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).
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
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
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
government to set both producer and consumer prices of rice. However, the costs of
storing commodities is often expensive for the government and can crowd-out private
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
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
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,
extension; and (3) implementation and enforcement of price support to both consumers
(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
(PASSCO). PASSCO had four main functions: (1) price support for paddy and other crops;
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
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,
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
price data to farmers to prevent middlemen from exploiting all of the gains of higher
prices. The strategy
has been relatively successful thus far.
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
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.
Focus on market-based price support mechanisms to avoid physically handling the
Consider the costs: price bands are generally cheaper to implement, and create less
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.