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Supply Response of Wheat in Bangladesh: Cointegration 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 the 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 elasticities are found to be inelastic both in the short and long run. The long-run and short-run price elasticities were 0.95 and 0.47, respectively.

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

Location: In Bangladesh

Start Date:

End Date:

Program Area: Socio-economic and Policy

Commodity: Wheat

Objectives:

To investigate such factors that might be playing 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 a competitive crop (BP). and proxy variable for weather (WE). The impact of weather on wheat yield variability is measured with a Stalling index (Stalling, 1960). To obtain expected yield, yield is regressed on time. The ratio of the actual to the predicted yield is defined as a 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 a 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, chickpea, mung bean, lentil, potato and mustard harvest price as they are competing crops of wheat. 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. The application of VEC models has been relevant in supply response, market leadership and integration studies (Nkang et al., 2007; Huq and Arshad, 2010, Engler and Nahuelhual, 2006; Vickner and Davis, 2000; Thompon et al., 2002; Sephton, 2003). The empirical application of the VEC approach follow three steps: (i) unit root tests to identifying the order of integration of the variables; (ii) cointegration test to identify the existence of relationship using Johansen maximum likelihood approach for multivariate cointegration; and (iii) estimation of the VEC to obtain the short-run and long-run coefficients. To ascertain the order of integration, a unit-roots analysis was undertaken for each of the chosen time series variables. Order of integration for all the variables must be known prior to cointegration analysis, at least to ensure that variable is not integrated of order greater than one (Abbott et al., 2000). In order to identify the order of integration of each single time series, we performed an augmented Dickey-Fuller (ADF) unit root test (Dickey and Fuller, 1981; Said and Dickey, 1984), both with or without deterministic trend using Standard Version of Eviews-6 Econometric Software. The study adopts the Johansen Maximum Likelihood procedure of cointegration. In this method, a preliminary analysis is carried out first to assess the order of integration of the data series through the use of unit root tests after which we test for the existence of cointegrating (long-run equilibrium) relationships among the data series. If a valid co integrating relationship is found, then we estimate a vector error correction model, since cointegration is a pre-condition for the estimation of an error correction model.

Source of Information: African Journal of Agricultural Research, Vol. 8(44), pp. 5440-5446, 14 November, 2013

Article Link (Online Journal): DOI: 10.5897/AJAR10.375

Funding Source:

Budget:

Total Budget (Tk.) :

Achievement/Findings:

The 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 the 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 yields are mainly affected by temperature conditions 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 improved policy package that encompasses price and nonprice incentive, as well as transmission mechanism, is needed for obtaining a better response from wheat farmers.

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