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Farmers’supply Response to Prices and Non-price Factors in Bangladesh

Dr.Mohammad Yunus
Bangladesh Institute of Development Studies (BIDS)E-17, Agargaon, Sher-e-Bangla Nagar Dhaka-1207

Dr.Quazi Shahabuddin
Bangladesh Institute of Development Studies (BIDS)E-17, Agargaon, Sher-e-Bangla Nagar Dhaka-1207

Abstract/ Executive Summary:

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. 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.

Keywords: Farmers’ Supply response, Prices non-price factors

Location:

Start Date:

End Date:

Program Area: Socio-economic and Policy

Non-commodity: Price behavior

Objectives:

To respond farmers to price signals and risks

Methodology:

The data would be collected from various secondary sources, including BBS,Bangladesh Bank, and would be analysed using standard cointegration and vector correction models. The analysis will begin with examination of the time series properties of the variables used and their order of integration determined using augmented Dickey-Fuller (ADF), Phillips-Perron (PP) and Kwiatkowski-Phillips-Schmidt-Shin (KPSS) unit root tests. If the null of non-stationary cannot be rejected, then a variable contains unit roots and hence it is not stationary. If its first difference is then tested and found stationary, it is I(1). Given that a variable X is I(1), the analysis proceeds to test for cointegrating relationship. If cointegration exists, error correction model is estimated. If not, the analysis continues with ADL modeling of the supply response.The study would look into own price effect, yield effect, real exchange rate effect, risk effects and institutional effect. The coefficients of own price and yield are expected to be positive. It is expected that the movement of the real exchange rate would capture the substitution effects in both production and consumption (between traded and non-traded goods such as export crops and food crops or between food imports and domestic production). It is difficult to make an assumption about the signs of the coefficient since the impact of changes in real exchange rate would be mixed for exportable cash crops and food imports. The coefficient of the risk variable is expected to be negative as farmers are generally assumed to be risk averse. To capture the effects of the regime change, dummy variables (both additive and interactions with relevant explanatory variables where the slope may change) will be introduced.

Source of Information: Biennial Report-2011-2012, BIDS

Article Link (Online Journal):

Funding Source:

Total Budget (Tk.) :

Achievement/Findings:

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. 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.

Knowledge Management: Report/Proceedings