Household welfare and pricing of rice:
Does the Large-Scale Field Model matter for Viet Nam?
NGOC Q. PHAM and ANH H. LA
Virtual Institute Seminar on Trade and Poverty
Geneva, September 8-10, 2014
Overview
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•
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Introduction
The Large-Scale Field Model
Research objectives and questions
Related literature
Methodology and data
Findings
Policy recommendations
Viet Nam’s rice exports have soared since
2006
Does being the world’s biggest rice
exporter matter for rice famer?
• Even though one would expect higher rice exports to
directly benefit rural households at all levels of wellbeing, most rice producers in Viet Nam are still poor,
living on less than USD 2 per day.
• The Vietnamese government has not implemented a
number of price policy instruments seeking to ensure a
minimum rate of return of 30 per cent for farmers. The
main instruments have been “floor prices” for paddy
both for ex- ports (minimum export free on board
(FOB) price) and for purchases from rice farmers
(minimum farm gate price for paddy).
Less than 5 per cent rice sales occur
directly between farmers and
exporters
What makes rice farming less
profitable?
• Existing Viet Nam’s rice value chain allows
collectors to earn 10 times more than farmers
(data in 2011 by Tran et al., 2013).
• Farmers’ ability to bargain for higher prices is
hampered by:
i.
ii.
iii.
The market power of intermediaries: collectors
usually set low prices.
Outstanding loans after harvest (accounted for
more than 17 per cent of rice production cost).
The inability to store rice (lack of storage facilities
and inadequate paddy drying technology).
 most farmers sell wet paddy to collectors
What prevents farmers from selling
directly to exporters
• 50 per cent of rice is exported by public exporters
through G2G contract, which do not requires highquality of rice   SOEs lack incentive to improve
performance  Vietnam’s export prices of rice fall. In
order to to maximize their margin, public exporters
prefer to buy rice from collectors rather than directly
from farmers, as this allows them to lower paddy prices
(avoid paying the official floor farm gate price for
paddy).
• Boat transportation and small fragmented fields (0.5 to
2 hectares) make high transportation and transaction
costs for exporters if they buy directly from farmers 
collectors who own small boats play a key role in
connecting small farmers and exporters.
What is the Large-Scale Field Model
(LSFM)?
LSFM aims to increase price of paddy
•
•
By 9.9% in short-run: by reducing the role of intermediaries
By 11.4% in the longer-run: in case exporters agree to pass
on 59 per cent (which equals the share of production costs in
the export price of rice) of the increase in the export price of
rice to farmers. Export price increase would be resulted from
the higher and homogenous quality of paddy produced by
farmers under the LSFM.
How the Large-Scale Field Model works?
The project also aims to consolidate land across farmers
to reduce 14.1% of the cost of production through
economies of scale.
How the Large-Scale Field Model
works?
LSFM includes several measures that aim to improve
farmers’ access to higher-quality inputs to subsequently
increase 14% of average yields.
The research objective
Evaluation of the potential effects on the welfare of
Vietnamese rice farmers of a pilot project that
upgrades the rice export value chain (Large-Scale
Field Model).
The research questions
What would be the effect of the implementation of the
LSFM project on household welfare and poverty
reduction?
Which of the main rice producing regions in Viet Nam –
the Mekong River Delta or the Red River Delta – would
be more suitable for this project?
Two complementary questions then concern the potential
side effects of the LSFM:
• Could food security be compromised if the LSFM
results in higher prices for domestic production in
foreign markets?
• Would higher prices in one region be transmitted to
other parts of the country through a price transmission
mechanism?
Related literature
Households are affected by price changes: after a
price increase, net consumers are worse off and net
producers are better off.
• Minot and Goletti (1998): rice export liberalization in
Viet Nam would raise food prices but also
increase average real income and reduce poverty.
• Benjamin and Brandt (2002): significant increases in
the price of rice have a largely beneficial impact on
rural household welfare.
• Coxhead et al. (2012): negative effect of an increase in
the price of rice on household welfare, especially
among the poor.
Methodology
LSFM will affect household welfare through effects on: (a)
farm gate prices of paddy, (b) productivity of rice farmers, and
(c) production costs.
We model how these changes would affect household
welfare, taking into account the ripple effect that a change in
the farm gate price of paddy would have on other prices in the
economy, and hence on household consumption, production,
and wage income.
The methodology comprises three steps:
1. Input-output model to estimate the effects of paddy price
on other products’ price;
2. Input-output model to estimate the effects on sectoral
wages;
3. and first-order approximations (see Deaton, 1989) to
Methodology
1. Estimation of price change
There are several ways of modelling the ripple effect a change
in the market price of fertilizers and pesticides would have on
other prices in the economy:
• The econometric estimation model (Nicita et al., 2005;
Balat et al., 2009) and the global simulation model
(Francois and Hall, 2009): data limitation; concordance of
trade data classification with the living survey
classification.
• Computable General Equilibrium (CGE) model (Chen and
Ravallion, 2004): limitation of time series data required to
estimate the elasticities and/or data required to calibrate
the parameters of the model.
• The cost-push Leontief price model (Miyazawa, 1976;
Oosterhaven, 1996; Dietzenbacher, 1997; ten Raa, 2005;
and Miller and Blair, 2009)
Methodology
1. Estimation of price change (cont’)
The cost-push Leontief price model:
p = A p+v
'
(1)
To estimate the ripple effect a change in the prices of fertilizers
and pesticides would have on other prices in the economy, split
A into:
é P P ù
1
ê
ú
(2)
A=
êë S1 S úû
The cost-push Leontief price model becomes:
ì
'
'
p
=
P
p
+
S
ï p
p
1 ps + v p
(3)
í
'
'
ïî ps = P1 p p + S ps + vs
The price changes in other S sectors due to price changes in P
sectors: ' -1 '
' '
(4)
Dp = I - S P Dp = T P Dp
s
(
)
1
p
1
p
Methodology
2. Estimation the effects on sectoral wages
Equation (3) can be modified as:
ì
'
'
ï p p = P p p + S1 ps + w p + rp
í
'
'
ïî ps = P1 p p + S ps + ws + rs
(5)
Take pp and vs as exogenous variables, whereas ps and vp
are endogenous variables, under the assumption that capital
stock coefficients are constant in the short term and thus
have not been affected by price changes, we obtain:
{
}
Dwp = ( I - P ) - S T P Dpp
'
'
1
'
'
1
(6)
Methodology
3. Estimation of welfare effects
Study the distributional effects of price changes in relation to
household characteristics, particularly living standards and
geographical locations (Deaton, 1989).
For each household, the welfare impact is:
du = å(f - C ) dp p + åq ew p dpp
h
h
p
p
h
p
h
j
p, j
(7)
Data sources
• Data on monthly domestic prices of paddy and rice are
available from the Information Center for Agriculture
and Rural Development for the period of January 2008
to December 2013.
• Estimation of the price changes: the national inputoutput table of 2007 published by the General
Statistics Office of Vietnam.
• Vietnam Household Living Standards Survey 2010 to
estimate household welfare effects.
Estimation of the top 20 price increases
Scenarios
Location
Baseline Red River Delta
scenario and Mekong
River Delta, rural
areas
Scenari Mekong River
o1
Delta, rural
(short- areas
run)
Scenari Mekong River
o4
Delta, rural
(longareas
run)
Parameters
Paddy price increase by 1 per cent
Paddy price increase by 9.9 per cent (owing
to the direct farmers-exporters linkage)
Production cost reduction by 14.1 per cent
Productivity increase by 14 per cent
Paddy price increase by 9.9 per cent (owing
to the direct farmers-exporters linkage)
Further paddy price increase by 11.4 per
cent (owing to the 11.4 per cent increase in
the export price of rice)
Production cost reduction by 14.1 per cent
Productivity increase by 14 per cent
Baseline – why not the Red River Delta?
Distribution of income from rice
production
Farm size
Rice income by farm size
Total welfare effects – short and long
run
Labour
income
Production Consum Total
income
p-tion
effects
Poverty
Poverty
reduction reduction
(1)
(2)
Scenario 1: short-run
0.000
5.458
-1.337
4.121
0.548
0.082
0.548
0.420
Scenario 4: long-run
0.000
7.808
-2.873
4.935
(1) When the poverty line is defined as the income of the richest among the 10 per
cent poorest households in rural areas of the Mekong River Delta, the poverty rate is
5.5 per cent.
(2) When the poverty line is defined as the income of the richest among the 20 per
cent poorest households in rural areas of the Mekong River Delta, the poverty rate is
13.46 per cent.
Total welfare effects – Scenario 1
Total welfare effects – Scenario 4
Side effects of LSFM
1. In 2030, the expected output would be far in excess of
national food security needs even under the worstcase scenario (Jaffee et al., 2012)
2. Econometric estimations (use panel data on weekly
domestic paddy prices from 1st January 2008 to 20th
August 2013):
The estimated pass-through elasticity is close to zero
but still positive and statistically significant  an
increase in the farm gate price of paddy following the
LSFM would only marginally affect the domestic price
of rice in the rest of Viet Nam.
Ln(MRD paddy price)
Ln(RRD paddy price)
0.000222***
(24.49)
Ln(MRD rice price)
January
February
March
April
May
June
July
August
September
October
November
Constant
Number of observations
2
Adjusted R
0.0776*
(1.92)
0.0842**
(2.03)
0.119***
(2.93)
0.127***
(3.11)
0.123***
(3.06)
0.110***
(2.74)
0.0596
(1.49)
0.0473
(1.17)
-0.0405
(-0.96)
-0.0436
(-1.06)
-0.0213
(-0.51)
7.593***
(127.48)
331
0.652
Ln(RRD rice price)
0.0000852***
(26.77)
-0.0146
(-0.54)
-0.0334
(-1.22)
-0.00776
(-0.29)
0.0108
(0.40)
0.0328
(1.23)
0.00687
(0.26)
-0.0180
(-0.68)
-0.0303
(-1.13)
-0.0186
(-0.66)
-0.0341
(-1.24)
0.0113
(0.41)
8.522***
(239.83)
331
0.686
Policy recommendation
• The results of our analysis show that farmers from the
Mekong River Delta should be given priority for application
of the LSFM.
• The estimations of the welfare and poverty reduction
effects of the LSFM in the Mekong River Delta also
suggest that the LSFM might be a better policy option than
setting floors for export prices and farm gate prices of
paddy.
• The effects of the LSFM would not only improve
household welfare in the region but also expected to foster
Vietnamese rice exports. As state-owned exporters may
have fewer incentives to implement the changes proposed
by the LSFM project, private exporters would likely be
better candidates to lead its implementation. Successful
implementation of the LSFM would however require some
level of competition among Vietnamese rice exporters and
hence access to the rice export quota.