Project Completion Report:  SANEI Rice Market Study (SRMS)

Project Period: January 2011 – February  2012

Funding Agency: South Asian Network of Economic Research Institute (SANEI)

Report Title:

Delinking of Local and International Prices: Exploring Competition in the Bangladesh Rice Market

Investigators:

Minhaj Mahmud (Bangladesh Institute of Development Studies)

Syed Naimul Wadood (Department of Economics, University of Dhaka)

Introduction

This study takes a broader perspective on the issue of recent price divergence between national and international markets in the recent years by looking into local rice markets, its segments, various agents, their incentives as well as their interactions.  We also investigate the relationship between local and international prices by employing standard econometric methodology. The study posits that recent price divergences could be explained through local market dynamics better as in the recent years private import of rice were  not virtually happening in Bangladesh.

Data and Methodology

Firstly, primary data were collected using comprehensive enterprise level questionnaires at different segments of markets as well as key-informant interviews from major supply points(Dinajpur, Naogan, Bogra, Kustia and Jessore) and major urban destinations(Chittagong and Dhaka). The survey focused on overall supply chain by studying Growers (the very first node of supply chain), Millers, rice Aratdars (brokers, also known as commission agents), rice Wholesalers and Retailers (the last point of the supply chain from whom customers buy rice). The survey instrument focused on various firm and market specific information, particularly detail of pricing decisions, bargaining issues, by employing open ended questions to a greater extent. We employ both descriptive and regression techniques to analyze survey data. Secondly, monthly price data of various rice varieties were collected from secondary sources to examine trends and volatility of rice prices as well as examining the relationships between local and international prices by employing time series estimation techniques such as co-integration analysis.

Summary of Findings

As observed rice markets contain a large network of intermediaries from the beginning point of the farmer to the end point of the consumer. These intermediaries differ in terms of their respective sizes, roles, objectives, skill and expertise, technical support, constraints, strategies, etc. The intermediaries interact and often bargain with each other, who are striving for securing self-interests. Almost all the contracts within this market are informal, in the form of verbal or mobile phone conversation or hand-written notes. Here, “trust” and “reputation” are important on which the firm invests overtime to operate in this market for long many years. On the other hand, default risk is seen quite high, which is cited as one major cause of exit of firms from the market.  Even though the entry cost is not prohibitively high, the issue of default risk, trust and reputation, skill and expertise and correct knowledge of the business partners are very essential to survive and hence these can be considered as steep entry barriers.

The rice market has become heavily interconnected except for the case of the farmers. , who may have limited number of contacts and limited options other than selling produce at the price offered by a miller. It has been observed that large and medium-sized enterprises enjoy greater economies of scale in their operations compared to smaller ones. Within the rice market value chain, there are two points where major bargaining takes place; one is between the farmer and the Bepari or Faria (often as agents of the miller) over the price and quantity of paddy, and the other is between the rice market wholesaler or commission agent (as agent of the miller) and the end-point wholesale or retail wholesaler over the price, quantity and quality combination of rice. The presence of rice miller, in both of these bargaining processes is observed, who by taking advantage of storage capacity is able to postpone sale at least for some period. This implies that millers or miller-cum-wholesalers have potentials to enjoy large leverage over the entire rice market value chain and thus potentially engage in opportunistic behavior within the market. Price determination process within the rice market value chain depends on relative bargaining power of the concerned parties. Large and medium enterprises enjoy the advantage of setting prices in the market, and the rest small ones follow them. We therefore find prices of a variety of rice offered by all the enterprises to move together, whereas small enterprises sell the same at a slightly lower price. Additionally, within the rice wholesale market, the enterprises are free to sell any amount at any price they can obtain, whereas each of them is concerned about prices of neighboring enterprises.

We also examined price trends of local and international varieties of rice. Both nominal and real prices show upward and downward movements during 1997 to 2007 period with persistently upward trend in the last periods of investigation. In case of international varieties similar trends were observed suggesting integration in an open economy context. We also observe long term relationship(cointergation) between prices of local varieties with several international varieties of rice with between most domestic varieties and India 25% variety, which is consistent as historically during the period of study major rice imports were from India. However, as in the recent years private imports of rice were virtually not happening in our context suggesting that the recent price divergences could only be explained through local market dynamics and agents behaviors and we make an exploratory attempt in this regard.

It is obvious that agents in the market interacting with each other pursue different objectives as well as face different constraints in their operations. Hence it is appropriate to examine different segments of the rice market separately to reach any conclusion regarding market competitiveness. The first segment of the rice market, one that involves primary growers, can be considered as to a large extent competitive, although the benefits of competition do not reach small and marginal farmers. The reason is that the small and marginal farmers often suffer from credit and cash constraints, and lack sufficient storage capacities, making them vulnerable to the opportunistic behavior of rather powerful intermediaries. As we proceed to the second segment of the market, which is of the rice millers and the wholesalers, we find that the issue of competition is rather interesting.  Given that an entrepreneur has to have large financial resources as well as business connections to be able to survive in the rice wholesaler market, entry into this market (segment) is rather difficult. Also default risks of financial transactions or delays in payments often serve as an entry deterrent for new potential entrants.

As observed price bargaining depends on relative economic power and/ or business connections of the two agents whereby the more informed and connected agent gains from the bargaining process. With regards to price movements of wholesaler firms within the rice wholesaler markets we found that large farms’ price quotations are often considered as the indicative prices and small and medium sized firms often simply follow this price.  This resembles the standard oligopolistic price-leadership phenomenon, where one dominant firm sets the prices and the other firms (often smaller) act as follower. Overall, in the second segment of the rice market, that of the wholesale markets, one may argue that competition is to a large extent restricted. Even though a large number of wholesaler firms operate in the market, the ones with more economic resources and business connections dominate.  In the case of the third segment (of the retailer firms), this mostly acts as a channel for prices set in the second segment (of the rice wholesalers). Our survey findings have implications for public policy. We cannot however conclude on how the competition (or lack of it) affects the end consumers since our study concentrated mostly on the price bargaining and negotiations within the primary growers’ segments, wholesalers’ segment and retailers’ segments, we specifically did not follow the issue of burden of any opportunistic behaviors on the consumers directly. This could be an extension of the present study.