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Farmers' Response to Revenue Changes, Rainfall and Revenue Risk of the Major Crops in Bangladesh

Shamsul Alam
Professor
Department of Co-operation and Marketing, Bangladesh Agricultural University, Mymensing.

Abstract/ Executive Summary:

Though several studies on farmers' response to price changes and price fluctuations over the years for the major crops in Bangladesh are available few have focused on farmers' response in terms of revenue changes and revenue fluctuations. After the Nerlovian pioneering work (1958) on supply responses, a substantial number of price response studies are available both for the developed and developing countries, but the farmers' response in terms of area changes/output supply to revenue changes/fluctuations has largely been ignored. Both product price changes (in real terms) and yield changes affect farmers' gross margin/ profit. If yield of a crop is stagnating or remain constant over time, then studies in terms of real price changes could be appropriate to analyze the farmers' response behavior than to revenue response. In a situation of expanding extension services and modern technologies, yield of crops, particularly for jute and rice after green revolution, has not remained constant. After independence, jute and rice yields generally .Therefore if the yield rates of crops are generally not stagnating, analyzing farmers behavior in terms of real revenue changes could be more appropriate for their crop output response analyzes. This is also imperative because, the revenue is money worth of output. Often price and yield may not move in the same direction. Therefore, it is not obvious how change in price will influence total revenue. Whether a given percentage increase in price will increase or decrease total revenue depends on the magnitudes of the corresponding percentage change in output supplied (may be responded through area increase or yield increase). Therefore, it would be more appropriate to analyze farmers' response behavior in terms of revenue changes than to price changes. Moreover, due to variation in price elasticity of demand (where output price increase may decrease farmers' revenue), revenue responses may be less pronounced, than the price responses of the farmers. This study has been particularly undertaken to examine how real revenue changes affect farmers supply behavior instead of only output price changes of the earlier studies.

Keywords: Farmers response, Revenue, Rainfall, Major crops

Location:

Start Date: 00-00-1971

End Date: 00-00-1988

Program Area: Risk Management in Agriculture

Non-commodity: Market analysis

Objectives:

To examine how real revenue changes affect farmers supply behaviour instead of only output price changes of the earlier studies.

Methodology:

The time-series data for the period 1971/72-1987/88 are used in this study. An earlier study was conducted to estimate price elasticity of supply of these crops along with the risk variables for this period. To compare the supply response elasticity of jute, rice and rice varieties in terms of real revenue changes, the same data set for the same period has been used to arrive at the estimates of supply elasticity and the risk variables. Estimates of the present study, thus could be compared with the price elasticity of output supply (in terms of area changes) for more precise interpretations of farmers' behavior in terms of real income changes for any aggregate policy analysis. Statistical Yearbooks and Agricultural Yearbooks published by the Bangladesh Bureau of Statistics (BBS) are used extensively as the data sources.The Nerlovian model takes account of dynamic aspects of price changes making the distinction between short and long-run elasticity. The traditional model is static and does not take account of simultaneity of changes of exogenous variables on area/output changes. Therefore, for estimation purpose, two equations have been developed following the Nerlovian price expectations and area adjustment models. Side by side, static model equation also has been estimated and reported when dynamic models have not turned out to be significant. It is hypothesized that variation in crop area is dependent on expected revenue (in deflated terms), rainfall during the sowing period and revenue risks as perceived by the producers.

Source of Information: The Bangladesh Development Studies,Vol. 21, No. 3, Crop Diversification in Bangladesh (September 1993), pp. 101-109 Published by: Bangladesh Institute of Development StudiesStable

Article Link (Online Journal):

Funding Source:

Total Budget (Tk.) :

Achievement/Findings:

A revenue response study could be an important way to analyze profit maximizing behavior of the farmers in aggregate. The literature of farmers aggregate response behavior in terms of real price changes in the developing countries is rich but there is dearth of studies based on real revenue changes. Crop revenues (after deflation) reflect profit abilities. In a developing market economy and also with integrating markets, utility maximizing farmers tend to be profit maximizes. There may be output price increase in real term but that may not go in favor of farmers in terms of realized revenues in the face of declining yield levels and/or wage increase. Therefore, farmers revenue responses may not be so much pronounced as straight price responses. Farmers are responsive to relative profitability or real profitability for cash crop like jute. If profitability goes down in terms of competing rice (Aus), jute area would decrease. So, there is a choice of policy options which should be favored, if at all. Transplanted Aman mostly covers up subsistence requirement and farmers yet seemed insensitive to revenue variations or revenue receipt has not been attractive so far in terms of labor costs put in for crop cultivation. Policy makers should take a serious note of this rather negative growth trend. Provision of irrigation facilities, measures for farm mechanization (spread of power tiller), development of markets for inputs, institutional credit facilities, all these can ameliorate problems of area adjustment up to the desired level by the farmers. Finally, an important lesson of this econometric exercise is that, varietal type wise analysis of a crop (having varying levels of input requirement and production period) gives more accurate behavioral results than varietal aggregation. Aggregation can conceal or neutralize economic /environment al influences.

Knowledge Management: Journal