Mohammad Yunus and Quazi Shahabuddin

    Farmers of Bangladesh grow crops not only for meeting subsistence needs but also for cash needs. In their pursuits, farmers respond in varying degree to incentives in the form of prices they receive for their produce. The prevailing prices at which farmers can sell their produce are the outcome of complex market structure shaped and sometimes reshaped by the domestic and external policy environment as well as non-price factors. These policy environments may propel or hinder farmers’ responsiveness to price signals.

    How do farmers respond to the ensuing price signals and risks? If they are risk averse, which element of risks, viz. price risk, yield risk, or revenue risk, matter most? Do their responses vary between the short-run and long run? This report will attempt to answer some of these questions. The novelty of this study is the distinct estimates of the long-run and short-run parameters. It was found in all of the cases that a long-run equilibrium exists. However, the extent of error correction mechanism is weak, as the error correction term is marginally significant in many cases.

    The elasticity estimates for the rice crops imply that a 10 percent increase in price would lead to 7.3 percent increase in Aus acreage, 5.6 percent in Aman acreage, but 10.3 percent in Boro acreage in the long-run. The corresponding estimates vary between 3.2 percent and 1.8 percent in the short-run. Among rice Aus and Boro switches their ranks in short-run price responsiveness. Almost similar phenomenon is evident in the case of yield elasticity estimates.

    While the corresponding yield elasticity estimates are higher except for Aus in the short-run, however, the gap between the price and yield elasticity has to some extent reduced compared to what was found in previous studies. In the long-run, however, the estimated yield elasticities exceed price elasticities for rice crops across all three seasons. This may imply that price responsiveness is taking lead in acreage expansion over yield responsiveness in the face of slow improvement in technology. One of the plausible reasons for higher price elasticity estimates may be that farmers are now becoming more and more market oriented in the face of shrinking arable land and growing population.

    As in the case of price elasticity and yield elasticity estimates, the risk elasticity estimates could not be derived for some crops for certain type of risk due lack of precision of the underlying coefficient estimates. It may be noted that most of the elasticity estimates of any of the three types of risks are negative, implying that farmers are in general risk averse. There is no systematic variation in the type of risk; for some crops price risks dominate while for others yield risks do. However, for crops if either price risk or yield risk dominates, revenue risk dominates, as well.

    Farmers experience higher price risks for jute, potato, and Boro; higher yield risks for black gram, Aus, brinjal, and tomato; and higher revenue risk for jute, wheat, and onion. As expected, the short-run risk responsiveness is lower than their long-run counterparts, whenever such parameters could be ascertained with precision of the coefficient estimates. The high level of risks for some of these crops erode the extent of high price or yield responsiveness making the ultimate outcome at best modest.

    Since the escalation of risk (be it price risk or yield risk) tend to erode the positive benefits of increased price and yield effects on acreage the government needs to make appropriate policy interventions to minimize such risks. The policy instruments to alleviate the undesirable consequences of risk aversion in general and risk minimizing behavior in particular may be classified, under two broad categories: (a) Policies specific to agricultural risk, which include crop insurance, relief, and famine policies, pure buffer stock or price stabilization schemes and flood protection measures. (b) Policies not risk specific, which include subsidization of inputs and/or credit, agricultural price support as income policy, reduction of background risk such as irrigation investments, increased efficiency of markets, improved access to information about technologies, improved non-agricultural job opportunities, especially through non-farm activities, land reforms and other income/wealth redistributive measures.

    In addition to the undertaking policies/programs to minimize the undesirable consequences of risk aversion, direct policy interventions should be made to enhance acreage response with respect to yield through public investment in research and extension. Bangladesh should invest in research and extension in agriculture to increase total factor productivity in the sector since the benefit cost ratio of this investment can be as high as 16:1. At present Bangladesh spends about 0.3 percent of agricultural GDP to research against the general recommendation of about 2 percent. Increase in expenditures on research will contribute to low cost supply of crop products by increasing yields and help farmers diversify production of crops by shifting from rice to high value crops.

    The extension system needs to be revamped so that it is more demand-driven and responsive to farmers' needs. The extension staff should be equipped with the most recent information on improved technologies and skills to work with farmers to help them solve location-specific problems.