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The Food Grains Market in the New Millennium: International Linkages

Mohammad Ali Taslim
Professor
Department of Economics, University of Dhaka, Bangladesh

Abstract/ Executive Summary:

Trade liberalization policies pursued during the last two decades have effectively integrated Bangladesh into the world economy. A consequence of this integration is that the prices of tradable commodities such as food grains are greatly influenced by the movements of the world prices. The latter is influenced by the global supply and demand factors. Thus, the prices in individual domestic markets depend less on their own supply-demand balances; instead, they depend mostly on the global balances. A heightened awareness of the business community about the global market and quick flow of information have ensured that global developments are transmitted to the local market quickly. This implies that the reasons for price increases in the domestic market cannot be explained without an understanding of the reasons for price increases in the international market. This has major implications for the effectiveness of domestic policies, which are not always fully understood. Domestic prices of cereals are determined to a large extent by the same factors that determine international prices. One of the ways Bangladesh could push domestic prices below international prices would be holding large stocks of cereals, which could be sold in times of shortages at subsidized prices to ease supply shortages. If Bangladesh were to become a food surplus country, then domestic prices could be held below international prices by imposing export bans or export taxes or by giving subsidies.

Keywords: Cereal prices, Domestic economy, Food grain, Food stocks

Location: Department of Economics, University of Dhaka, Bangladesh

Start Date: 00-00-2007

End Date: 00-00-2013

Program Area: Socio-economic and Policy

Non-commodity: Market analysis

Objectives:

Objective of the study was to identifies the major influences on the international cereal prices and their transmission to the domestic economy.

Methodology:

After a fairly long period of relative calm, the international food grain market became highly unstable during 2007 and 2008. The prices of all major cereals including rice, wheat, and maize rose very sharply. The food price index in mid- 2008 was more than twice its value compared to the price level five years ago. The amplitude of the fluctuations was so large that globally it pushed down many poor households below the poverty line. Bangladesh was no exception; the very steep increase in the price of rice and flour hurt the ordinary people, especially the poor. It was feared that a large number of them had fallen back into abject poverty reversing much of the good work done earlier for poverty alleviation. Prices of essential goods, especially rice and wheat, plummeted toward the end of 2008 bringing some relief to the ordinary people. Within only six months the food price index had crashed by more than one-third from its peak in June 2008 and the rice price by nearly one-half. Prices crept up from around mid- 2010, and by the end of 2011 rice prices had risen by nearly 50 percent increasing real fears of a civil unrest around the world. However, rice prices stabilized, and by the beginning of 2013 prices started falling gradually. During January-November of 2013 the price of Thai rice (5% broken) fell in the world market by 22 percent to reach the lowest level since January 2008. The retail rice price in Bangladesh at the end of 2010 was 41 percent higher than its level a year ago, and the retail wheat price was higher by about 50 percent. Since then both retail and wholesale prices fell gradually and declined by about 20 percent. But surprisingly the upward march of the prices resumed at the beginning of 2013 despite falling international food prices. By the end of the year the domestic prices were almost at the same level as they were three years ago. The price of a commodity in a free market is determined by the interaction of market supply and demand. The price increases only if there is excess demand for the commodity. Conversely the price decreases when there is excess supply. Excess demand for a commodity will arise if either there is an increase in the market demand or a fall in the market supply. World production of rice increased steadily during the 1980s and 1990s. There was a record harvest during the 1999/2000 period with the production of milled rice surpassing 400 million metric ton mark for the first time. The high and rising volume of production, that was generally higher than total consumption, permitted a very robust stock-to-consumption ratio, which reached a record high level of 37.1 percent in 2000/01. Total global trade (export) also increased steadily and reached a record high of 27.7 million metric ton in 2001/02. A new development in the fuel market from the end of the second millennium is the large-scale use of food/feed crops, especially maize and soybean, for the production of fuels, also called bio-fuels to distinguish them from fossil fuels. The use of maize for the production of ethanol accelerated in the first decade of the new millennium. Cereal production in Bangladesh remained stagnant during the first half of the new millennium, but increased steadily thereafter. There was a large increase in the production of rice crops in 2008/09 when the total production of rice was 31.31 million ton, an increase of 8.2 per cent over that of 2007/08. The large increase was due mostly to Aus and Aman output, which increased substantially after poor harvests of the previous year due to floods and a cyclone. These increases would seem to have been caused by the ‘cobweb’ response of the farmers to the extremely high cereal prices in 2007 and 2008, as well as government efforts to provide timely input support to the crop farmers.

Source of Information: Journal of the Asiatic Society of Bangladesh (Hum.), Vol. 59(2), 2014, pp. 243-64

Article Link (Online Journal): http://www.asiaticsociety.org.bd/1_858_Taslim_Dec_14.pdf

Funding Source:

Budget:

Total Budget (Tk.) :

Achievement/Findings:

While the international price is a major influence on the domestic price of a tradable good such as rice, there are domestic factors that may cause a price divergence. One such factor is government intervention. If the government intervenes in the market to procure a certain volume of rice at an administered price, it will influence the local free market price. When the government sells a substantial amount of rice at a subsidized price, it will push down the free market price. The government procurement price should normally set a benchmark for market price. However, if the procurement price is set too low, there may be no one willing to sell his or her product to the government. This was evident during the 2009/10 crop season when the government’s procurement drive had to be abandoned as the farmers were not keen to sell rice to the government. Consequently, the government was obliged to import on a large scale to build up the public food grain stock which had fallen to a low level. A low food grain stock held by the government may engender expectations of shortages, and reduce the ability of the government to influence the market as and when needed. The government needs to improve its forecasting capacity in order to take timely offsetting measures, and set the price fixation mechanism in a manner such that the procurement prices align closely to the market prices.

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