Principal Investigator: Dr. Mohammad Jahangir Alam Department of Agribusiness and Marketing

1. Effectiveness of Bangladesh`s Rice Procurement System and Possible Alternatives: Supporting Farmers` Income and Sustaining Production Incentives Principal Investigator: Dr. Mohammad Jahangir Alam Department of Agribusiness and Marketing BAU, Mymensingh-2202 Interim Report Prepared for Presentation at NFPCSP Workshop Roposhi Bangla Hotel, Dhaka 1000 28-29 November, 2012

2. Research Team

3. Introduction • Purposes of domestic rice procurement are: (i) Building stocks for PFDS & (ii) Income support to farmers • For the said purposes -- govt. provides a support price > cost of production (ensure that farmers do not produce at a loss because of distress sells) • Higher prices, are in conflict with the objective of keeping prices low enough for low-income consumers • Conflict can be avoided through • Higher govt. subsidies– BUT have budgetary implications & can reduce investment in public goods • Besides impact on govt. budget, proc. prices that are too far above market prices can favor rent seeking activities

4. Introduction (2) • Moreover - timing of announcement is also an important decision. It could • Encourage investment by farmers & greater input uses • Improve prices when farmers engage in distress sells • Food Policy Plan of Action (2008-15): importance of enhancing the effectiveness of system & providing effective support to producer, while ensuring stable consumers` price • Given this backdrop, the research will contribute to understand – • Effectiveness of the system in terms of impact on the farmers • Alternative system & instruments to achieve the objective of sustaining farmers` income

5. Objectives • To examine to what extent the current procurement system supports rice prices and farmers` income, thus providing production incentives (with emphasis on marginal & small farmers) • To examine to what extent the current procurement system allows the government to procure adequate supplies for its distribution needs • To identify actionable options for enhancing the effectiveness of the procurement system considering their relative costs and benefits, and possible alternative methods for supporting farm income, other than a procurement system

6. Study Phasing The study is designed to conduct into four phases Phase 1 → review, farmers stocking behaviour & proportionate of proc. from farmers & millers (literature, HIES & historical data) Phase 2→ relationships estimation (historical data) Phase 3→ effectiveness & constraint of proc. system (field survey) Phase 4→ feasibility, practicality & acceptability of alternative proc. systems and of alternative methods (survey in phase 3, FGD & KII)

7. Phase 1: Literature review, stocking behaviours & procurement Research Questions in Phase 1 Addressing the stocking behaviour & procurement: What are the evidences of the domestic proc. & rice price stabilization interventions? What are the stocking behaviours of farmers? What is the proportion of grain that is procured from farmers and millers?

8. Farmers` stocking behaviour (Research question 2) • For calculating stocking behaviour (quantity & proportion of production stored), we have used HIES 2010 data • We have calculated this by season, farm sizes and income quartile On top of that , the following stock functions will be estimated Change in Stock function: S=f (Xi) where S= change in stock & Xi= explanatory variables x1= size of production (& its square) x2=other sources of acquisition (e. g. payments in kind & received) x3=price x4=main occupation of hh x5=size of hh x6= location of hh (to correlate with timing of crop in a particular location) etc. x6= cost of stocking, etc.

9. Preliminary findings Table 1 :Disposal of paddy in Boro, Aman and Aus seasons by farm size • Source: Calculated from HIES 2010

10. Table 2 : Production and disposal of all paddy by farm size • Note: Stocks= 1.-(sum of 2. to 9.) • Source: Calculated from HIES 2010

11. Table 3:Production, disposal & stocks of all paddy by surplus & deficit district categories • Source: Author`s calculated from HIES 2010 Average production is higher in the surplus districts, stocks are less than the deficit districts

12. Share as a percentage of production by Income quartile Stock is the lowest for lowest quartile & highest for highest quartile Percent Consumption, sold and stocks

13. Domestic procurement (Research question 3) • Calculation of domestic procurement from farmers & millers • We will impute total domestic procurement which is a sum of the procurement from farmers & millers • (Total domestic proc. = ∑ proc. from farmers & millers) • Calculated by season (Aman & Boro)

14. Figure 1: Procurement from farmers (Aman and Boro) Percentage of procured grain Percentage of procured grain • Figures indicate that the percentage of grain procured from farmers in both Boro & Aman is declining & it is very sharply in the recent past • Between 1989/90 – 2011/12, only 21.35% was procured from farmers (Aman) • Between 1991 - 2012, only 20% of the grain was procured from farmers (Boro)

15. Figure 2: Procurement from millers (Aman and Boro) Percentage of procured grain (Boro) Percentage of procured grain (Aman) • Proportion of grain that was produced from millers (Aman season) fluctuated to a great extent • Proportion of Boro procurement from the millers is rising sharply. In fact, 80% of the grain was procured from the millers. • Conclusion is – the millers are the primary source of procurement.

16. Phase 2: Estimating relationships Research Questions in Phase 2 • What is the relationship between ---- • Production deviations from trend & govt. procurement? • Production deviations from trend & govt. distributions? • Proc. price &prevailing market price? • Government stock & price level? • Procurement & deviations of real market prices from trend, and • Distributions & deviations of real market prices from trend

17. Models • Prod. deviations from trend & govt. procurement; • Production deviations from trend & govt. distributions? Estimating trend • In doing this, we will estimate polynomial trend function • Y = production, T = time trend & n= order of polynomial • Other models could also be used (linear, quadratic etc.) Y=actual procurement (distribution) & Xi= explanatory variables x1= Opening govt. stock at the start of the season x2= planned dist. of current season x3= deviation of prod. from trend x4= deviation of real (inflation adjusted) market price from average of past n years (t= 1, 2 or 3)

18. Models Procurement & market price – where Pm=market price Pp=procurement price Government stock & market price where Pm=market price & S=government stock • Procurement & deviations of real market prices from trend, and • Distributions & deviations of real market prices from trend Y=actual procurement (distribution) & Xi= explanatory variables Pit = deviation of real market prices Data: Historical data such as total rice production, total government procurement, total government distribution, procurement price, market price, government stock for both Boro and Aman will be used Will explore the relationships for • the entire data period; • before 1992; and • 1992 & after.

19. Figure 3: Production deviation from trend and procurement Quntity (‘000 MT) -Aman • Initial results were a bit surprising • BUT latter, it shows the similar trend • r = 0.48 Quntity (‘000 MT)- Boro • Here most of the year, we found the positive correlation between good production and procurement • r = 0.57

20. Figure 4: Production deviations from trend and public distribution Quntity (‘000 MT) • PFD was surprisingly low during years of low production (1997/98 -1998/99) • BUT some years such as 1999/2000 and 2004/05, when prod. deviation from trend was small, distribution was relatively higher • r = 0.77

21. Phase 3 & 4 Research Questions: Addressing overall assessment, alternative systems, methods: What is the farmer`s overall assessment of the proc. system? What are the overall views of millers on the effectiveness of the system? What are the other country experiences on alternative systems & farmer`s income support? What are the feasible alternative systems & alternative methods (other than proc.) that would enhance the benefits to rice farmers?

22. Effectiveness and constraints (Questions 1 & 2) Table 4: Farmers selection (Non-participating farmers) (n=300) Table 5: Participating farmers(n = 200) Table 6: Millers’ sampling (n= 280)

23. Phase 4: Feasibility, practicality & acceptability of alternative methods • Critical theoretical review (pointing out the existing paradox in fixing both a quantity to be procured & a procurement price) (comes from phase 1) • Alternative Systems and Instruments: • In the form of a matrix listing instruments along the left hand side and objectives across the top. • Cells of the matrix can then be filled with plus, minus, or zero depending on the effect of each instrument on each objective • In doing so, FGDs, KIIs & results in the different phases will be the keys

24. Matrix Development On top of that - we will explore whether we can use any quantitative tools (as suggested by Mr. Naser Farid, DG, FPMU) especially to see the impact at government exchequer

25. Different activities and its` status

26. Thank You