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ANALYSIS

Riceflation and agflation

Kazi Mahmudur Rahman, Asiiiq Iqbal and Hasanuzzaman
Global food prices registered an unprecedented 40 per cent increase during 2007. This is fraught with the potential danger of causing large-scale discontent if the situation gets out of hand. Hence, it is urgent for all countries facing this situation to take energetic steps with the objective of reigning in the price-hike of food and other essentials. In 2007, rice price in Bangladesh rose by 42.6 per cent on average whilst wheat price posted a rise of 55.4 per cent. Prices of other essentials rose in tandem soybean oil and milk powder increased by 42.8 per cent and 48.9 per cent respectively in Bangladesh.
The current world-wide price-hike of essential agrocommodities was termed as "agflation" by The Economist. Bangladesh's governments have traditionally relied on imports in order to offset the national demand-supply gap for many agro products (rice, onion, edible oil, etc). Recent data indicates that approximately 2.5 per cunt (precyclone Sidr estimate) of Bangladesh's staple crop (rice) is from imports and it is worth stressing here that natural calamities have, to some extent, increased this dependencypercentage.
Bangladesh’s international sources of rice import are limited to India, Thailand and Vietnam. Between February 2007 and February 2008, prices of 5 per cent broken rice imports increased by 59.1 per cent, 43.6 per cent and 46.1 per cent respectively in these three major importing sources. Added to the increased global price are two more factors: (a) higher transport cost resulting mainly from higher world fuel prices, which have spiraled prices of agro-products upwards; and (b) traditional market structure of our economy, where starting from the producers to the end-users (consumers), there is presence of a large number of 'middlemen' or market intermediaries, who have a fair amount of say on market prices and influence the overall competitive environment in the market.
Farmers tend to receive an insignificant equivalent part of the retail price at consumer level, In the supply-chain of essential commodities in Bangladesh. In economics terminology, perfect Information is one of the basic prerequisites for perfect competition.
Increasing global population, soaring demand for bio-
fuels and animal feed, and unfavorable weather conditions can be considered as four of the principle factors that has had a negative impact on global demand for agricultural products. Utilization of cereals production as feed is forecasted to increase by nearly 2 per cent during 2007-2008 which can be largely attributed to the Chinese appetite for pork. Industrial usage of cereals is also on the increase. The fear is that the rapidly growing bio-fuel sector will eat into the cereals supply in the global market. In 2000, about 15 million tons of America's maize crop was turned into ethanol; it was expected to be around 85 million tons in 2007.
It is difficult to measure demand-supply situation in Bangladesh in absence of reliable data on total demand for food grains for human consumption, as seed and as fodder. However, it is possible to make rational calculations based on the existing market scenario. Bangladesh suffered from a loss of 1.4 million tons of rice due to the two floods and the horrifying cyclone-Sidr in 2007; she will need to rely on other rice exporting countries to meet the nationwide demand for rice. No doubt, Bangladesh is at a critical juncture as far as food secu-
rity is concerned. On the one hand her domestic supplies have been damaged, while on the other hand, prices of agrocommodities in the international market have continued to increase. Can the price escalation be attributed to the individuals' rational expectations against agflation?
When one assumes rational expectations, they assume that individuals are correct on average. Farmers will be rational if they choose to produce the goods which are in short supply at present and subsequently,
they will increase their production in the hope of making more profits in the following period. Bangladeshi consumers, they will be irrational to expect a downturn of this current trend of riceflation.
For a country such as Bangladesh which is prone to natural disasters and addicted to rice, consequences of increasing rice price are clear and catastrophic. In the short to medium term, bumper harvests are the likely way out to offset tlte rising price of rice, whiph can take place only if
new land is brought to cultivation. The medium-to-long term solution is to raise productivity. The care-taker government had encouraged farmers to grow hybrid rice after the twin floods and cyclone-Sidr damaged Bangladesh's staple crop rice-in the Aus and Aman seasons. According to official sources, arable land for hybrid rice in the current Boro season are over 10 lakh hectares, which was 3.90 lakh hectares in the previous season.
One could speculate is the current trend of riceflation supply (shortage) or demand (excess) driven? Or, is it an inflation driven agflation (riceflation)? To what extent government policies aimed at curbing riceflation will impact on the rising price of rice, given that our import-dependency percentage is relatively low, remains to be seen once the boro rice arrives into the market. For now, it can be safely assumed that consumers' expectations, based on the existing market scenario, is likely to fuel the ongoing riceflation in Bangladesh.
The authors are researchers at the Centre for Policy Dialogue (CPD). Authors are solely responsible for contents of the article which do not necessarily represent institutional views