Tackling Inflation: Slash Price , Launch New Scope

Amid inflation, slashing prices is a must, To save tiny savings, launch investment scope just.

Egg prices remain an issue in dealing with rising price levels. Despite increasing surveillance, prices are not lowered. For two days, big distributors stopped selling eggs as govt fixed prices for eggs at various stages. News reports say unusual precipitation hampered poultry farming across the country, causing shortfall of 5/8 million eggs daily. This is one of the reasons for unusual hike in egg prices. However, I disagree with the view that corporate groups bag huge profit from the unusual hike in poultry item prices. Swollen retained earnings presented as proof of foul play,but the profit before tax clearly shows size of profit corporate group usually generates¹.It is not true that retained earnings show earnings after dividends. Rather it is reserved for paying dividends or reinvestment in the future at the will of corporation.

There is an increasing tendency to blame cartel/syndicate for the price hike in kitchen market. Back in March and August in 2023 in two pieces titled "Poultry Meat Gets Costlier" and "Poultry Market Becomes Volatile Again", I highlighted that there are too many farms and punishment is immediate in case of forming cartel in the poultry market². Bangladesh Competition Commission fined two big farms and govt allowed import of Indian eggs. Then what is the point of forming cartel?

But there are signs of unholy alliance in the input market. Govt should probe on that. Like telecom business, govt may intervene in hatchery and feed production business to supply feed and chick to marginalized poultry farmers who find the feed prices too high.

Govt also needs to do a lot of things for hedging tiny savings against inflation. In our country, people do not have enough things to hedge their tiny savings against inflation except depositing money into bank accounts where interest rate is still lower than the true inflation rate. Govt is planning to allow ordinary people's investment into treasury bills which offer interest rate up to 12%. Problem is such investment requires minimum investment of Taka 100000 and it does not allow investment into treasury bills with 91-day or 180-day maturity. If small investors with Taka 500/1000/5000 are allowed to invest into such treasury bills, it would do a great help to them against inflation during the time of high price levels.

Similarly, ordinary people and micro savers' participation can be allowed into commodity exchange market where they can buy/sell futures ,options of commodities through banks/MFS. At the same time, foreign currency regulations act needs to be updated so that individuals can increase their foreign currency holdings in case of free fall of Taka or high inflation. Currently, the act forbids holding of foreign currency by individuals without valid documentation.

Lowering the price levels is a must step to give comfort from scorching heat of inflation. At the same time, it is no less important to protect peoples' savings.

References:

1. "Dim ,Murgi Beche Fule Fepe Utchhey Boro Utpadak Protishthangulo(Big Producers Get Bigger By Selling Eggs,Poultry) ",Mehedi Hasan ,Bonikbarta, October 16,2024. Link: https://bonikbarta.com/bangladesh/dLzn4ol50hNoEqfH
2. "Poultry Market Becomes Volatile Again",Rezaul Hoque, August 17,2023,https://hoquestake.blogspot.com.Link : https://hoquestake.blogspot.com/2023/08/poultry-market-becomes-volatile-again.html?m=1

Poultry Market Becomes Volatile Again

Poultry price hike troubles the people, Hurts protein need of the feeble, True culprit hides amid the endless squabble.

Poultry market has become volatile again. This time soaring price of egg is squeezing the pockets of the consumers. Egg is being sold at taka 15 apiece,almost loosing the title of “cheapest source of protein”.Back in March, broiler chicken caused storm into tea cup after 1 kilo had been sold at more than taka 300 per kilo.

Consumers’ Right Protection body inspected the market and found blank receipt /receipt without price and date at the wholesale market. Clear indication of opaque transaction taking place in a country that aspires to become a knowledge based economy. Some wholesalers and dealers put the blame on corporate poultry farms. However,money receipts shown and the so-called representatives of poultry industry interviewed do not belong to the top 15 corporate poultry farms.

In brief, following points emerged out of the egg price debacle:

1 Poultry feed accounts for 70% of the cost and corn and soya account for 85% of the poultry feed. Bangladesh has to import key ingredients of poultry feed and depreciation of taka affected the poultry feed price¹. Recent restriction on import by Bangladesh Bank also played a role.

2. Egg substitutes like lower-end fishes (Telapia,Pangush) registered increase in their prices. One kilo is now being sold at taka 200-250. Earlier the prices varied between taka 120 and 130.

3. Ministry of livestock set the price of egg at taka 12 apiece.

4. One industry representatives in a press conference said that egg production dropped because of extremely hot weather in this summer time. Chicken consumes lots of water than feed during this time.

5. Following govt intervention, egg price fell to taka 165/ dozen

Some points need serious scrutiny. Corn prices are falling over the last 10 months.Poultry meat has become cheaper,now taka 160/kilo.According to a news report,students living in hostels found poultry meat cheaper than dozen of egg as more meal can be prepared with the poultry meat.Moreover, quail egg is still cheaper,it is not a popular substitute though.So there are substitutes of egg and they are still cheap. This ultimately stem formation of any cartel.

Price fixing by ministry of livestock to some extent set the narrative against the consumer.

Back in March I wrote “Poultry Meat Gets Costlier”².Sharing parts of it again:

“Dutch embassy in Bangladesh commissioned a study on poultry sector of Bangladesh. The study revealed that all the farms produced 525 million broiler chicken annually. There are 300/500 farms that have on average 15000 birds and 18000 contract farms that have the capacity to raise around 3000 birds ³.Apart from that there are small and household level farms that raise chicken under open sky. The big farms and the contract-farms jointly account for 62% of the total broiler meat production. Any successful cartel requires that organizational cost be lower and punishment be lower among other things. With so many contract farmers ,it is impossible to enforce such a cartel. And why the big farms shoot their own feet by taking a stance that ultimately allows entry of chicken from neighboring India that has cost-effective solution to rear chicken. People will switch to eat fish and egg if poultry meat stays out of their reach. In that case ,revenue loss will compound problems of the poultry farmers who are indebted to banks,cooperatives and dear ones. The big farms are subject of regular audit by the chartered accountants. Govt ,Competition Commission can check those audit reports to see how much they earn and how they do that. It is not easy to make windfall gain in poultry farming.

However, there is a possibility to influence the pricing of poultry meat.There are 15 big farmers.Interestingly, they also on the list of top 15 Breeders and Hatchers. These farms also furnish chicks to other farmers. It is not known how many of them in feed business. I do not know whether they acquire any hatchery or breeding farm. But their sheer capacity is influencing the input market price. Similarly, it is not known whether these farms have already purchased other farms. But news reports say nature of contract they place before other farms does not allow them to sell their products at their will in a profitable way.Subcontracting farms' profitability shrinks significantly. There is some kind of “tie-in” in that contract.That means nature of the contract to some extent shapes the poultry meat prices. Close scrutiny of the contract between big farms and other farms is needed. Back in 2012,Bangladesh introduced Competition Act 2012. It prohibits "combination" (cartel/alliance) that adversely effects competition in a commodity market(section-21) ⁴Bangladesh Competition Commission may intervene here.

Govt may also intervene to set up hatchery and breeding unit across the country so that marginalized poultry farmers get chicks and poultry feeds at affordable price. If govt can intervene in telecommunications market then it can also take initiatives to ensure protein for the poor. I think it is not pragmatic to report on commodity prices at retail level. Many western media broadcast prices at wholesale level. Dissemination of retail price and breakdown of production costs through media to some extent sets the “narrative” against the consumers and validates unreasonable price hike.”

Profiteering is pretty common in this part of the world. And we have witnessed how perishable kitchen commodities went through unreasonable price hike. Price hike taking place at a moment when purchasing power of people has fallen and election is knocking on the door. Businessmen were demonized right and left in our command and control economy. I fear this may be used as a pretext to demand election money from the corporate poultry farms. Do not forget ruling party leaders warned loyalists against extortion ahead of August 15, National Day of Mourning. Corporate farms do not control the local bazaars and streets. Whatever outlets they had were shut down, hinting unfavorable business environment.

Policy support towards the poultry industry is what we needed.Just a year ago America made offer to import soy meal from them.I think we have to make strategic ties in this kind of sector instead of military. If we get soya at a convenient price that makes our poultry feed and fish feed cheaper, we could meet our protein need at a cheaper cost as well as capture part of the foreign market.

Central bank may also step forward to their aid by providing subsidized credit or access to export assistance fund. This will help them expanding their farm size as well as bringing the cost of production to a competitive level.

Blame game and witch hunting have become the trend ,which only hides the true reason. Without deep digging into an issue, any kind of character assassination only complicates the problem.

Notes And References

1. ”Eggonomics 101:How Do India, China Keep Egg Price In Check When Bangladesh Fails?”,Masum Billah and Shawkat Ali,Business Standard, August 17,2023. For more read at https://www.tbsnews.net/features/panorama/eggonomics-101-how-do-india-china-keep-egg-prices-check-when-bangladesh-fails
2. ”Poultry Meat Gets Costlier “,Rezaul Hoque,https://hoquestake.blogspot.com,March 31,2023. For more read at https://hoquestake.blogspot.com/2023/03/poultry-meat-gets-costlier.html?m=1
3. "Poultry Sector Study Bangladesh", Larive International B.V. and LightCastle Partners Ltd,May,2020
4. Protijogita Ain 2012(The Competition Act 2012)

A Hedge Against Uncertainty In Agribusiness

Corona robs joy of poultry farmer,
Eggs are sold far below market can offer.
Time has come to introduce big buyer,
Way of hedging against loss & not letting him suffer.

Coronavirus stretched its shadow over poultry farming, dairy farming and other agribusinesses. News reports say gloomy dairy farmers are selling their milk much below the market price. Mobile egg sellers are selling eggs at Tk 75/dozen. In normal times, a dozen would cost Tk 120. Evidently, poultry farmers and dairy farmers bear the full brunt of the falling demand, compounded by indefinite lockdown.

Poultry and dairy farming are 100% value adding economic activities. Money was often drawn from local cooperatives, relatives, microfinance institutions and even public banks. Any bad spell to farming activities will augur ill for informal and institutional investors. So in a broader sense, many investors’ money may be lost if poultry and dairy projects fail because of Coronavirus.

If poultry farmers and dairy farmers are not duly compensated for the loss, then we may see a production slump in the subsequent years, adding further woes to the consumers by raising the prices of eggs and milk. Egg is the cheapest source of protein. Any supply shock or price hike in fish or meat leads to consume more eggs. As it appears, this Coronavirus may also make a dent in our protein consumption.

I did a little analysis on the impact of disaster years on egg price for the period 2012-2018. For the given period I gathered data for fish(Rui) and egg prices. Data gleaned from BBS Statistical Pocket Book 2016 and 2018.

At 5% level of significance and for 7 observations and 1 explanatory variable, the Durbin-Watson statistic reported no autocorrelation(d = 2.345).

It was assumed that for ordinary citizens fish and egg secured the bottom places in the protein ladder in terms of price. So, apart from supply and demand side factors egg price to some extent depends on fish price. It was also assumed that eggs were sold at Tk 95 per dozen in 2017 as the data for that year was not available.

Following regression function was constructed:

lnEgg_t = a + b Fish_t + c D_t
where lnEgg_t = log natural of Egg price at t,
Fish_t = Fish price at t,
D = 1 for disaster years ( any kind) ,
= 0 form calm/ normal years.

After running the regression got the following result:

lnEgg_t = 4.97 -0.0012 Fish_t + 0.00616 D_t (F= 1.153, p = 0.402)
(t=18.64, p= 0.000048) (t= -1.48, p= 0.211) (t= 0.117, p=0.91)

Except the intercept, neither the model nor the slope coefficients turned out to be significant. If the coefficient of the dummy variable were significant, we would say that egg prices during disaster years were 0.62% higher than those during calm years.

For the current year, we are witnessing that egg price hits all time low in the last 10 years. Unfortunately, our market conspicuously lacks mechanism of hedging against volatility. Moreover, in a corrupt country like ours compensation for disasters may often fall in wrong hands, mocking the steps to aid victims. As it is noticed, borrowers of microcredit often receive compensation during bad times due to their attachment to institutional lenders. By the same token, if we develop some kind of institution in farming and agribusiness model, then we will ensure just prices for our farmers and will insulate them from any volatility from man-made or natural disruption.

Game theory helps us better to grasp this point. Here I present a sequential game. Pairs of numbers in the game tree represent payoffs to poultry farmer(P) and wholesaler(W). Poultry farmer has two choices to make: to make a contract with an institutional distributor to sell his eggs at negotiated price in the future(C); or not to make the contract with big distributor and rely on the usual middlemen(NC). Meanwhile, for wholesaler, the choice is to offer the prices of normal market(N) or the volatile market (V)reading the market demand.

The first number in the pair represents the price received by the poultry farmer by selling a dozen of egg. The second number represents the payoff to wholesaler by selling a dozen of egg.

Two important criteria for determining the outcome of the game are:

⚫ Provided that what the others have chosen, a player’s decisions must be optimal.
⚫ At the time decisions are taken, they are optimal for the decision-maker.

Looking at game tree, we realize that for two subgames there are two Nash equilibria. If poultry farmer chooses no contract with big distributor, then wholesaler’s optimal decision will be to offer the normal market price. (96,120) is the equilibrium here. Because Tk 120 is greater than Tk 75 for the wholesaler. If the poultry farmer goes for contract with big distributor then wholesaler’s response will be to go for normal market price offer. Here the Nash equilibrium is (108,140).

For poultry farmer, a decision at the present time depends on his returns in the future. He will compare his returns under two states. He will notice that a contract will fetch him Tk 108 and no-contract will get him Tk96. Moreover, volatile prices (Tk 48 > Tk 36) are higher under contract. Since Tk 108 under contract-normal market price is higher than Tk 96 under no-contract –normal market price, his optimal decision will be Tk 108. So poultry farmer looks forward but reasons backward. When poultry farmer chooses the contract, wholesaler will go for the normal-market price, Tk 140 here. So (108,140) is the subgame perfect equilibrium here.

Underlying assumptions here in this discussion are---- there are many big distributors (including the govt backed-one) apart from middlemen; returns under contract with distributors are higher than those under no-contract. Moreover, in any kind of disaster like situation if the govt wants to send compensation then it can do so through the distributors.

Anyone could become this big distributor. Egg cooperatives, TCB, a public listed company or a big local group could easily vie for a big distributor. Govt has to ensure that there are many of these distributors and they operate under certain laws.

Key take-away of this discussion is : big distributors are needed in agribusiness to protect the farmers from volatility and uncertainty. Their presence will ensure just prices for the farmers as well as help flawless distribution of compensation in a disaster like situation.

The idea of big distributors should be preceded by new laws or fine-tuning of existing ones. Laws demarcate do’s and don’ts for the parties in crisis like situation and dispel any ambiguity. Value-adding nature of agribusiness and involvement of informal investors calls for greater govt protection. Laws should be attuned to these ground realities.