Managing the rice market

It seems the government is feeling nervy in managing the rice market as it is often found to blame the rice mill owners and hoarders in the trading chain for increasing the price of rice in the very recent past. Price of rice went up 15 to 20 per cent at the retailer's level. The consumers, mostly the low-income groups, are blaming the government for failing to contain price hike.

The issue of rice price has become very important, as it is the number one food item in Bangladesh, and the poor people of Bangladesh spend 70-80 per cent of their incomes on rice consumption. They consume alternative food items like wheat but they spend much less of their income on those food items. As the prices are inter-related, especially among the substitutes, the rise in the price of rice is also expected to give rise in the prices of the alternative foods like that of wheat. Being desperate to bring down rice price, government agencies recently raided the go-downs and warehouses of the big rice traders. But will that help contain the price spiral in the market place? We don't think so. When do the hoarders hoard more than what they hoard normally? Obviously, when they see or, at least sense, a short supply of the item. The demand for rice is more or less inelastic with respect to price. So the big traders do not feel an inclination to reduce the price and sell more to make extra profit. For them, controlling the supply side of rice trade brings more of boons than banes. But hoarding of more than a lawfully defined amount of rice or paddy is an offence under the existing law. The law prohibiting hoarding was necessary, otherwise, the consumers would have been at the mercy of the hoarders.

Prohibitive law alone cannot bring down the price of rice or ensure a normal supply of the item. Here, the authorities shall have to see the supply side also, whether that is constrained, even for a temporary period. The authorities know the demand side, now if they fail to match it by ensuring the required supply, the middlemen and the hoarders will take advantage of the situation. When the rice traders see that government go-downs for rice storage are empty, and when the import of the rice is far less adequate, they try to take advantage of the situation.

Now, in such a situation what the government can do apart from undertaking market vigilance?  There is one option open, and that is-- the government can itself be an important market player. To be an important market player, the government is required to be the procurer, importer as well as the seller. Obviously, government cannot sell rice at the price less than the cost of procurement. But when the government is seen to be a strong intervening agency, the private sector rice traders will become cautious and they will have no choice but to sell at competitive price.

Most of the Bangladesh markets are not transparent and competitive, so is the rice market. This market, at the time of shortage, turns to be oligopoly which means market is being dominated by few big firms. In an oligopoly, the government has to remain vigilant while performing the duty of overseeing. In the recent months, rice production internally faced a setback in the backdrop of the repeated devastating floods in the northern part of Bangladesh. That shortage shall have to be made up by import. Rice exporting countries are not many. So, they can raise export price when they see desperate buyers looking up to them.

Producing at home more of the food grains and keeping the import option open should be the preferred strategy for Bangladesh. Also, the government must not give the impression to the consumers and the market players that a major food item like rice suffers from shortage of supply. Rather, the reverse should be the policy, telling that there is adequate rice supply in the pipeline. Many world famous economists pointed out much earlier that the shortage in the market place was not found because there was a less supply of a particular item, especially essential ones like rice, but because supply of the same was not made available to the consumers in the market place.

If the government thinks that in spite of adequate supply of rice in the system, the price of the same is going up because of hoarding, then it has to act through strict enforcement of law, but more importantly, it shall have to intervene in supplying more of the same by itself to the market. The present programme of OMS is the right one, but its coverage shall have to be enlarged.

Raiding privately owned warehouses does not always bring good result. Raid also gives a signal that there might be a shortage of rice in the system. In a market economy, hoarding also has a cost. The government should see how it can make it more costly.

The writer is Professor of Economics, University of Dhaka.

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