Food prices and the poor
Friday, 24 August 2007
Forrest Cookson
To achieve this, the government is: attacking syndicates and others accused of raising the food prices unreasonably; creating parallel markets to sell food at low prices; importing more food supplies; and increasing food production through greater provision of credit, maintaining low interest rates on agricultural credit and subsidising the price of key inputs, particularly fertiliser.
The difficulty with the above programme is that it is unlikely to achieve the desired effect. The policies are either perverse, not timely, or of very modest impact.
Most food prices in Bangladesh are essentially determined by Indian food prices and the Rupee-Taka exchange rate. The international price (dollar terms) and the Taka-dollar rate may determine some prices [such as vegetable oil] but the Indian influence is certainly more powerful. For most persons food consumption is quite basic and imported products through the formal system are only a small part of the consumption. This Indian related price is a floor price. Increased food supply will not change the prices! Increased imports will not reduce the food prices without subsidies. Prices may go above the floor when there is a disruption in supply or a speculative surge in demand. But this effect is temporary. Indian inflation is slowing but the Rupee will continue to get stronger. This model of food price formation suggests the major instrument in the hands of government is the rupee/taka exchange rate.
There is no real evidence that there is monopolistic pricing in the food sectors. This belief is a myth! Mark-ups in food markets appear to some persons high, but in fact there is waste, a range of qualities, and a range of actual transaction prices that make high mark-ups characteristics of wholesale markets. Elsewhere I have tried to explain the follies of believing in collusive behaviour.
Parallel markets to provide food through other distributors are rarely successful. The volumes of food available are too small and in many instances those lucky enough to buy at below market prices turn around and resell part or all at the higher market price. To focus on stopping monopoly pricing and a parallel marketing effort may be good public relations but it does not reduce prices.
To help poor rural households two programmes are needed: First, large rural infrastructure projects to employ landless persons. This is meant to place greater purchasing power in the hands of landless households. This may be tackled as soon as the flood recedes. Putting people to work will provide some relief from the higher food prices. If prices cannot be brought down then purchasing power needs to be increased. There is probably plenty of food in Bangladesh but there is an acute shortage of purchasing power. The government cannot do much about the food prices but it can certainly raise the purchasing power of landless households.
The second programme is the actions by government to promote more output in agriculture. This is an important and valuable approach. Farmers are pretty smart and it is another myth that there is a lot that can be done to achieve an immediate increase in agricultural production. The real changes needed cannot be accomplished swiftly. The interest rate is less important than the quality of the credit delivery system. The availability of fertiliser is one of the critical questions; price is an issue but quality and timely supply are more important. The fertiliser trading system cannot be improved without major amendments to the existing system taking away the constraints. Both of these undertakings: improving delivery of agricultural credit and constructing a more competitive fertiliser marketing systems are projects requiring several years. The existing fertiliser marketing system restricts competition contributing to high prices and does not provide for acceptable maintenance of quality. The delivery of agricultural credit has improved but interest rates that are so far below rural informal rates it encourages relending.
Keeping diesel prices low in the belief that raising such prices would have serious consequences for the farmers is probably wrong. The fuel part of transport costs by vehicle is not more than 40% of the total cost; transport costs are not more than 10% of the cost of fertiliser. Fertiliser cost is not more than 15% of agricultural output value. A 50% increase of fuel price should raise the produce prices by not more than 5%. Increasing diesel prices is a one time increase, not an increase year after year. When prices are low then there is certainly smuggling to India where diesel prices are higher. Fuel will find its way across the border, leaving Bangladesh in short supply and farmers unable to pump water. The farmers are probably already paying prices higher than official prices as diesel is often purchased from middlemen.
Rural households exist in a world of informal markets and highly competitive buying and selling. There are constant threats of product adulteration. Credit markets resell low interest credit at high rates. Actual transactions prices are often quite different from the "official" prices and the informal markets will immediately arbitrage price differentials.
The best ways to increase agricultural output is to support competitive markets and input product packaging that prevents or limits adulteration. Market competition can be increased at both the farm and wholesale level. Bangladesh farmers are very shrewd good businessmen as well as good agronomists. We have seen that if given a free market environment that they will prosper. Controls - price or other - will simply slowdown the growth of agriculture.
What can work?
* Increase agricultural production by competitive marketing of fertilisers and building improved markets.
* As for prices increased supply will reduce speculation, but the prices may continue to be driven up by a strong Indian rupee.
* Increase poor rural households' purchasing power.
What will not work?
* Bullying market participants.
* Parallel marketing system.
What could work?
Monetary policy if tight enough to cause a revaluation of the Taka to 62-64/US dollar.
To achieve this, the government is: attacking syndicates and others accused of raising the food prices unreasonably; creating parallel markets to sell food at low prices; importing more food supplies; and increasing food production through greater provision of credit, maintaining low interest rates on agricultural credit and subsidising the price of key inputs, particularly fertiliser.
The difficulty with the above programme is that it is unlikely to achieve the desired effect. The policies are either perverse, not timely, or of very modest impact.
Most food prices in Bangladesh are essentially determined by Indian food prices and the Rupee-Taka exchange rate. The international price (dollar terms) and the Taka-dollar rate may determine some prices [such as vegetable oil] but the Indian influence is certainly more powerful. For most persons food consumption is quite basic and imported products through the formal system are only a small part of the consumption. This Indian related price is a floor price. Increased food supply will not change the prices! Increased imports will not reduce the food prices without subsidies. Prices may go above the floor when there is a disruption in supply or a speculative surge in demand. But this effect is temporary. Indian inflation is slowing but the Rupee will continue to get stronger. This model of food price formation suggests the major instrument in the hands of government is the rupee/taka exchange rate.
There is no real evidence that there is monopolistic pricing in the food sectors. This belief is a myth! Mark-ups in food markets appear to some persons high, but in fact there is waste, a range of qualities, and a range of actual transaction prices that make high mark-ups characteristics of wholesale markets. Elsewhere I have tried to explain the follies of believing in collusive behaviour.
Parallel markets to provide food through other distributors are rarely successful. The volumes of food available are too small and in many instances those lucky enough to buy at below market prices turn around and resell part or all at the higher market price. To focus on stopping monopoly pricing and a parallel marketing effort may be good public relations but it does not reduce prices.
To help poor rural households two programmes are needed: First, large rural infrastructure projects to employ landless persons. This is meant to place greater purchasing power in the hands of landless households. This may be tackled as soon as the flood recedes. Putting people to work will provide some relief from the higher food prices. If prices cannot be brought down then purchasing power needs to be increased. There is probably plenty of food in Bangladesh but there is an acute shortage of purchasing power. The government cannot do much about the food prices but it can certainly raise the purchasing power of landless households.
The second programme is the actions by government to promote more output in agriculture. This is an important and valuable approach. Farmers are pretty smart and it is another myth that there is a lot that can be done to achieve an immediate increase in agricultural production. The real changes needed cannot be accomplished swiftly. The interest rate is less important than the quality of the credit delivery system. The availability of fertiliser is one of the critical questions; price is an issue but quality and timely supply are more important. The fertiliser trading system cannot be improved without major amendments to the existing system taking away the constraints. Both of these undertakings: improving delivery of agricultural credit and constructing a more competitive fertiliser marketing systems are projects requiring several years. The existing fertiliser marketing system restricts competition contributing to high prices and does not provide for acceptable maintenance of quality. The delivery of agricultural credit has improved but interest rates that are so far below rural informal rates it encourages relending.
Keeping diesel prices low in the belief that raising such prices would have serious consequences for the farmers is probably wrong. The fuel part of transport costs by vehicle is not more than 40% of the total cost; transport costs are not more than 10% of the cost of fertiliser. Fertiliser cost is not more than 15% of agricultural output value. A 50% increase of fuel price should raise the produce prices by not more than 5%. Increasing diesel prices is a one time increase, not an increase year after year. When prices are low then there is certainly smuggling to India where diesel prices are higher. Fuel will find its way across the border, leaving Bangladesh in short supply and farmers unable to pump water. The farmers are probably already paying prices higher than official prices as diesel is often purchased from middlemen.
Rural households exist in a world of informal markets and highly competitive buying and selling. There are constant threats of product adulteration. Credit markets resell low interest credit at high rates. Actual transactions prices are often quite different from the "official" prices and the informal markets will immediately arbitrage price differentials.
The best ways to increase agricultural output is to support competitive markets and input product packaging that prevents or limits adulteration. Market competition can be increased at both the farm and wholesale level. Bangladesh farmers are very shrewd good businessmen as well as good agronomists. We have seen that if given a free market environment that they will prosper. Controls - price or other - will simply slowdown the growth of agriculture.
What can work?
* Increase agricultural production by competitive marketing of fertilisers and building improved markets.
* As for prices increased supply will reduce speculation, but the prices may continue to be driven up by a strong Indian rupee.
* Increase poor rural households' purchasing power.
What will not work?
* Bullying market participants.
* Parallel marketing system.
What could work?
Monetary policy if tight enough to cause a revaluation of the Taka to 62-64/US dollar.