Fair prices for rice farmers: Simple idea but complex reality

Mustafa K. Mujeri | Published: June 03, 2019 21:32:44

— Photo: Focus Bangla

Bangladesh presents a very interesting case study on public sector intervention in the rice sector. Over time, different strategies that the government has adopted to strike a delicate balance between its thrust  to  make  agriculture dynamic and the recognition of rice as a culturally valuable and politically volatile crop are best understood within the political and economic contexts of the country. Various forms of subsidies, ranging from price support to fertiliser subsidy and outright cash assistance to rice farmers, and direct intervention of the government in price stabilisation have made this situation possible.

Rice consumers in Bangladesh pay higher prices for rice in the market but the farmers do not get fair prices-often they sell paddy or rice at a loss-and the margins wind up in the pockets of the wholesalers/retailers (farias/ beparis) and the middlemen, including the rice millers. One study on the marketing margin analysis of rice shows that the farmers receive between 7.0 per cent and 29 per cent (excluding production cost) of the prices paid by the consumers for different varieties of rice. The village traders (farias/beparis) earn around 10 per cent, while the rice millers are identified as the most powerful group in the chain. Through earning a large share in total value created from the rice trade, the rice millers have enough capacity and power to influence and control the value chain in a manner that can protect their interest.

 As is well known, the small rice farmers usually face significant disadvantages in terms of access to credit from the institutional sources, tied credit from informal sources at highly unfavourable terms, risks of crop loss due to natural disasters, high volatility of farm gate price, and many other adverse circumstances.

Over the years, what the rice farmers have got or have been promised in terms of policy support falls in familiar lines such as agricultural credit, subsidies, crop insurance or electronic trading platforms. Obviously, the farmers would love to see electronic trading eliminate middlemen, but when and how would this happen? What is on offer is an expression of intent, which is already old. The rice farmer does, of course, need credit, but how would he pay it back without a decent price for his produce?

So far, the policy response of the government to the farmer's plight is to play around with loans, subsidies, rice procurement, and minimum procurement prices. The real concerns should highlight two issues that are at the core of farmer distress. These are not new, but they are crying out for policy attention for long. What the farmer wants, above all, is a fair price for his produce. All kinds of forces stand in the way.

THERE SELDOM EXIST ANY CREDIBLE MEANS OF PRICE DISCOVERY: There are layer upon layer of middlemen who mediate between growers and consumers, and there seldom exist any credible means of price discovery. The rural areas are bristling with middlemen. The rice farmers have to go through a middleman to sell rice. The more the middlemen, the greater the arbitrage and wider the gap between the farm gate price, which is what the farmers get, and what the end consumer pays. The farmer would be very pleased if he gets 40 per cent of what the end consumer coughs up. However, 25 per cent is probably closer to the norm.

The farmer has a handicap while dealing with traders and brokers. He cannot get real-time information on the going price whereas they are clued in to the market. Price discovery and market information are critical when prices swing wildly from day to day. The farmer has nothing better than teashop gossip to go by. The farmer wants a dedicated site that will give real-time price, and that does not exist.

LABOUR SHORTAGE: The second issue is labour. Cost is a problem, but the bigger problem is availability. Agricultural labour is an 'uncultured' activity fit only for those who cannot do any better. No one with any education wants to work in a field. Young people won't come either. That leaves agriculture with an ageing workforce, mostly women. Men and women commute to urban centres, and even work for lower wages to get away from agriculture. Agriculture has an image problem.

Labour shortage forces the farmer to look for alternatives. The farmer is looking for mechanisation to help him through this crisis, but this is happening at a slow pace. Surely, it is not beyond human genius to fabricate machinery suited to small holdings.

What stands in the way is economics, and not technology. That is where the government should step in if it really wants to help the farmer. Without a fair price for the produce and meaningful mechanisation, agriculture will go down the chute and increasing farm incomes will remain a pipe dream.

PROMOTING THE MARKETING CAPABILITY OF THE SMALL FARMERS: Promoting the marketing capability of the small farmers is the key challenge of raising the rice price received by the farmers and increasing farm investment. The rice fanners have several alternative channels of selling rice such as small middlemen who come and collect at the farm gate, selling directly at the mill gate, or others. However there are restrictions in channel choices because of poor infrastructure, lack of marketing facilities, insufficient credit and up-to-date market information. The probability of selling at the farm gate increases with the distance to the market; and small farmers mostly sell rice at the farm gate or local market.

Moreover, due to the oligopolistic market structure and in the absence of farmer organisation, individual marketing practices expose the farmers to high transaction costs with low bargaining position. The majority of the farmers are also unable to receive a fair price as they have to sell their products soon after harvest because of the immediate cash need for repayment and other reasons when the price is generally low. The farmers who possess storage, transportation, larger quantity and access of market information are more likely to sell to the remunerative direct marketing channels or to the rice mills directly. These factors underscore the importance of forming farmers' cooperatives, development of marketing infrastructures, accessibility of up to date marketing information in order to support farmers bargaining power to increase small farm's profit and investment.

THE RICE VALUE CHAIN: In Bangladesh, however, where the institutional factors are weak in the rice value chain, important elements are the factors that determine 'relationship marketing' such as dependence and relationships. In Bangladesh, exchange relationships are significantly influenced by such factors as power and dependence especially for major agricultural products like rice.

In the rice market, exchange relationships among the participants, in almost all cases, are based on buyer-seller interactions at each stage of the chain rather than across the entire chain. While many of the relationships have been built over the years, their domain is mostly transactional exchange rather than value creation. Such relationships do not create value jointly by the participants and hence are unlikely to enhance the competitive advantage of the chain.

In such circumstances, reliance on the market alone is not likely to lead to more efficiency in the rice value chain and enhance the competitiveness of the rice farmers so that the small farmers can get fair prices. The government needs to adopt effective policies for ensuring fair prices to the growers through procurement and other means, enhancing the staying power of the farmers by creating storage (e.g. at the community level through cooperatives, private-public partnership and other mechanisms) facilities for paddy by the farmers, and encouraging farmers to enter into more collaborative vertical and horizontal partnerships to enhance capability and bargaining power.

Moreover, with collaborative arrangements, the scope of additional value creation increases as each member is involved in the management of the value chain collectively which can be shared by the members with each one gaining from the process. The present characteristics of the rice value chains in Bangladesh indicate that the value chains are not competitive and the values are distributed among the participants in an inequitable manner.

With right policies, the chain can be made more competitive with creation of higher value along with more equitable sharing of the value among the participants. It is seen that the rice millers usually appropriate the lion's share of the value along with wholesalers and larger buyers in the downstream of the chain. In the upstream, the farmers remain the most disadvantaged. Under the existing power structure, the trend towards greater differentiation in rice varieties leads to closer interactions across the chain participants but such relationships become biased in favour of the strong partners with consequent adverse impact on the weak members especially the farmers. Obviously any asymmetric dependence based relationship within the rice value chain is not congenial to promoting welfare of the small farmers.

While the private sector participants dominate the rice sector so that the private sector will have to play the dominant role in the value chain transformation process, the government will have to take effective measures to facilitate the entire process. The initial efforts need to deal with creating awareness among the chain participants regarding the benefits that will accrue to all participants through improvement of the value chain. The government will have to adopt measures to encourage the participants to develop both horizontal and vertical collaborations covering the entire chain.

The adoption of competition policy and guidelines for the rice sector will contribute to more equal sharing of value. For enhancing and sustaining the benefits of an improved supply chain, rice productivity needs to be continuously increased through adoption of improved technology and other measures. The failure to provide fair prices to the farmers, low innovations and productivity, and market imperfections are the outcomes of unfair dependency relationships across the chain members and lack of their collective collaboration. The implementation of a value chain focus for the rice sector will improve the conditions of the chain participants especially the small farmers as well as deliver rice having better quality and higher value to the rice consumers.

Mustafa K. Mujeri is Executive Director,Institute for Inclusive Finance and Development (InM)


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