Wednesday, April 24, 2024

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Dhaka Tribune

Want to create shortages? Enforce ceiling prices

Will these measures by the government alleviate or exacerbate the problem?

Update : 04 Apr 2024, 04:06 PM

Consumers in Bangladesh have suffered from inflation since the Russian invasion of Ukraine in 2022. Depreciation of the taka has made the problem even worse. 

In the face of rising prices, the Department of Agricultural Marketing recently announced price ceilings for many foods. The public is in favour of price ceilings; however, any economist would caution that fixing a low price ceiling of any good is likely to create a shortage of that good. 

According to economics, market prices are determined by two factors: supply and demand. The supply of any commodity usually falls as its price falls. Consider the example of broiler chickens. Thousands of small farmers buy broiler chicks, grow them for about 35 days, then sell them as broiler chickens. Not all of these farmers are equally productive. When the price is low, less productive farmers (whose production cost is higher) will stop buying broiler chicks, and stop production. These less productive farmers will resume chicken production when the broiler price is high. That’s why a low price reduces the quantity supplied, and a high price increases the quantity supplied. 

The demand for any commodity usually falls as its price increases. Consumers choose between alternatives; one food can be substituted for another. Let’s return to the example of broiler chicken. When the price of broiler chicken is low, many consumers buy chicken instead of fish; when the price of broiler chicken is high, many consumers buy vegetables instead of chicken. That’s why a smaller quantity is demanded at a higher price, and a larger quantity is demanded at a lower price. 

The market clearing price (or market price) is the price at which the quantity of broiler chicken supplied by producers is equal to the quantity demanded by consumers. If the government fixes a ceiling price lower than the market clearing price, consumers will want to buy more than producers are willing to sell (at that price), and there will be a shortage. 

Poultry farmers sell chickens and eggs to traders who transport these products to urban wholesale markets. At present, most broiler chicken farmers are selling broilers at about Tk170 per kg; that is the market clearing price at the farm level. However, the Department of Agricultural Marketing has declared a ceiling price of Tk151.80 per kg for broiler farmers. Most small farmers are ignoring the declared price ceiling. What will happen if the government starts trying to enforce the declared price ceiling? A large number of less-efficient small broiler farmers produce broiler chicken at a cost higher than the declared ceiling price. If these less efficient small farmers are forced to sell at the declared ceiling price, they will make losses and will stop producing. Supply will fall, creating a shortage of chicken. 

If these less efficient small farmers are forced to sell at the declared ceiling price, they will make losses and will stop producing

At present, egg farmers are selling eggs (to traders) at about Tk8.50 per egg. Most small egg farmers are making losses selling at Tk8.50; their production cost is higher. Egg farmers understand that the demand for eggs is usually low during Ramadan. Consumers are enjoying traditional Ramadan foods (dates, chickpeas, eggplant, Haleem, etc) and have a reduced appetite for eggs. Farmers are continuing to produce eggs because they expect that the egg price will increase after Ramadan ends, and that they will then return to profitability. However, the Department of Agricultural Marketing has declared a ceiling price of Tk9.05 per egg for egg farmers. This declared ceiling price is higher than the present market price (Tk8.50) at which farmers are selling eggs, but is still below the production cost of most small farmers. If the government tries to enforce the declared ceiling price, small egg farmers who are already making losses will lose hope of breaking even, and will stop producing eggs; this will create a shortage of eggs.

An economist would say that it is fortunate that the declared price ceilings on eggs and chickens are not being enforced. These ceiling prices should be revised upwards, so that they do not demotivate farmers from more production.

If the government wants to make eggs and chicken cheaper, it would be better to take measures which would increase the supply rather than reduce the supply. For example, the materials used to make poultry feed (maize, soybean meal, vitamins, limestone, etc) should all be exempted from import duties and other taxes. Reducing the cost of feed would reduce the production cost of chicken and eggs, making it easier for small farmers to break even.

Kazi Zahin Hasan is one of the owners of Kazi Farms, residing in Dhaka.

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