Why are rice prices rising?

24.10.2017

The rice price has increased significantly over the past year, and there is much discussion as to why this happened. A brief review of the rice market concepts: The farmer sells paddy to whoever buys it and this ends up at the rice millers.

Of course a lot of rice is milled locally in small mills for consumption in rural areas. The price of paddy will vary with location and time but the paddy market is reasonably integrated.

There is another price ex mill for milled rice. There will be variations of quality rices so this ex mill, wholesale price will cover a range of values. The urban wholesale markets will have prices slightly different that the ex mill price due to transportation and trade mark ups.

Finally, there is a retail price, at which the consumer purchases the rice. It is this retail price for coarse rice that we will focus on as a representative price for the whole spectrum of prices for different rice types. All of these prices should move more or less together as if one gets too high demand will decline and the price will fall.

The rice price in Bangladesh is closely connected to the Indian rice price. If the taka/rupee exchange rate and the import duties are stable then the Bangladesh price will track the Indian price. This will not be exact, but if the prices differ too much, rice will move across the border.

There is always potential for movement of rice in the informal transport channels. This channel will move rice in either direction according to the price. There is really a single market for rice between India and Bangladesh and price variations are temporary and will be removed by this arbitrage of rice moving both in formal and informal transport channels.

In July 2014, the price of coarse rice was Tk3.1 per kg, and fluctuated around Tk3 per kg during the year. The price declined slowly during the period July 2015 to June 2016 with the price fluctuating around Tk2.6 per kg.

    Government actions over the past year are correct: Explain that there is plenty of rice, import more rice, reduce the import duty

Then the price increased rapidly from Tk2.6 per kg in July 2016 to Tk4 per kg by June 2017, an increase of 53%. An increase of that size will increase the urban CPI by 3% and the rural CPI by 12%. The official estimates however, do not indicate such increases.

The typical explanation for this increase was the reduced availability of rice from the floods and the outbreak of blast disease. Other explanations were that the millers were not releasing milled rice into the market and that “syndicates” were withholding rice, driving the rice price higher.

In Asia, the standard explanation for rising food prices is that the business men in the food chain are withholding food from the market, having formed a conspiracy to manipulate the price. The standard Asian government response is to attack the millers and the traders.

To send government officials to markets to discover and discipline these monopoly “blood suckers” as they are usually known. This Kabuki ritual is performed every time there is a spike in the grain prices.

Most of the time, no one takes this very seriously, but it gives everyone someone to blame.  Conspiracies involving many businessmen are impossible to maintain; in Bangladesh, a conspiracy with more than three persons soon becomes public knowledge.

A few words about rice production and consumption

First, estimates from the BSS and the Ministry of Agriculture indicate that Bangladesh produces about 34 million mt of rice every year. The consumption is about 26 million mt. There is some retention of paddy.

However about 15% of the rice crop is just lost in the process of milling or trading. The implication of this is that rice stocks at any time are typically 6-8 million mt. There is always quite a large amount of rice inside Bangladesh. There are supplies in every house, in every retail shop, on every farm as well as well as in the millers’ warehouses.

Bengal has had its share of crises over the rice price. Some of these have been disasters leading to famine. Some have led to widespread intervention in the rice economy. The research of Amartya Sen on Bengal famines sets out the reasons and authoritative explanation of these price crisis that have occurred from time to time.

The reasoning emerged from a determination that even in the most terrible famine there was plenty of rice available. What drives the changes in rice prices is the expectation that prices are going to rise.

When there is widespread belief that there is a shortage of rice and the price is going to rise, then the public reacts by buying more rice. This action results in higher prices. The expectations of the public are influenced by what is believed about the availability of rice and also by an individual’s idea about what other people think.

If you think that everyone believes the rice price is going up, then you buy more rice now even if you think that there is plenty of rice in the country. Sen has taught us that one should look to expectations when there are sharp price spikes.

During this past year, there was widespread belief that there was a shortage of rice. This came from reporting on crop losses and low levels of rice in government stores. The amount of rice that might have been lost from floods was never more than 2-3 million mt and even this level is now probably proving too high.

The government rice stores always get a lot of attention, but the level of stocks is less than 10% of production — significant but not that important. In addition, there is always reporting about the efforts of the millers to withhold rice and drive the price up.

All of this together generates expectations in the public that the price of rice is going to rise, and leads to increased stocks of rice being purchased and held everywhere.

The higher demands arising from these expectations then increase the rice price.

Government actions over the past year are correct: Explain that there is plenty of rice, import more rice, reduce the import duty. All of these actions may lead the public to change their expectations away from increasing prices.

Ultimately, the rice prices will return to the level established by the Indian rice market price, the taka/rupee exchange rate and customs charges.


dhakatribune

Readers choice: TOP-5 articles of the month by UkrAgroConsult