Why rice prices need to be kept down
The production of rice, especially the Boro variety (cultivated in residual water in low-lying areas), has facilitated Bangladesh’s journey from import dependence to food self-suffciency. Total production of the three main varieties of rice paddy (Aus, Aman, and Boro) increased from 28.8 million tons to 36.45mn tons in 2019, making up 88% of total grain production in the country.
The wide availability of rice means millions of people can afford a staple food source, contributing to poverty alleviation. The government showed a strong commitment to ensuring food security this year by supporting farmers in the early harvesting of Boro, which was in danger because of forecasted flash floods and a lack of workers due to lockdowns.
The government provided facilitation services and supplied mechanical harvesters on credit, and a combination of innovative local interventions in labour mobilization, technology, and strong monitoring together resulted in a successful harvest.
Boro rice accounts for more than half of Bangladesh’s total rice production. This year, due to pandemic-induced economic shock, a good Boro season was even more important for farmers. For many, it could be their last resort to avoid hunger if lockdowns continued.
Good harvests also make it easier for the government to buy enough for public sale at a reduced price (commonly known as open market sale, or OMS), which regulates prices, or to redistribute as a relief.
According to the Ministry of Disaster Management and Relief -- 175,000 tons of rice were distributed among more than 67 million people up until June 15. An additional 100,068 tons have been allocated for distribution before Eid-ul-Azha.
Even though the Boro harvest was good, why is the price of rice so high?
The government was anxious to ensure that farmers received good prices for Boro production, to help ease their pandemic-related financial troubles. As a result, the government procurement target was doubled to 800,000 tons. The procurement price stayed at the same level -- Tk1,040 ($12.3) per mound (equivalent to 40kg).
Farmers received higher prices for their rice than they did in 2019 -- a study by the Brac Institute of Governance and Development found that farmers received approximately Tk765 per mound from millers -- but there was still not enough rice in the market.
There are four key reasons for this
Firstly, the cost of production this year was approximately 13% higher than last year, meaning that even though farmers were offered higher prices, profit margins were slim -- so they were less inclined to sell.
Second, looking at an uncertain future and an unstable market, many farmers opted to keep additional stock for personal consumption. The normal practice is to keep enough just to tide families through to the next harvest (Aus), but this year many decided to keep extra for safety.
Thirdly, this year was marked by significant demand-supply gaps. Bangladesh faced a number of natural disasters in 2019, resulting in widespread economic hardship, particularly in rural areas, so food consumption in those areas dropped. People simply could not afford to eat as much.
Coarse rice is the most common staple eaten in those areas, so the demand for it dropped, and the price soon followed suit. In 2019, the government procurement target was also half of what it is this year, and there was not a lot of relief distributed, which compounded the price drop.
In parallel, increased migration to urban areas (where finer varieties of rice are more commonly eaten) resulted in an increase in the demand for, and therefore the price of, fine grain rice.
This year, as a result, farmers opted to produce less coarse and more fine varieties of rice.
Unfortunately, Covid-19 flipped the market dynamics
A huge need for relief meant that demand for coarser varieties, which are cheaper and more preferable as relief items, shot up. Parallelly, there was sudden mass migration to rural areas because of fewer employment opportunities in urban areas, and, as a result of drastically reduced socializing and closed restaurants, there was almost no demand for finer varieties of rice often used in rich dishes such as biryani and pulao for weddings.
Finally, farmers who were more financially solvent and saw the price of coarse rice increasing in the market, especially following Cyclone Amphan, hoarded stock. The millers found themselves in a difficult situation. First, because the farmers were less interested in selling, the millers had to offer them higher prices.
Second, the millers had to accept rice with higher moisture content -- often soaked with Cyclone Amphan-induced rain -- meaning that their costs rose as they dried it. Third, labour and transportation costs rose as a result of lockdowns.
According to a number of millers interviewed by Brac staff, the production cost this year was between Tk38-Tk42 per kg, while the government offered only Tk36. As a result, many millers decided to sell the finished rice to wholesalers instead of to the government.
This presented a new challenge
Millers offered the rice to the wholesalers on credit, as is the custom for that product. Wholesalers were reluctant to buy though, as they still had much of the rice that they purchased from millers in May and June in stock. Why?
The retail price of rice went up in March-early April because of panic buying following the first death from Covid-19. Wholesalers eagerly raised their prices in response. The millers, who generally keep the largest portion of the stock in their yards, followed suit -- and benefited the most.
All the players in the supply chain benefited from the panic buying, except for the farmers (who generally cannot afford to keep any extra stock) and the consumers, who ultimately absorbed the price of everyone else’s profits.
In late-April, people grew cautious with their money, realizing that the pandemic was going to last for more than a few weeks. Buying slowed and prices slumped. Retailers rushed to dump the stock they had acquired to keep up with the increased customer demand (which they had bought for the higher prices) and suffered the first losses in the supply chain.
These losses rapidly trickled down, with wholesalers then also rushing to dump their higher-priced stock. Lockdowns began, and retailers then had to suddenly close, temporarily bringing the entire supply chain to a halt.
When retailers came back to their stores in mid-June, most of them still had a large quantity of high-price rice to sell. They had to recoup their losses, so they artificially created “shortage” by not buying more rice from wholesalers.
This caused another domino effect, with wholesalers hiking up the wholesale price in response, which increased their inventory turnover time.
Millers sandwiched between wholesalers and farmers
They still had rice from the previous harvest, which they could not sell because wholesalers did not want it, and they also could not access credit to buy new rice from farmers, because the wholesalers had not sold the previous quantities of rice which they had bought from them.
The credit system in Bangladesh works such that buyers do not have to pay until a shipment has been sold. This slower than average wholesale sell had two consequences.
Firstly, millers had to take credit at a higher rate of interest to procure Boro rice from the farmers. Secondly, they had to reduce the credit limit for the wholesalers. Consequently, the cost of the production for millers went up and a significant quantity of ready-to-market rice is now piling up in the millers’ silos.
The first obvious secondary impact of Covid-19 is that the government could not meet the declared procurement target. As of June 16, the government procured just 4% of the target, which is half of what it was at the same time last year. This failure can potentially have huge consequences.
The first consequence is that the government will not have enough rice to run open market sales. Not being able to regulate the price by making it available at a lower price to the public means people could end up paying any price for it -- which would affect those living in poverty the hardest.
The second consequence is that if the government needs to distribute rice as relief for either Covid-19 or another natural disaster, the required rice will need to be bought at a higher price. As of June 3, the public stock of the staple stands 29% lower than that of last year, and flooding is predicted across Bangladesh’s northern regions in the coming months.
The second obvious secondary impact is a rise in the price of rice. As described, the production prices for farmers and millers have increased. Wholesalers and retailers are not only buying rice at higher prices, but they are also both trying to recoup losses.
As a result, the price of Boro coarse rice has increased 47% at the retail level and 49% at the wholesale level compared to the first week of April 2020, and 36% and 33% compared to this time last year. In brief, customers are ultimately paying for the whole market system inefficiency.
Government is considering reducing tariffs on rice imports to ease the pressure
This will give a negative signal to Aman producers ahead of the cropping season, which may lead to the price drastically falling just before harvesting. This would not have an overall positive effect on the economy, and would particularly negatively impact the rural economy.
In this context, we would like to suggest supportive measures at multiple levels
• The government could import rice on a government-to-government basis. This would enable them to expand open market sales, which would dampen the price at the retailer level, which would force wholesalers to reduce their prices -- which would ultimately drive down prices for consumers. The government could also increase market monitoring to discourage hoarding.
• Measures to reduce food insecurity among small and medium farmers and share-croppers could be made a mid-term priority. We see consistently, at the first sign of market instability, that farmers hoard extra stock for safety. These household-level stocks contribute to destabilizing markets.
• Introduction of rice banks, which have been piloted by many non-government organizations including Uttaran, offer a fascinating model. The banks are village-level silos to store food grains for challenging times. As a shared pool, the total food grains stored in such silos typically is much smaller in amount than the total amount of rice otherwise stocked up in individual households.
• Farmers’ Organisations (FOs), of which Bangladesh has a rich history, can play a vital role in improving the ability of the farmers to get a better price. A 2013 survey by the Food and Agricultural Organization (FAO) found there were as many as 198,114 FOs of diverse types, and 81% of them were formed with the support of the government. These organizations could play an important role in accumulating rice from individual producers, use machines to do the drying and act as a collective agent to undergo all the bureaucratic processes required to directly sell the rice to government agencies and collect the proceeds.
This year, for example, if farmers could have received the government-declared prices instead of what they received from millers, more farmers would have sold their rice to the government. These FOs, if properly capacitated, could also create their own rice banks to reduce concerns around food insecurity as well.
• In the present situation, injecting cash to millers could also help to unlock markets. Millers buy paddy for cash but sell finished rice for credit, playing the vital role of investors in the supply chain. When they are cash-starved, the market is starved. “Warehouse financing” could be adopted, using millers’ rice stocks as collateral, to access immediate and low-interest credit. This could be supported by government monitoring to discourage hoarding by the millers.
Sarah-Jane Saltmarsh is Head, Program and Enterprise Communications at Brac and Nahrin Rahman Swarna is Policy Analyst, Advocacy for Social Change at Brac.