A 'Mega Model' to ensure fair price for farmers

In an article titled "In Quest of Fair Price for Farmers", published also in The Financial Express Anniversary Supplement last year, we tried to show that the bargaining power of Bangladeshi rice farmers, as proxied by "Farmers' Share in Consumer Prices" or FSCP, has eroded over years, and the middlemen in the entire rice market value chain have become more powerful.

Comparing results of various research studies, we showed that FSCP for rice has decelerated from a high level of 71.07 per cent in 1983 to 46-54 per cent in 2010, which was largely grabbed by the middlemen, especially millers and retailers. Despite the fact that the number of intermediaries in the market increased quite significantly, the benefits of increased competition amongst the intermediaries did not work in favour of the farmers.

This year, the issue of fair price drew national attention. The news headlines on fair price of corps, normally published in rural sections of newspapers, were prominently covered on the front pages, and there were numerous editorials written to highlight the importance of the matter. I believe there is a consensus that reforms are needed in the crop marketing chain and the government has an important role to play in fixing the problem. Many advocated a more active role of the government through procurement of rice, saying it should buy more rice from the market, and directly from the farmers to make sure that they get fair price.

However, we should keep in mind that in order to dictate the price of the entire rice market, the government will need to purchase almost half or more of the year's output, which is quite unrealistic. Even if the government purchases such a bulk amount, the question still remains how the government will sell the bulk of rice to the consumers. Would the government then need to reintroduce the ration card system that we had during the 1970s?

We should not forget that there were good reasons why the role of the government in crop marketing has gradually diminished. If we could recall that during the 1970s and early 1980s, the government had more active role in the crop marketing system through various ration stores where consumers could buy at affordable prices and the producers would also get a reasonably fair price.

However, it became increasingly evident that such a government-controlled marketing system was inefficient and reforms were needed to make it more efficient through involvement of private players. Thus the role of Trading Corporation of Bangladesh (TCB) has gradually diminished and government-owned retail stores were shut down one after another.

Now if we go back to the same age-old socialist regime of crop marketing, we would definitely make the same mistakes again. However, this is also true that rampant involvement of private parties in crop marketing channels does not produce desired results, which we have shown in our previous article. Now the question is: What is the solution then?

This article tries to answer this question. Here we have illustrated a countrywide step-by-step model that will offer a solution to this age-old problem. To propose a realistic solution, we have taken a middle route by advocating a more active role of the government in the crop marketing process. However, the price fixing mechanism will still be on the basis of interaction of market forces. So, in short, the proposed model is a hybrid of socialism and free market principle.

Before going into deeper discussion of the model, let us revisit why the bargaining power of Bangladeshi rice farmers gradually declined.

There are a number of reasons of this.

Firstly, majority of our farmers are marginal farmers and they have very small piece of land for cultivation. Poverty is something that is a day-to-day affair to them. Due to their financial constraints, they have to continuously borrow from village moneylenders at very high interest rate, which they are obligated to repay once they harvest their crops.

So, during the harvesting season, they have to sell their produce as quickly as possible to avoid escalation of compound interests charged on them. The situation exacerbates if they face various natural calamities, such as flood. If they lose their harvest, then their debt burden increases, which they would need to resettle during the next season for which they also need to take additional loan from the same moneylenders. So it acts like a "booby trap" for them.

If they generate excess cash by having a good harvest in a particular season, they might lose this cash in the next season just because of recurring flood, drought or cyclones. As a result, the farmers cannot bargain strongly with the rice traders during the harvesting season, and they are compelled to sell the produce at throwaway prices to the middlemen.

Farmers know very well that if they could convert their paddy to rice, they would get much higher price from the market. But husking or milling of paddy requires additional funds, which most of the marginal farmers don't have. So they are compelled to sell paddy to the agents of the millers at low prices. The agents of the millers also take full advantage of this weak financial situation of the farmers.

Farmers could get a better price if they could store their harvest without any cost. But most of the marginal farmers have a lack of storage capacity, and once they have bumper production, they are forced to sell the excess output just because of the absence of storing facilities at their backyard.

Even though they wish to take the additional produce to a central market for selling, they incur transportation costs, and they know full well that if they are not able to sell this produce on a given day, they would need to bring it back home by incurring more transportation costs. This will naturally erode their margins.

Agents of the millers know well about this condition of the farmers. So when they meet these farmers in the market, they offer a price, which is sometimes not even sufficient to cover the cost of production. Since many farmers have the same situation and all of them have excess production during a bumper harvest, the market price for paddy usually remains low when farmers start harvesting their paddy. This is a common phenomenon in the Bangladeshi rice market every season.

The government's faulty import policy also reduces the bargaining power of the farmers to a great extent. Rice is a staple food in Bangladesh and most of the voters in the country are not farmers. Especially the ruling elites who mostly live in urban areas would always love to see the prices of essential items, such as rice, remain low.

In order to appease this non-farmer ruling class, the government always tries to keep the prices low in the market. If the production remains low in a given season due to various natural disasters, the government always tries to make sure that the price of rice does not rise in the next season. So they relax the rules of import by allowing imported rice to flood the market that will make the urban class happy.

Timing of such relaxed import policy sometimes influences the market price negatively. Farmers will get a fair price of the crops if the price remains steady during the harvesting season. But the government might allow import of rice in such a time period, when it should have been restricted for the benefit of the farmers. But this does not always happen out of fear of reprisal from the urban class emanating from any potential crisis of rice.

Absence of the authentic production data is also another factor behind low prices of rice. The government does not know exactly how much local production and how much shortfall will there be in the next season that will keep the rice price steady. As a result, sometimes traders import in bulk amount that are not even required in the local market. Such oversupply creates a downward pressure on the rice price.

So in order to solve this problem of fair price, we need a nationwide system that will have the following elements:

* The farmers should have access to low cost funding for cultivation;

* In order to help the farmers to take advantage of higher price of milled rice, the farmers should be given sufficient funds at low cost during harvesting season to convert their paddy to rice;

* The farmers should be provide with sufficient storage capacity so that they can store their excess output and sell them when the market goes in their favour;

* The market intermediaries should be regulated in a manner where there will be nobody in the market who will make abnormal profit in the process of transferring rice from the farmers to the urban consumers;

* There has to be an automated system for monitoring market price to determine supply and demand of rice, and this information has to be readily accessible by all stakeholders;

* The government should know well how much production of rice will there be in a given season and whether there will be any shortfall of rice. In order to obtain this information, government officials concerned should be able to interact with farmers on a regular basis. If there is a potential shortfall in the market, then the government should be able to regulate the import of rice in such a manner that would not dampen the price, especially during the harvesting season.

Now we are proposing a nationwide model that will offer a solution to the problem of fair price. The closest model of this type - "Regulated Market" - already exists in neighbouring India. A more efficient model styled "Modern Terminal Market" is nowbeing discussed by the Indian government. However, we believe our proposed model is economically more efficient compared to both these models.

At the beginning, the government will have to construct large warehouse like structures in all areas, where rice is produced in abundance. The warehouses should be constructed with sufficient spaces that will accommodate all rice produced in an area. One Union might have one or more such warehouses depending on production pattern. We call these warehouses "Crop Sales Centres (CSC)".

There will be two types of CSCs in the country. One will be 'Supply Centres' and others will be 'Demand Centres'. The Supply CSCs will be located closer to the farmers and the Demand CSCs will be located closer to the urban consumers.

Every CSC will have two selling sections - one for wholesale market where bulk lots will be sold, and the other for retail market where smaller portions of rice will be sold to consumers. The retail section of the Demand CSCs will be larger in size to accommodate more consumers, while the size of the retail section of the Supply CSCs will be relatively smaller.

In order to take rice from the Supply CSCs to the Demand CSCs, there will be licensed market intermediaries known as "Market Specialists". Their main function will be to transfer rice from the Supply CSCs to the Demand CSCs or between two or more Supply CSCs.

These Market Specialists will not be allowed to stock the rice anywhere other than CSCs. That means once a lot will be purchased by a Market Specialist from a Supply CSC, the lot will have to be transported immediately to the target Demand or Supply CSC. They will be penalised if they do something otherwise.

Numerous licenses will be issued to maintain competition amongst these market players. The rules of licensing will be straight forward and anybody should be able to obtain such license without incurring high cost.

Modern information technology will be used in every aspect of operations of the Centres so that there will be no need for physical interaction between the farmers and the market specialists. The sale price of rice will also be deposited directly to the bank accounts of the farmers as soon as sales take place.

The Centre will charge a minimum fee, either flat or a certain percentage of each sale, to cover operational costs of the Centre. There will be a maximum ceiling of charging such fee. For example, if a Centre requires Tk 500,000 per month for operations, then as soon as such amount will be collected from the sales, charging of additional fee will be restricted. So there will be no profit motive for the Centre.

Every Supply CSC will be equipped with the following elements:

* A Bank that will help farmers to obtain the required funding for cultivation. Every CSC should have at least one branch of Bangladesh Krishi Bank (BKB) on its premise. This Krishi Bank branch should be able to extend funds to the farmers under Shariah-compatible financing modes at affordable rates;

* There will be a separate window in this branch of the bank that will extend 0 per cent Qarde Hasanah loans to farmers during the harvesting season for helping them to convert their paddy to rice. This loan will be for shorter term and every loan will be settled through sales of rice of respective farmers through the CSCs;

* There has to be a Grading Terminal in each Supply CSC that will grade the rice of each farmer. The Grading Officials will grade rice of each farmer and will mark the sacks on the basis of grades they obtain. The farmers will eventually tag a price quote on the basis of the grade that they receive from the Grading Terminal;

* Once the graded rice reaches the warehouse section, the quoted price will be entered into an automated system, which will be displayed on TVs and online terminals. The lowest price of a particular grade will appear on the top of the screen and rice of lowest prices will be released for selling at first. The production of most competitive farmers will thus get the highest priority. This will improve overall economic efficiency of the market. We are providing below an example to illustrate this:

In the above table, three Grades of rice are for sales. In every Grade, the lowest priced Lot is appearing on the top, while more expensive Lots on the same Grade are appearing below and will be sold at the end. So the Market Specialists and other potential buyers will look into this screen to determine which Lot they would like to buy. For a specific Grade, they would of course prefer to buy the least costly Lot because the quality of rice in all Lots under a specific Grade will be the same.

* To help the Market Specialists to obtain information on where to transfer the rice, there will be information on the present "Occupancy Rate" of Demand CSCs. Occupancy Rate of a Demand CSC will be calculated by dividing Present Stock of the Centre by total capacity of the Centre multiplied by 100.

If Occupancy Rate of a particular Demand CSC is 70 per cent, then it means 30 per cent space of the Centre still remains empty. Therefore, more rice can be accommodated from the Market Specialists in that centre. If a certain Demand CSC in a city does not have enough space, then the Market Specialists would be able to know readily in which of urban Demand CSCs there is still room for transfer of rice.

* "Turnover" of each Demand Centre is also important. Turnover will be calculated by dividing Amount Sold in KG on a given day by Number of Hours of that day's operations. If a Centre has a turnover of 10,000 KGs, it means that the amount of rice sold to the ultimate customers is 10,000 KGs/hour, which is above another centre having a turnover of 5,000 Kgs. With this Turnover, Market Specialists will readily know the demand of rice for that particular CSC. So if a CSC has a high occupancy rate and at the same time high turnover, then the Market Specialists will know for sure if they transport rice to that Centre, they will be still able to sell rice immediately despite availability of low amount of space. Although the space is low, the demand for rice is high, and as a result, there is always more space created in that CSC for additional stock of rice. Both these ratios, i.e., Occupancy Rate and Turnover, will help market integration. This is shown in the following table:

* The above demand data will also be accessible by the farmers and they will know the tendency of transporting rice by the Market Specialists from one CSC to the other. So during the season of high demand for rice, the farmers will tend to raise their price gradually and get benefit from the market trends. As a result, the benefit of the rise in market prices will be mostly enjoyed by the farmers, not by the millers or any other intermediaries that is the case now;

* In the wholesale section of the Supply CSCs, Market Specialists and other local wholesalers will be the main buyers of rice, while the retail consumers will buy in lesser quantities (such as 5 kgs) from the retail sections. Thus the consumers in the rural areas will be able to purchase rice at farm-gate prices.

* Every CSC will have Farmers' Club where both government officials and representatives of the farmers will frequently interact to share information about cultivation and production trend. Farmers in a particular location will be grouped under a Cooperative Society so that they can make decisions that will benefit them all. Such decisions might encompass items, such as, fixation of floor price of rice during each harvesting season, amount of subsidy needed for cultivation, availability of pesticides and labour.

This Club will periodically announce how much day labourers are needed in a particular cropping or harvesting season. As a result, the true picture of demand and supply of labour will be known. This information will be accessible by all citizens through the internet;

* Once all the areas will have such CSCs and all the farmers will be brought under this new crop marketing system, the government will be able to obtain real time data on the actual production of rice of the entire country in a given season. As a result, more prudent import strategies can be formulated for overall welfare of the farmers as well as of the consumers.

Now let us look at how this Mega Model will be implemented step-by-step.

First, the government will have to select an area for the pilot test of the model. One or more Unions can be selected for the pilot tests. In these Unions, a number of Demand CSCs can be constructed. During the harvesting season, the farmers will be encouraged to bring their produce for selling rice through these Centres. In order to encourage them, a cash incentive can be provided in the beginning.

Farmers will obtain interest-free loan from the bank, convert the paddy to rice, and bring their produce to the Centre in lots. Once the rice is graded, the rice will be stored in the warehouse. In the beginning, the government will announce a procurement price that will cover the costs and also ensure sufficient profit for the farmers.

At the beginning of the pilot test, the government will be the only buyer in the Centres. This is because farmers will need time for getting used to this new culture of crop marketing. The government can continue procuring rice for multiple seasons to help the farmers become accustomed to this new system.

During this initial stage, the government can identify marginal farmers and procure rice from them with a fair price. Here with the term "Fair Price", we mean the price that is sufficient for the farmers to cover their production costs and the price that will keep them attracted to cultivate in the next season and stay in the farming profession. Continuing such procurement drive for subsequent multiple seasons through the Centres will improve their overall financial condition and their bargaining power will increase.

In the second stage, the government will construct new Centres in other Unions and at the same time will construct some Demand CSCs in the urban areas, such as in Dhaka city. During this stage, Market Specialists will be given licenses and they will be allowed to buy rice besides the government.

Bangladesh Accelerated Poverty Reduction Model

The Centres constructed in the first phase will be slowly opened for the private players, while the Centres constructed in the second phase will still be controlled by the government only. This will be done in order to avoid any unwanted market shocks by the farmers that might discourage them to accept the new system.

Once the farmers in the first phase will be fully accustomed with the new culture, the Centres will be fully opened to the private market intermediaries without any government procurement role. This process of government control and gradual phasing out of such control will continue over phases once new centres are constructed in new Unions. At the same time, more Demand CSCs will need to be constructed on the basis of supply situation of rice.

Such pilot can continue for multiple seasons, and the government should allocate sufficient funds to implement such pilot schemes. Strengths and weaknesses of the model will be identified during these pilot phases and necessary adjustments will need to be made to fine-tune the model. Once the pilot is successful, the model will be replicated in all the Unions, Upazillas and district towns.

After successful countrywide implementation of the model, its coverage can be expanded to include fruits, vegetables and fisheries. We term this model as "Bangladesh Accelerated Poverty Reduction Model (BAPRM)". This is shown in the above diagram:

It is proposed that initially the government will be the only investor in the model. However, if the pilot is successful, then the government can invite NGOs, foundations and various development agencies to participate in the funding process. This model will have multiplier impacts in the economy in terms of reducing poverty and promoting economic growth. Therefore, many development agencies would be interested in investing in the model.

At a later stage, private investors can also be invited to invest under Public-Private-Partnership model, but in this case of private participation, the government has to make sure that there will be a regulatory body for controlling maximum margins that the private investors can charge on each sale. Without such a regulation, the private investors will make this model a profitable venture, and as a result, the present blue collar intermediaries will eventually be replaced by white collar ones, and the farmers will not be the ultimate beneficiaries of the model.

A more comprehensive description of this model in Bangla is available in our website (www.ideasfd.org). In Bangla version, we've argued that absence of fair price of crops is the single most important factor causing poverty, and thus, if fair price of crops can be ensured through appropriate mechanism and the farmers are given the power to take advantage of market trends, poverty will be reduced at a much accelerated rate.

The proposed model is economically more efficient than Indian Regulated Market system because the proposed model connects supply centres with demand centres with the help of licensed market intermediaries that will ultimately help the farmers to get the highest benefit during the season when the price reaches its peak. The proposed model also covers the aspects of market integration in a more comprehensive manner.

Our model is more market driven as well compared to the regulated markets in India. Other than restricting Market Specialists for keeping stocks outside CSCs, the model does not violate free market principle in any other aspect.

On the other hand, Modern Terminal Market in India relies only on Public-Private Partnership model; however, we believe that unless there is a regulatory mechanism, this PPP model will not benefit the farmers.

Moreover, reliance on PPP model reduces the speed of implementation of the model because not too many investors would be willing to invest in these new ventures unless there is a lucrative profit potential.

We believe the government should steer this initiative in the beginning, and once the new model is successful under the government patronage, additional Centres can be established under PPP model if investors feel interested.

However, we strongly feel that such investors should have strong development mindset rather than profit motive only. Involvement of only profit-seeking investors will jeopardise the overall objective of this model.

This Mega Model is applicable not only for Bangladesh, but also for any other country that has been suffering from the problem of fair price of crops for farmers. Legitimate governments elected through free, fair and credible elections are thus welcomed to implement this Mega Model.

Mabroor Mahmood is the Founder of IDEAS FOR DEVELOPMENT (IFD).

[email protected]