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Supply Response of Wheat in Bangladesh: Co-integration and Vector Error Correction Analysis

A. S. M. Anwarul Huq
Institute of Agricultural and Food Policy Studies, Universiti Putra Malaysia, Putra Infoport, Jalan Ksjang-Puchong, 43400 UPM Serdang, Selangor, Malaysia.

Fatimah Mohamed Arshad
Institute of Agricultural and Food Policy Studies, Universiti Putra Malaysia, Putra Infoport, Jalan Ksjang-Puchong, 43400 UPM Serdang, Selangor, Malaysia.

Gazi Nurul Islam
Institute of Agricultural and Food Policy Studies, Universiti Putra Malaysia, Putra Infoport, Jalan Ksjang-Puchong, 43400 UPM Serdang, Selangor, Malaysia.

Abstract/ Executive Summary:

Numerous past studies on wheat cultivation in Bangladesh is criticized for using the weaker Nerlovian Partial Adjustment models and also for analytical interpretation through Ordinary Least Square (OLS) creating spurious results for time series data. This problem can be avoided if Econometric technique of co-integration is used. It is for this the present paper estimates the supply response of wheat in Bangladesh by using the modern technique of co-integration with Vector Error Correction Model (VECM). Our unit root analysis indicates that underlying data series were not stationary and are all integrated of order one, that is I(1). The Johansen multivariate co-integration approach indicates the presence of a co-integrating relationship in the supply response model. Wheat acreage is significantly influenced by price of wheat, and other competing crops such as Boro rice. The non-price factors weather has a highly positive effect on wheat area in the short-run. The wheat supply elasticity’s are found to be inelastic both in the short-and long-run. The long-run and short run price elasticity’s were 0.95 and 0.47, respectively.

Keywords: Supply response, Wheat, Co-integration, Vector error correction approach.

Location: Time series data Collection from 'The Yearbook of Agricultural Statistics' Period 1972-1973 and 2005 to 2006 (BBS, 1982, 1998, 2004, 2005, 2008)

Start Date:

End Date: 00-00-2006

Program Area: Socio-economic and Policy

Commodity: Wheat

Objectives:

To Investigate the Co-integration and vector error correction analysis for a vital role in explaining the farmers’ area allocation decision.

Methodology:

Time series data during the post independence of the country for the period 1972-1973 to 2005-2006 (BBS, 1982, 1998, 2004, 2005, 2008) were used for this study. Data on area, production and price of wheat, boro paddy, potato, mustard were collected from "The Yearbook of Agricultural Statistics" published by the Bangladesh Bureau of Statistics (BBS), Ministry of Planning, and Government of the People's Republic of Bangladesh. The variable chosen includes natural logarithm of wheat area (A), natural logarithm of deflated wheat price (WP,), natural logarithm of deflated Boro paddy price taken as competitive crop (BP). and proxy variable for weather (WE). The impact of weather on wheat yield variability is measured with a Stalling index. To obtain expected yield, yield is regressed on time. The ratio of the actual to the predicted yield is defined as weather variable. The direct effects of weather such as rainfall and temperature may captured by this index in supply response model. Data on infrastructural developments, expenditure on agricultural research and extension, applications of modern techniques like fertilizers and improved rice varieties etc, are hardly available particularly in developing countries like Bangladesh. Therefore, these variables cannot be easily represented in the wheat supply response equations directly and individually. An attempt is made to capture their effects collectively by introducing time-trend dummy variable. Nominal harvest price was deflated with the Laspeyres price index (using base year weights). The Laspeyres price index was constructed for boro paddy, chick pea, mung bean, lentil, potato and mustard harvest price as they are competing crops of wheat. In this study, the area planted is used in lieu of planned output, which may be justified by the fact that the farmers have greater control over the area than on the production or output. In this case, we assume that other inputs are varied in proportion to land and that constant returns to scale prevail. Harvest price of wheat is taken in this model because most of the farmers in Bangladesh dispose off their products just after the harvest. The methodology used was the method of co-integration and its implied vector error correction approach (VEC), extensively used in supply response studies. The VEC model is considered appropriate for non-stationary time series with a common long-term trend. This implies that although the variables may exhibit a dynamic of their own in the short term, they tend to move together in the long run. To ascertain the order of integration, a unit roots analysis was undertaken for each of the chosen time series variables. Once the order of integration of time series data was determined the co-integration was used by using Johansen’s approach (1988) which provides likelihood ratio tests for the presence of number of cointegrating vectors among the series and produces long-run elasticities. It is hypothesized that wheat area and real wheat price are jointly determined (that is endogenous to the system) while the other variables (as expected) is exogenous to the system.

Article Link (Online Journal):

Funding Source:

Total Budget (Tk.) :

Achievement/Findings:

Present paper estimates the long-run relationship between wheat area, price incentives and non-price factors in Bangladesh by Using Johansen’s Cointegration approach. Generally, the results conform to a priori expectations. Farmers' response to producer prices is statistically significant and positive. Two basic results turned out from the analysis - firstly, the estimated supply elasticities came out to be less than one, but they appeared to be high enough to imply that further agricultural reforms are required. Secondly, weather appeared to be important non-price variables explaining wheat area, which shows crop production in Bangladesh are still largely influenced by weather variability. Our result indicates that Boro crops compete with wheat crop. Supply elasticity in consideration to price is significantly positive, in case of wheat, for which price policies will be effective in obtaining the desired level of output. Producers react to the prices at the time of harvest it is for which any policy intervention with regard to price must be made at that time. As the impact of price on production is higher in the long run compare to that of the short run, the government should focus on the factors that affect the long run price instability. Government should focus on the policies that ensure the profitable price to the producers in the long run. It also important to noted that, price alone has limited influence on farmers’ resource allocation decisions, external factors, such as government agricultural and trade policies as well as weather conditions is critical for output supply. Weather remains one of the most important uncontrollable variables involved in agricultural production systems; the estimated result shows that weather plays a critical role in wheat production in Bangladesh. Wheat yield are mainly affected by temperature condition and fogy weather throughout the production period in winter. Increasing the area under wheat cultivation can be done by removing the hurdles, like quality seed, fertilizer, institutional credit, fuel/oil for irrigation, machine tillage etc. Primitive technology is being used for wheat cultivation for which budgetary allocation should be made for research and development. The study therefore recommended that an improve policy package that encompasses price and non price incentive as well as transmission mechanism is needed for obtaining a better response from wheat farmers.

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