Food Quality Changes and Implications: Evidence from the Rice Value Chain of Bangladesh

Summary

In Dhaka, the share of the less expensive coarse rice is shown to be rapidly decreasing in rice markets and it thus seems that the role of rice as only a cheap staple food is being redefined. The increasing demand for the more expensive varieties is seemingly associated with a more important off-farm food sector—in particular, milling, retailing, and branding—as well as a transformed milling industry. We further find that the labor rewards for growing different rice varieties are not significantly different and that farmers do not benefit directly from consumers’ increased willingness to pay for rice.

Introduction

Food value chains are being transformed worldwide, given changing consumption patterns, and the increasing insistence on food quality and safety (World Bank, 2007). These changes are also happening in a number of developing countries (see, for example, Jaffee and Henson, 2004, Orden and Roberts, 2007, Reardon and Timmer, 2007, Swinnen, 2007, Unnevehr, 2007, World Bank, 2007), and more in particular in Asia (Mergenthaler et al., 2009, Minten et al., 2011, Pingali, 2007). However, despite the presumed importance of the transformation of food systems of developing countries, there are currently still relatively few good data and analyses of its magnitude and impacts.

Three strands of research on the transformation of food systems in developing countries can be distinguished in the recent literature. First, new evidence is emerging on the increasing demand for food quality by the poor (for example, Banerjee & Duflo, 2011). While economic theory would predict an increase in a demand for the cheapest calories when calorie-insufficient households are given a choice, new research shows that even the poor increasingly seem to prefer food quality and taste over quantity (Deaton and Drèze, 2009, Jensen and Miller, 2008). This change in preference may be driven by the decline of heavy physical work, improvement in transportation, increasing availability of motorized mills, and better access to water and sanitation, factors that could possibly contribute to lower energy requirements and more modest productivity gains from higher calorie consumption (Banerjee & Duflo, 2011).

Second, a number of authors have looked empirically at the influence of new food safety and quality requirements on poor small producers, mostly because of the emergence of new commercial channels such as export agriculture or supermarkets (Reardon et al., 2009, Jaffee et al., 2011). For example, different institutional models are emerging that successfully address these requirements, including contract farming (Minten et al., 2009, Miyata et al., 2009) and vertical integration (for example, Swinnen, 2007, Birthal et al., 2005). A significant body of research now exists that looks at income and welfare effects of these changes on producers (for example, Maertens and Swinnen, 2009, Miyata et al., 2009, Neven et al., 2009, Rao and Qaim, 2011). A common characteristic of this research is that it has largely focused on non-staple crops, rather than staples such as rice and wheat, and on the emergence of new market channels.

Third, research has been done on the distribution of the gains within value chains from this transformation because it is not well understood who actually benefits from the higher prices that consumers are willing to pay for safe, high-quality products (for example, Swinnen & Vandeplas, 2010). Some argue that midstream companies might extract the surplus through their bargaining power within the chain (for example, Unnevehr, 2000, Warning and Key, 2002, Fitter and Kaplinsky, 2001) while others have argued that improved quality standards might actually reduce transaction costs in trade and thus lead to benefits for suppliers (Henson & Jaffee, 2007). Research in this area has, however, been largely theoretical (for example, Swinnen & Vandeplas, 2010).

Based on unique recent data from the rice value chain in Bangladesh, the objective of the paper is twofold. First, we want to document important changes related to the emergence of quality differentiation that have been happening in the rice value chain in the last decade. Second, we want to understand how prices are formed along the value chain and this for different rice qualities. We do so by looking at price information for actors upstream (the farmers), midstream (the traders and the millers), and downstream (the retailers). This information allows us to understand the links between quality differentiation and price formation and thus the distribution of gains from that differentiation among the actors in the value chain. This is an important topic as Bangladesh is one of the poorest Asian countries and rice accounts for almost 70% of consumers’ caloric intake. Any changes in the performance of the value chain and in pricing of rice and paddy might affect livelihoods of a large number of poor people, on the production as well as the consumption side.

The present analysis contributes to the literature in three ways. First, we find an important change in quality, as measured through differential varietal choices, in the rice market of Dhaka, the capital of Bangladesh.¹ In particular, we note an important decline of the less expensive coarse rice in the past decade. We further find a doubling of the premium paid for the fine rice over the past three decades. It thus seems that the role of rice as only a cheap staple food is being redefined, even in these poor settings.

Second, we analyze data from innovative surveys we implemented at different levels in the rice value chain, from rural producers in Bangladesh to urban consumers in Dhaka. In these surveys, we make a clear distinction in food quality characteristics throughout the value chain. Such simultaneous surveys at different levels in the value chain have rarely been fielded,² and this survey is the first for staples in traditional as well as modern value chains in developing countries. These surveys give us unique insights into the price composition in rice value chains in Bangladesh.

Third, we find that the producer share in final retail prices drops to half for the higher-priced fine rice from almost three-quarters for the lowest-priced coarse rice. Retailers and millers in particular capture most of the quality premium between farmers and urban consumers, while there are no large price differences among rice of different qualities at the farm level. Seemingly associated with the rise in quality, we further find significant changes in the milling sector in the areas surveyed, to wit, concentration in the mill sector and concomitant rise of the average scale of mill.

The structure of the paper is as follows. We first present some background information on the rice sector in Bangladesh in Section 2. Section 3 describes the data and methodology used. In Section 4, basic descriptive statistics from the primary surveys are presented. Section 5 looks at rice quality downstream in urban retail markets while Section 6 studies it upstream, at the farm level. Section 7 then explores who benefits from the increasing willingness to pay for rice quality in the value chain. We finish with conclusions in Section 8.