Implementing a Price Support Program for Myanmar's Rice Sector

Executive Summary This paper will evaluate the costs and benefits of implementing a price support program for Myanmar’s rice sector. I begin with a review of the literature relevant to price support programs for staple crops. From the review, I will present a general framework for evaluating price support programs. This framework will then be applied to select countries in Southeast Asia to provide context for how these experiences might be applied in Myanmar. Next comes a quantitative analysis of a prospective price support program in Myanmar, complete with rough forecasts of government expenditures under each program. The paper concludes by recommending implementation strategies to minimize the costs and maximize the benefits from a price support program. Context: The Rice Industry in Myanmar Agriculture contributes to roughly 45% of Myanmar’s GDP and employs 66% of the labor force. Rice is cultivated on 18.9 million hectares and constitutes 33% of the total crop area sown (Wong 2013). The major production areas are the Ayeyarwady Delta, Bago in lower Myanmar, and Sagaing. Rice and the rice industry are critical to the livelihoods of the people of Myanmar. Roughly 66% of the labor force is employed in agriculture, and a large percentage of these farmers cultivate rice (CSO 2011). There are two main categories of rural farmers: farmers and landless agricultural laborers. In 2009, it was estimated that 30-50% of rural laborers were landless.1 Landless agricultural laborers are paid in monthly wages, and are net buyers of rice (Fujita 2009). Close to 75% of farm household income comes from rice cultivation activities, especially in the main rice-producing regions (Wong 2013). In recent years, the Kyat’s exchange rate has strengthened relative to the dollar. This stronger exchange rate, coupled with rising costs of production, have led to steep drops in the value of rice farmers’ harvests – leading to lower farm productivity and farmer incomes. The Parliament of Myanmar has proposed a price support program as part of its 2013 Farmer Rights Protection Act in order to combat the rising costs of production and decreasing rice prices. A Literature Review of Price Support Implementation Issues Price support programs have two main purposes: (1) to increase the average price of rice; and (2) to decrease price variation via “price bands.” In theory, increasing the average price of rice allows the government greater control over farm-gate prices. In practice, trying to set a specific farm-gate price requires costly implementation and enforcement measures. Using a price-band strategy allows the price to fluctuate within a specified range of prices. Price bands require less frequent government intervention, and are typically less expensive to implement than trying to set a specific price. Most price support programs set official government prices at the farm-gate. However, knowing which gate-price to set is complicated. Setting prices according to farmer production costs can be subjective. For rice in particular, production costs can vary by season, by grower, by region, and by type of rice grown. When prices are tied to production costs, the government is vulnerable to rent-seeking behavior by groups trying to influence the price-setting mechanism. Conversely, setting prices as a function of border prices 1 Landlessness has been increasing in recent years (Fujita 2009; Dapice 2009). 2 allows for objective prices that better reflect scarcity values. Such market-based support prices can minimize market distortions and are a lower burden on government resources. The tradeoff is that basing government-support prices on market prices prevents the government from having strict control over prices at the farm-gate – at times, middlemen can capture the benefits of higher prices. Controlling prices at the border via trade taxes or restrictions can be relatively easier to monitor, compared to enforcement at the farm-gate. Using trade taxes is also more straightforward to implement, and allows the government to avoid physically handling the commodity. However, in the ASEAN context, trade taxes may require some political negotiations. Also, controlling prices at the border does not necessarily guarantee a higher farm-gate price if the middlemen are able to capture most of the benefits. Devaluing the exchange rate is a similar way to raise the prices of all imports and exports – potentially to the benefit of rice farmers. Marketing boards and public procurement of rice would lower price uncertainty and allow the government to set both producer and consumer prices of rice. However, the costs of procuring and storing commodities is often expensive for the government and can crowd-out private sector players. Country Case Studies Thailand’s Paddy Pledging Scheme procures rice at prices 30-40% above market rates. The scheme has been credited with increasing production of rice. However, it has proven to be a major strain on government budgets. Rice storage facilities are filled to unsustainably high levels, and the government has been forced to sell much of its rice at a loss. In the late 1960’s/early 1970’s the Government of Indonesia formed a food logistics agency (BULOG). BULOG had three main objectives: (1) heavy investment in rural infrastructure; (2) R&D and dissemination of improved agricultural technology, including high-yielding seeds, fertilizers, pesticides, and farmer extension; and (3) implementation and enforcement of price support to both consumers and farmers (Arifin 2004). The program has increased farmer production, however there is evidence that farmers have not always benefitted from the price support program. For instance, in 2003 over 50% of farmers sold their crops at a price below the government benchmark. In 1973, the Government of Pakistan formed the Pakistan Agricultural Storage and Services Corporation (PASSCO). PASSCO had four main functions: (1) price support for paddy and other crops; (2) price stabilization; (3) construction of storage facilities and marketing infrastructure; and (4) promotion of postharvest processing facilities (Rashid et al 2005). Farmers under this program did not always benefit from the price support system. Often, middlemen were able to buy rice from farmers below the official price, then sell it later at a profit. Procurement was recently transferred to the private sector in select districts. In 1977, the Government of Papua New Guinea stopped basing its cocoa support prices on costs of production – the rationale being that cost of production is a dubious criterion since costs depend on many factors and can vary widely across growers. The government also realized that setting the price too high or two low would make its price support program too expensive to administer. Therefore, the government decided to base the target price on the long-run world price, by setting the official price 10- 20% higher than a 10-year moving average of past world prices. The government widely disseminated price data to farmers to prevent middlemen from exploiting all of the gains of higher prices. The strategy has been relatively successful thus far. 3 Data, Methods, and Analysis Using data from the USDA, FAO, CSO, and MSU, I constructed a basic per-hectare cash flow for a typical rice farmer in Myanmar – this cash flow is otherwise known as the “base case.” Starting from the base case, I then simulated the effects of four price support programs on the farmer cash-flow: (1) fixed prices at the farm-gate; (2) price-bands at the farm-gate; (3) fixed-prices at the border; and (4) price-bands at the border. When evaluating border-price controls, I simulated two extreme scenarios of middlemen market power to show how the benefits to farmers can vary under border-price support programs. The analysis yielded the following results:  Fixed price programs, in theory, produce greater benefits for farmers than price-band programs.  In my model, a fixed-price program cost 4.4 trillion Kyat more than a price-band.  Fixed-price program implementation costs were, on average, 44% of the GoM’s annual budget. Price-bands cost roughly 30% of the budget. Data quality, especially on rice yields, can strongly affect estimated program benefits. Using FAO data on yield produced program benefits over 200% higher than those using USDA data. The sensitivity of estimates to data source underscores the difficulty of setting prices according to production costs, since inaccurate data on production costs and output could lead to dangerously incorrect estimations of program benefits and costs. Also, when supporting prices at the border, there is a risk that middlemen will absorb the benefits of a price-support program at the expense of farmers. Recommendations  Focus on market-based price support mechanisms to avoid physically handling the commodity.  Consider the costs: price bands are generally cheaper to implement, and create less macroeconomic distortions.  Set prices as a function of world market prices: there is not enough data on farmer production costs to make proper estimates of farmer cost structures.  Limit the power of middlemen to capture the programs’ benefits as much as possible.