmers. In other words, the millers, traders and the government officials are most likely to oppose any reform of the current system. Thus, the policy makers may wish to examine the political feasibility of alternative programs, given the economic benefits these social groups receive, their economic power and numeric size.
An alternative market-based program of price support If the food requirements of the public sector can be reduced significantly, a market based approach of price support will be much more efficient and effective than the present system of direct procurement and distribution (Ahmed, 1992, 1978). One of the reasons why price support is needed during the harvest months is the high rate of market participation by farmers immediately after the harvest. If the market offer of foodgrain during harvest months can be reduced, seasonal price variability should decline. However, this still keeps the farmers vulnerable to low prices after a bumper crop. Therefore, a certain minimum level of procurement should be carried out, especially during the bumper crop years, to protect the income of the producers. In general, providing incentives to farmers for not marketing output immediately after harvest should be the least-cost approach of stabilizing seasonal variability of foodgrain prices. Marketing behavior of farmers Although the increased adoption of High Yielding Varieties (HYV) in winter (boro) and late spring (aus) have reduced the price variability over the last decade, seasonal price variability of rice in Bangladesh is still quite significant. In April, rice prices are about 13 per cent higher than the price observed in December at the wholesale level. At the farm level, this variation is likely to be even more pronounced. The reasons for low price of foodgrain during harvest months imply that the farmers offer their produce in the market for sale at a much higher rate
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immediately after harvest than in other months, even though the price is expected to increase by more than 13 per cent in four months. The reasons for the high marketing rate during harvest months in Bangladesh can be explained by two important factors, the first is likely to be more important than the second. (a) The credit market in rural Bangladesh is highly imperfect so that the cost of holding or acquiring cash varies significantly over the year. Cash requirements after the harvest are usually high. The introduction of HYV has increased the use of market inputs and the high interest rate of borrowing encourages the farmers to repay the loans soon after the harvest. They also need cash to pay the taxes and to meet other commitments. (b) The cost of storing the cereal may also be high in rural Bangladesh. The storage technology is primitive and a part of the grain stored could be damaged due to use of poor storage technology in a high humidity environment. Food losses due to pests and insects are also high. In fact, due to high demand for storage services, a number of non-governmental organizations (NGOs) have started community-based storage facilities for farmers (RDRS, 1996). The alternative strategy An alternative means of providing price support to the farmer would be to arrange short-term credit for farmers based on the value of output likely to be marketed immediately after the harvest. The credit will allow the farmers to buy other necessities, pay taxes or to repay the loans incurred for buying fertilizer, pesticide or other inputs. The cash flow should reduce the propensity to sell foodgrain produced immediately after the harvest. Although the cash flow is an important aspect of the food marketing pattern after the harvest, it is not sufficient to reduce the increased market participation by farmers. Lack of storage facilities and lack of knowledge of the effective methods of storing may force the farmers to market most of their surplus after the harvest rather than risk the loss of foodgrain through spoilage. The credit program should be complemented with the technical assistance program to advise farmers on the most effective methods of storing food items at the household level. The financial implications of this alternative policy of price support can be illustrated using the Bangladesh food sector data presented above. Assume that the total production of rice in a particular year in the country is about 17 million tons and 8 million tons are harvested during early winter (same as the aman crop harvest in Bangladesh). Since 25 per cent of the output is marketed, 2 million tons of the early winter harvest would be offered for sale. To avoid an underestimation of the financial requirements for the alternative program, let us assume that about 40 per cent of the marketed harvest will be offered for sale by the growers during the first month. The rest will be marketed more or less evenly over the next four to five months. Excluding the first month’s sale, the growers should be able to stock approximately 1.2 million tons for future sales. Since growers often market their grain to meet a short-term need for cash, assume that the government or a non-governmental entity will lend Tk 5000 per ton (about US$ 130) for 80 per cent of winter marketed harvest of the farmers. This amount is slightly less than the price a farmer can get by selling the crop immediately after the harvest. The total funds needed for the credit program will be about Tk 8000 million. As the credit will be advanced at the market rate of interest, the impact on the government budget should be quite low, if politically motivated credit forgiveness policy can be avoided. The funds needed can be borrowed from the private sector at the prevailing market rate and made available for the farm sector. The actual cost to the government should not be more than one per cent of the total borrowed fund. However, allowing for about nine per cent default rate and
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some additional costs for developing appropriate technology for storing food items, the total cost to the government should be about Tk 800 million. If the growers plan their sales over the year to maximize their income, the average price received by farmers will be significantly higher. The seasonal variability of rice price indicates that the farmers should be able to increase their sale proceeds of the first month by at least 13 per cent if the harvest is sold four months after the harvest rather than marketing the produce at harvest time. However, the introduction of the credit program is likely to reduce the seasonal price variability. Even if the price variability becomes half of 13 per cent over the period December to April, farmers can still obtain an additional return of more than three per cent over and above the market rate of interest they have to pay on the borrowed funds. In fact, the net increase in earning by the farmers should exceed 300 million taka simply by delaying the marketing of food produced by borrowing money from the banks at the commercial rate of interest. This policy of providing credit to farmers at harvest period should lower the food requirements of the public distribution system as well, assuming that the government will buy only half of the foodgrain it used to buy before the program. Therefore, the budget requirement to buy 400 thousand tons of rice will be Tk 2800 million (approximately US$ 73 million). This is not the only savings achieved by the public food distribution system. The food distribution system usually spends about Tk 60 per ton on storage of the food and another Tk 70 per ton on transportation (Chowdhury et al., 1993). The average distribution cost is about Tk 50 per ton. The additional indirect savings for not buying 400 thousand tons should be about Tk 70 million. The opportunity cost of the fund for four months at five per cent rate of interest becomes Tk 48 million. Therefore, total savings of the public sector for reducing its market participation becomes Tk 2918 million. Since the implementation and operation of the credit system will cost about Tk 800 million, the net savings should be about Tk 2000 million.
Concluding remarks A large scale public food procurement and distribution system appears to be highly inefficient in many developing countries of the world. Moreover, most of these public food distribution systems could not protect the farmers from seasonal or cyclical price fluctuations. On the other hand, the system failed to protect the poor from food vulnerability (Ahmed, 1993). Although an increase in market procurement and distribution of food by the public system may help reduce the seasonal price variability, the social cost of higher market participation by the public sector will be too high to be acceptable from the political point of view. Considering the food distribution system of Bangladesh as a case study, we have shown that a significant part of the governmental budget actually goes to increase the income of traders and others related with the system. Increasing the role of the government in the market will further aggravate the situation. This research suggests that an effective price support program can be devised by reducing the governmental procurement by 50 per cent and providing credit to farmers directly after the harvest in proportion to the marketable surplus of the farmers. Such a system will encourage the farmers to store the food after the harvest reducing the seasonal variability of prices. Moreover, any increase in the market price of food will benefit the farmers directly rather than the traders. The distribution system should also be made more efficient and effective through a better targeting mechanism. The estimates presented here suggest that under the new program the poor households will not be worse off, while the farmers will clearly be better off compared
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to the existing system, and at the same time the governmental budget in this area can be reduced by about more than US$ 100 million per year.
References Abedin, J. (1985) Input demand and output supply elasticities for rice in Bangladesh-A study based on Thakurgaon farmers. Bangladesh Development Studies 13, 111–125. Ahmed, A. (1992) Food Consumption and Nutritional Effects of Rural Rationing and Vulnerable Group Development Programs, Preliminary findings, International Food Policy Research Institute (IFPRI), Bangladesh Food Policy Project, Dhaka, Bangladesh. Ahmed, A. (1993) Food Consumption and Nutritional Effects of Targeted Food Intervention in Bangladesh, IFPRI, Food Policy Project. Ahmed, R. (1978) Public foodgrain distribution and poverty in Bangladesh. Bangladesh Journal of Agricultural Economics 1, 1–23. Ahmed, R. (1981) Agricultural Price Policies Under Complex Socio-economic and Natural Constraints: The Case of Bangladesh, IFPRI, Research Report No.27, Washington D.C. Alderman, H. and Braun, J.V. (1984) The Effects of the Egyptian Food Ration and Subsidy System on Income Distribution and Consumption, Research Report No.45, IFPRI, Washington D.C. Behrman, J. (1966) Price elasticity of the marketed surplus of foodgrains. American Journal of Agricultural Economics 48, 875–893. Chowdhury, N. (1988) Farmer’s participation in the paddy markets. Bangladesh Development Studies 16, 99–108. Chowdhury, N., Ahmed, R. and Goletti, F. (1993) A Joint Determination of Market Supply, Home Consumption and Stock Holding of Rice in Bangladesh, IFPRI, mimeo. GOB (1979) Statistical Yearbook of Bangladesh: 1979, Government of Bangladesh, Bangladesh Bureau of Statistics (BBS), Ministry of Planning, Dhaka, Bangladesh. GOB (1989) Statistical Yearbook of Bangladesh: 1989, Government of Bangladesh, BBS, Ministry of Planning, Dhaka, Bangladesh. GOB (1995) Statistical Yearbook of Bangladesh: 1995, Government of Bangladesh, BBS, Ministry of Planning, Dhaka, Bangladesh. International Food Policy Research Institute (1992) Progress in Tendering for Rice, Bangladesh Food Policy Project, Policy Brief, Number 2, November, Dhaka, Bangladesh. International Food Policy Research Institute (1992) Open Tendering for Rice, Bangladesh Food Policy Project, Policy Brief, Number 1, May, Dhaka, Bangladesh. Islam, R. (1980) Foodgrain procurement, Input subsidy and the public food distribution system in Bangladesh: An analysis of the policy package. Bangladesh Development Studies 8, 89–117. Krishna, R. (1962) A note on the elasticity of the marketed surplus of a subsistence crop. Indian Journal of Agricultural Economics 17, 000–000. Quasem, M. A. (1987) Farmers’ participation in the paddy markets, their marketed surplus and factors affecting it in Bangladesh. Bangladesh Development Studies 15, 83–104. RDRS (1996) Annual Report 1995, Rangpur-Dinajpur Rural Services, Dhaka, Bangladesh. Thomas, V. (1980) Regional differences in foodgrain production and distribution in Bangladesh. Bangladesh Development Studies 8, 93–105. Yotopoulos, P.A. and Nugent, J. (1976) Economics of Development: Empirical Investigations, New York: Harper and Row.
Pergamon
PII: S0306-9192(98)00010-4
Market based price support program: an alternative approach to large scale food procurement and distribution system M. Mahmud Khan* Health Economics Programme, Center for Health and Population Research (ICDDR, B), Mohakhali,Dhaka, Bangladesh and Tulane University, Louisiana, USA
A.M.M. Jamal Department of Management, Southeastern Louisiana University, Hammond, Louisiana, U.S.A. In most developing countries of the world, large scale public food procurement and distribution systems (PFDS) have become too expensive for the country governments to support from their own resources. Despite high financial and administrative costs of the programs, the degree of seasonal price stabilization and price support achieved through the activities remain quite low. Using the Bangladesh PFDS as a case study, this research indicates that considerable improvements in price support can be achieved by providing credit to the farmers immediately after the harvest. If the government procurement is reduced by 50 per cent in Bangladesh, and providing 150 per cent of the cost of running PFDS as credit, Bangladesh can improve the farmers’ income and achieve better stability of cereal prices at a cost less than one-third of the current costs of the PFDS. 1998 Elsevier Science Ltd. All rights reserved Keywords: price support, food procurement
Introduction The demand for basic foodgrains remain more or less stable with changing prices of the commodities (Abedin, 1985; Alderman and Braun, 1984; Behrman, 1966; Chowdhury et al., 1993; Krishna, 1962; Quasem, 1987). One consequence of this price insensitivity is that even a minor change in production and availability creates wide fluctuations in the market price. A bumper harvest is often associated with quite low market prices. In some cases, prices decline so drastically that recovering the cost of cultivation becomes virtually impossible. To protect the farmers from price variability, policy makers often implement price support schemes. The support price for agricultural commodities, in theory, not only reduces the varia-
*Corresponding author: Fax: + 880-2-886050; E-mail: [email protected]
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bility of farm income but also encourages a higher rate of agricultural growth. Therefore, supporting agricultural prices can be viewed as an important developmental policy tool as well. However, price support makes poor households more vulnerable to food and nutritional stress. An increase in food prices reduces the purchasing power of poor households much more adversely than that of other higher income households. Therefore, with price support, it is important to devise a program to protect the level of food consumption of extremely poor members of the community. The food procurement programs, although widely used and being in operation for more than half a century, failed to provide adequate price support for agricultural products (see Islam, 1980). Usually, the schemes are expensive to implement and require high levels of budgetary allocation. Actual market procurement of agricultural commodities is only the first step towards the effective implementation of a price support program. The commodities procured need processing before transporting to storage facilities. The program must also maintain the warehouses on a regular basis and protect the stocks against climatic conditions, pests, rodents, and theft. In fact, loss of food due to mismanagement, theft and corruption often exceeds 15 per cent of total food procured in many developing countries. Apart from these direct monetary and real costs, the interventions often fail to achieve the intended objective of price support. The degree of price support provided by procurement programs appears to be too small compared to the costs incurred. The purpose of this paper is to propose an alternative, market-based approach for providing price support of basic foodgrains. The advantages of a market-based program are many. The role of the public sector can be reduced to a minimum and most of the administrative, management and storage-related functions can be transferred from the public sector to households and other private entities. The implications of adopting a market based approach will be examined carefully in this paper using the Bangladesh food sector as a case study. Before presenting the case for a market-based system of price support, an attempt will be made to examine the role of the public food system in supporting agricultural prices and protecting the vulnerable groups in Bangladesh during the past 20 years. We have also examined how the governmental expenditures in the program benefited the different social groups involved. Such an analysis helps identification of political forces likely to oppose a change in the public food procurement and distribution system.
Food production and domestic procurement for price support: the Bangladesh case Domestic food procurement in Bangladesh prior to 1977 was basically guided by the following two objectives: (a) to ensure an adequate supply to meet the food requirements of the public food distribution system, and (b) to prevent smuggling of foodgrain across the border (Islam, 1980). Although price support and price stabilization were mentioned as important objectives of food procurement, the Bangladesh government was basically concerned with achieving the target procurement level rather than trying to achieve a target market price. Relationship among production, procurement and food imports Food procurement per year in Bangladesh varied from as low as seven thousand tons to more than one million tons over the past 20 years. During 1980–81 and 1981–82, percentage of net food production procured reached a record level, more than 7.5 per cent of net production.
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However, the average procurement rate was about three per cent of net food production since 1972-73. As mentioned earlier, the objective of the food procurement before 1977 was to prevent smuggling and to generate a target quantity of food to be used by the PFDS. Therefore, it is not surprising that over the period 1958 to 1971, a high proportion of total procured foodgrain was obtained from the border areas. Moreover, foodgrain procurement was below 10,000 tons in five of these 12 years and only in 1958–59 and 1963–64 it crossed the 100,000 level (Islam, 1980). After the mid-70s, the procurement program started emphasizing its role as a price support instrument. For effective price support, the quantity of food procured should change due to changes in surplus food production, i.e., production over and above the minimum customary consumption level. Assuming 120 kg of rice equivalent as the minimum requirement of an individual per year, the surplus was estimated for all years since 1972–73 (see Table 1). Using this estimate of surplus foodgrain as the independent variable, a simple bivariate regression1 indicates that one per cent increase in surplus production increases procurement by 0.7 per cent. Table 1 Net food production, domestic procurement and food imports in Bangladesh, 1972–1994 Year
Net food production (’000 tons)
1972–73 1973–74 1974–75 1975–76 1976–77 1977–78 1978–79 1979–80 1980–81 1981–82 1982–83 1983–84 1984–85 1985–86 1986–87 1987–88 1988–89 1989–90 1990–91 1991–92 1992–93 1993–94
9018 10646 10102 11511 10500 11796 11726 11591 12999 13523 13185 13825 14182 14512 14475 14851 14814 14909 17235 17344 17563 17255
Population (millions)
74.27 76.40 78.46 79.90 81.80 83.70 85.60 87.70 89.95 92.16 94.43 96.75 99.13 101.57 102.94 104.37 106.86 109.00 110.12 112.00 114.00 116.00
Food Quantity of Quantity of Percentage of production food procured food imported net production per capita (in ’000 tons) (in ’000 tons) procured (kg/person/yr) 121.42 139.35 128.75 144.07 128.36 140.93 136.99 132.17 144.51 146.73 139.63 142.89 143.06 142.88 140.62 142.29 138.63 136.78 156.51 154.86 154.06 148.75
52 71 138 415 316 530 355 256 1017 1033 302 192 270 344 349 190 376 416 985 1020 232 170
2782 1651 2260 1440 810 1849 1147 2812 902 1076 1256 1843 2059 2590 1202 1763 2911 2138 1877 1563 828 653
0.58 0.67 1.37 3.61 3.01 4.49 3.03 2.21 7.82 7.64 2.29 1.39 1.90 2.37 2.41 1.28 2.54 2.79 5.72 5.88 1.32 0.99
Note: food production includes production of both rice and wheat. 1
The following regression model was estimated: log(PR) = 0.5636 + 0.7074 log(SQ),
R2 = 0.44
(0.187) where PR = quantity of foodgrain procured in tons of rice equivalents in a year and SQ = output over and above the requirement defined by 120 kg of rice equivalent per capita per year.
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It is interesting to note that in a multiple regression model, food imports show very weak negative impact on food procurement and net production shows no impact at all on total foodgrain available for public distribution. Production and procurement of foodgrain by geographic region is reported in Table 2 below (see Thomas, 1980). Note that the percentage of food production procured deviated significantly from one region to another. Most of the grains were procured from Rajshahi, an area located in the north western part of the country. However, a simple log–linear relationship using the data from 20 regions of the country (former districts) indicates that the procurement rate depends on foodgrain production per capita, percentage of land owned by large farmers (defined by more than 7.5 acres of land ownership) and number of large farms as percentage of total farms in the region.2 The regression result implies that if production per capita increases by one per cent, procureTable 2 Food production and procurement by district in Bangladesh District name
Average production in thousand tons Rice prodn. 1988–89
Dinajpur Rangpur Bogra Rajshahi Pabna Kushtia Jessore Khulna Barisal Patuakhali Jamalpur Mymensingh Tangail Dhaka Faridpur Sylhet Comilla Noakhali Chittagong Chittagong HT
748.00 1494.67 773.00 920.67 452.00 336.00 729.00 654.33 789.33 494.67 533.67 1679.67 476.67 728.00 610.33 1133.67 1056.00 717.33 855.67 104.67
Wheat prodn. 1988–89
99.63 134.93 51.60 103.80 84.53 88.30 77.97 8.93 8.17 0.17 36.30 41.23 44.63 63.73 67.70 10.47 134.97 2.17 0.17 0.00
Total rice and wheat
837.67 1616.11 819.44 1014.09 528.08 415.47 799.17 662.37 796.68 494.82 566.34 1716.78 516.84 785.36 671.26 1143.09 1177.47 719.28 855.82 104.67
Average procurement in 1985–89 74.93 52.57 64.37 40.27 15.67 3.93 10.07 1.30 1.67 2.13 0.90 8.93 3.20 1.07 2.37 9.50 5.43 0.43 1.00 1.77
Source: GOB, 1989.
2
log PR = 5.0947
⫺ 7.4927 log T (2.10)
+ 1.8291 log Q (0.71) R2 = 0.667
+ 5.6983 log L (1.32)
where PR = quantity procured as percentage of total foodgrain production, T = percentage of total agricultural land owned by large farmers (more than 7.5 acre owners), Q = production of foodgrain per capita (kg/person/year) L = number of large farms as percentage of total farms. All the coefficients of the model are of expected signs.
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ment tends to increase by about 1.8 per cent. Given the land area under the control of large farmers, the higher the number of farmers in the region, the higher is the level of procurement. An increase in the percentage of large farms by one per cent increases food procurement by more than 5.0 per cent. However, given the number of large farms, if the land area under the control of large farms increases, procurement of foodgrain tends to decline. The relative number of small farms have no impact at all on the procurement rates. This may be due to the fact that the large farmers, especially the very large ones, allocate a smaller proportion of their land to labor intensive foodgrain cultivation and therefore, foodgrain marketing among large farmers declines as the average farm size increases. The number of large farms has a positive impact on procurement rates as they offer a higher proportion of their production for sale in the market. Procurement and market price of foodgrain In Bangladesh, rice is the most important foodgrain procured by the government. In 1991–92, rice constituted about 93 per cent of total domestic food procurement (IFPRI, 1992b). Therefore, the analysis should concentrate on market and procurement prices of rice. The marketing structure in Bangladesh is pyramidal with thousands of farmers at the base. The price observed at this lowest level is usually termed as the grower’s price. The traders buy the rice from the growers and sell them to millers and other intermediaries for further processing. The market price received by the traders must include the cost of transportation and trader’s margin. The millers sell the processed output to wholesale houses which in turn sell the grain to retailers. Therefore, at each step of the marketing chain, cost of handling, processing and trade margin must be added to the purchase price to obtain the final selling price of rice. Unfortunately, we have no direct data on price received by the millers in Bangladesh. Harvest price of paddy and wholesale price of rice are published regularly by the Bangladesh Bureau of Statistics (GOB, 1979; GOB, 1989; GOB, 1995). As expected, the wholesale price is quite closely related to the grower’s price. In fact, the mean of the ratio of wholesale price to grower price for the period 1980–81 to 1986–87 was about 1.23. The 23 per cent spread between grower’s price and wholesale price appears quite consistent with a competitive market scenario. A recent study found that the trader’s margin in Bangladesh was about six per cent (Chowdhury, 1988). Assuming that the processing of paddy adds another five per cent to cost, the price paid by millers after allowing for the costs associated with these two factors alone increases the grower’s price by 11 per cent. The IFPRI study found that the cost of processing was about 5.6 per cent of grower’s price (IFPRI, 1992a). Adding six per cent to the original price for incorporating the cost of handling and trader’s margin at each stage, the wholesale price should be around 23 per cent higher than the grower’s price. It is interesting to note that the procurement prices remained below the wholesale prices for all the years over the period 1972–73 to 1986–87. Therefore, unless the seasonal variations are strong enough, the wholesale businesses should not be interested in participating in the procurement program. In certain years, even the grower’s price (expressed in rice equivalents), on the average, remained above the procurement price. The fact that the government carried out voluntary procurement in those years as well, it must be true that the seasonal and spatial distribution of prices were such that at least some traders, millers and farmers found it to their advantage to participate in the procurement program. To test the impact of procurement price on the quantity of food procured in the country, we have estimated a number of linear and log–linear models with procurement (PR) as the
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dependent variable. Procurement price as a percentage of wholesale price (PP) and surplus output (SQ) were entered as independent variables. The best empirical model3 implies that a one per cent increase in the relative procurement price increases food procurement by 2.8 per cent while a one per cent increase in surplus output increases procurement by 0.44 per cent. The fact that the procurement price remains more than 10 per cent below the average wholesale price in almost all years since 1972–73 does not necessarily imply that the procurement failed to provide any price incentives or price support to farmers (see Islam, 1980, who considered it a sign of failure). In fact, the policy of keeping the procurement price below the wholesale price is fully consistent with the idea that food grains should be procured from small traders and actual growers (Ahmed, 1981). In the regression result, the price ratio is found to be statistically significant, implying that the procurement program did have some impact on the market price of food grain. Welfare economics of food procurement in Bangladesh Procurement programs generally increase the demand for foodgrain in the market. This increased demand should increase the price received by the growers, even though actual procurement takes place at the millgate or at important market points. Therefore, the growers’ price already incorporates the impact of the procurement efforts. In other words, the growers’ price would have been even lower if there was no government procurement of food grain. To estimate the impact of foodgrain procurement on growers’ price, the market equilibrium is analyzed using a simple demand-supply framework. In Fig. 1, S represents total foodgrain supply. The supply function includes only the actual market offer excluding the foodgrain retained for self consumption or speculation purposes. Similarly, the demand function reflects the market demand. The demand function without any procurement is D1 and the equilibrium
Figure 1 Market for cereals (rice and wheat) with and without a public food procurement program 3
The following log–linear model performed better than other linear and semi-log models: log(PR) = ⫺ 9.6866
+ 2.8018 log(PP) (1.069)
+ 0.4418 log(SQ) (0.189) R2 = 0.618
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481
market price without procurement should be at P0. If Q is the amount of food procured, the demand function will shift to the right by the same amount. Let the new demand function with procurement be D2. The market price (growers’ price) should increase to P1 due to this demand shift. If the demand and supply elasticities are known, the market price impact of the procurement can be estimated with the help of a simple formula.4 Using the estimate of price elasticity of marketed output for Bangladesh (about 4.0 calculated from Quasem, 1987), we have derived the value of a, the increase in the marketed supply of foodgrain due to procurement, for the years 1977–78 to 1990–91. Table 3 shows the net output of rice, quantity procured, growers’ price, value of a, and per cent change in quantity. The table also indicates what would have been the price implication (growers’ price) in the market in the absence of the procurement program. Note that the price effect is quite significant. Except for the year 1987–88, growers would have received a price more than 10 per cent below the price they received if no procurement was carried out. During the years 1983 to 90, the price support effect was more than 13 per cent on the average. Since the rice sector is 30 per cent of the rural economy (estimated from detailed GDP table of Bangladesh, reported in GOB, 1989), this should increase the income of the rural population by four per cent for the procurement program alone. The above estimation procedure assumes that the distribution of imported and procured food
4
In Fig. 1, a vertical line from the after-procurement equilibrium point E intersects the horizontal line at P0 in between D1 and D2 into two sections: a and b. It is easy to prove that the value of a can be written as: a=
Q0·ηs ηd + η s
where = price elasticity of x, ηx x = demand or supply. Note that the value of Q0 is known and some micro-economic studies provide estimates of price elasticities of output and demand. We need an estimate of supply elasticity to derive the value of a. To calculate the price effects, we also need an estimate of market offer rates. Quasem, 1987 reports that the marketing rate of foodgrain for small, medium and large farm size groups were 26, 30 and 26 per cent, respectively, in the mid-80s. Since the percentage of small and medium farms in Bangladesh is about 70 and 25 (GOB, 1989), the average marketing rate for the country should be more than 25 per cent. In this analysis, we have assumed an average marketing rate of 25 per cent. The marketed output M can be defined as M = Q ⫺ C, where Q is net output, C represents retained output for consumption and precautionary purposes. Using the methodology followed by Yotopoulos and Nugent (1976), it can be shown that the market supply elasticity can be approximated using the following equation: ηMP = ηQP·
冉 冊
Q Q ⫺ ⫺ 1 (ηCP + ηCI) M M
where = price elasticity of marketed output, ηMP = price elasticity of production of the foodgrain, ηQP = price elasticity of output retained, ηCP = income elasticity of output retained. ηCI In this derivation we have defined change in farmers’ income by valuing the net output of the foodgrain under consideration. Note that, the last expression within brackets will be very small. The price elasticity of retained output is a small negative number and the income elasticity of retained output, especially foodgrain, is a small positive number. Therefore, we can ignore the second term of the right hand side of the equation and the price elasticity of marketed output can be approximated by multiplying price elasticity of production and the ratio of total to marketed output.
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Price implications in the rice market in the absence of rice procurement in Bangladesh
Year
Net prodn Quantity (in 000 tons) procured
Grower’s price Tk./maund
Value a proc*es/ es + ed
Market supply at 25% rate
% change in quant.
1977–78 1978–79 1979–80 1980–81 1981–82 1982–83 1983–84 1984–85 1985–86 1986–87 1987–88 1988–89 1989–90 1990–91
11796 11726 11591 12999 13523 13185 13825 14182 14512 14475 14851 14814 14909 17235
125.18 153.31 171.13 168.24 193.42 202.11 243.39 290.96 255.64 334.36 347.72 363.37 381.54 404.45
326.15 218.46 157.54 625.85 635.69 185.85 118.15 166.15 211.69 214.77 116.92 231.38 256.00 606.15
2949.00 2931.50 2897.75 3249.75 3380.75 3296.25 3456.25 3545.50 3628.00 3618.75 3712.75 3703.50 3727.25 4308.75
11.06 7.45 5.44 19.26 18.80 5.64 3.42 4.69 5.83 5.93 3.15 6.25 6.87 14.07
530 355 256 1017 1033 302 192 270 344 349 190 376 416 985
% change in price
⫺ ⫺ ⫺ ⫺ ⫺ ⫺ ⫺ ⫺ ⫺ ⫺ ⫺ ⫺ ⫺ ⫺
27.65 18.63 13.59 48.15 47.01 14.10 8.55 11.72 14.59 14.84 7.87 15.62 17.17 35.17
Source: GOB, 1989 and GOB, 1995. es: elasticity of supply ed: elasticity of demand
does not affect the demand or supply curves significantly. If the distribution pattern of the imported and procured food is well-targeted towards extremely poor households, who have very limited participation in the food market due to lack of purchasing power, the demand and supply should remain stable even after the re-injection of the procured food into the system. However, leakage to the private foodgrain market has become important, especially in recent years, with the decline of offtake in urban rationing. The average procurement and growers’ price of rice for the years 1983 to 1990 were Taka 6233 and Taka 4367 per ton respectively. Since most of the foodgrain is procured at the millgate, an effective price support program at Taka 6233 per ton for the millers implies that the price received by the growers should have been about Taka 5327, excluding all trader margins and costs of transportation and storage. However, the growers received a price of only Taka 4367 per ton. At this price, a procurement price of Taka 5109 per ton (Taka 4367 × 1.17) at the millgate should be enough to provide the millers all the additional costs of transportation and normal profit. During the period 1983–90, government procured 305 thousand tons of rice per year on the average. Therefore, the monetary transfer to millers over and above the cost of processing and normal profit was about Taka 293 million per year. The governmental procurement program could easily save this money by lowering the procurement price. Fig. 2 shows the size of the millers’ excess profit. This excess profit encourages corruption and may have benefited the politically powerful players involved in procurement rather than the farmers. The figure also shows the mean values of food procurement, marketed output, and the quantity of market supply for the years 1983–1990. Note that the growers’ monetary income from rice marketing increased by about 21 per cent due to the presence of governmental procurement although their total income (value of total output) increased by only four per cent. In monetary terms, grower’s market income from rice increased by Taka 2775 million, as shown in Fig. 2. Since the number of farmers receiving price-based benefits due to procurement is much larger than the number of millers and traders involved, additional income per capita for the millers, traders and the public officials should be much higher than the per capita additional
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Figure 2 Income gain by farmers and excess profit of millers due to the presence of public food procurement system in Bangladesh
income of farmers. In other words, the millers, traders and the government officials are most likely to oppose any reform of the current system. Thus, the policy makers may wish to examine the political feasibility of alternative programs, given the economic benefits these social groups receive, their economic power and numeric size.
An alternative market-based program of price support If the food requirements of the public sector can be reduced significantly, a market based approach of price support will be much more efficient and effective than the present system of direct procurement and distribution (Ahmed, 1992, 1978). One of the reasons why price support is needed during the harvest months is the high rate of market participation by farmers immediately after the harvest. If the market offer of foodgrain during harvest months can be reduced, seasonal price variability should decline. However, this still keeps the farmers vulnerable to low prices after a bumper crop. Therefore, a certain minimum level of procurement should be carried out, especially during the bumper crop years, to protect the income of the producers. In general, providing incentives to farmers for not marketing output immediately after harvest should be the least-cost approach of stabilizing seasonal variability of foodgrain prices. Marketing behavior of farmers Although the increased adoption of High Yielding Varieties (HYV) in winter (boro) and late spring (aus) have reduced the price variability over the last decade, seasonal price variability of rice in Bangladesh is still quite significant. In April, rice prices are about 13 per cent higher than the price observed in December at the wholesale level. At the farm level, this variation is likely to be even more pronounced. The reasons for low price of foodgrain during harvest months imply that the farmers offer their produce in the market for sale at a much higher rate
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immediately after harvest than in other months, even though the price is expected to increase by more than 13 per cent in four months. The reasons for the high marketing rate during harvest months in Bangladesh can be explained by two important factors, the first is likely to be more important than the second. (a) The credit market in rural Bangladesh is highly imperfect so that the cost of holding or acquiring cash varies significantly over the year. Cash requirements after the harvest are usually high. The introduction of HYV has increased the use of market inputs and the high interest rate of borrowing encourages the farmers to repay the loans soon after the harvest. They also need cash to pay the taxes and to meet other commitments. (b) The cost of storing the cereal may also be high in rural Bangladesh. The storage technology is primitive and a part of the grain stored could be damaged due to use of poor storage technology in a high humidity environment. Food losses due to pests and insects are also high. In fact, due to high demand for storage services, a number of non-governmental organizations (NGOs) have started community-based storage facilities for farmers (RDRS, 1996). The alternative strategy An alternative means of providing price support to the farmer would be to arrange short-term credit for farmers based on the value of output likely to be marketed immediately after the harvest. The credit will allow the farmers to buy other necessities, pay taxes or to repay the loans incurred for buying fertilizer, pesticide or other inputs. The cash flow should reduce the propensity to sell foodgrain produced immediately after the harvest. Although the cash flow is an important aspect of the food marketing pattern after the harvest, it is not sufficient to reduce the increased market participation by farmers. Lack of storage facilities and lack of knowledge of the effective methods of storing may force the farmers to market most of their surplus after the harvest rather than risk the loss of foodgrain through spoilage. The credit program should be complemented with the technical assistance program to advise farmers on the most effective methods of storing food items at the household level. The financial implications of this alternative policy of price support can be illustrated using the Bangladesh food sector data presented above. Assume that the total production of rice in a particular year in the country is about 17 million tons and 8 million tons are harvested during early winter (same as the aman crop harvest in Bangladesh). Since 25 per cent of the output is marketed, 2 million tons of the early winter harvest would be offered for sale. To avoid an underestimation of the financial requirements for the alternative program, let us assume that about 40 per cent of the marketed harvest will be offered for sale by the growers during the first month. The rest will be marketed more or less evenly over the next four to five months. Excluding the first month’s sale, the growers should be able to stock approximately 1.2 million tons for future sales. Since growers often market their grain to meet a short-term need for cash, assume that the government or a non-governmental entity will lend Tk 5000 per ton (about US$ 130) for 80 per cent of winter marketed harvest of the farmers. This amount is slightly less than the price a farmer can get by selling the crop immediately after the harvest. The total funds needed for the credit program will be about Tk 8000 million. As the credit will be advanced at the market rate of interest, the impact on the government budget should be quite low, if politically motivated credit forgiveness policy can be avoided. The funds needed can be borrowed from the private sector at the prevailing market rate and made available for the farm sector. The actual cost to the government should not be more than one per cent of the total borrowed fund. However, allowing for about nine per cent default rate and
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some additional costs for developing appropriate technology for storing food items, the total cost to the government should be about Tk 800 million. If the growers plan their sales over the year to maximize their income, the average price received by farmers will be significantly higher. The seasonal variability of rice price indicates that the farmers should be able to increase their sale proceeds of the first month by at least 13 per cent if the harvest is sold four months after the harvest rather than marketing the produce at harvest time. However, the introduction of the credit program is likely to reduce the seasonal price variability. Even if the price variability becomes half of 13 per cent over the period December to April, farmers can still obtain an additional return of more than three per cent over and above the market rate of interest they have to pay on the borrowed funds. In fact, the net increase in earning by the farmers should exceed 300 million taka simply by delaying the marketing of food produced by borrowing money from the banks at the commercial rate of interest. This policy of providing credit to farmers at harvest period should lower the food requirements of the public distribution system as well, assuming that the government will buy only half of the foodgrain it used to buy before the program. Therefore, the budget requirement to buy 400 thousand tons of rice will be Tk 2800 million (approximately US$ 73 million). This is not the only savings achieved by the public food distribution system. The food distribution system usually spends about Tk 60 per ton on storage of the food and another Tk 70 per ton on transportation (Chowdhury et al., 1993). The average distribution cost is about Tk 50 per ton. The additional indirect savings for not buying 400 thousand tons should be about Tk 70 million. The opportunity cost of the fund for four months at five per cent rate of interest becomes Tk 48 million. Therefore, total savings of the public sector for reducing its market participation becomes Tk 2918 million. Since the implementation and operation of the credit system will cost about Tk 800 million, the net savings should be about Tk 2000 million.
Concluding remarks A large scale public food procurement and distribution system appears to be highly inefficient in many developing countries of the world. Moreover, most of these public food distribution systems could not protect the farmers from seasonal or cyclical price fluctuations. On the other hand, the system failed to protect the poor from food vulnerability (Ahmed, 1993). Although an increase in market procurement and distribution of food by the public system may help reduce the seasonal price variability, the social cost of higher market participation by the public sector will be too high to be acceptable from the political point of view. Considering the food distribution system of Bangladesh as a case study, we have shown that a significant part of the governmental budget actually goes to increase the income of traders and others related with the system. Increasing the role of the government in the market will further aggravate the situation. This research suggests that an effective price support program can be devised by reducing the governmental procurement by 50 per cent and providing credit to farmers directly after the harvest in proportion to the marketable surplus of the farmers. Such a system will encourage the farmers to store the food after the harvest reducing the seasonal variability of prices. Moreover, any increase in the market price of food will benefit the farmers directly rather than the traders. The distribution system should also be made more efficient and effective through a better targeting mechanism. The estimates presented here suggest that under the new program the poor households will not be worse off, while the farmers will clearly be better off compared
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to the existing system, and at the same time the governmental budget in this area can be reduced by about more than US$ 100 million per year.
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