Marketing Institutions and Food Price Volatility in Developing Countries: Assessment of Competition in Sugar Market of Bangladesh

This study by Mohammed Helal Uddin (University of Dhaka and Economic Research Group) assesses competition in the Bangladeshi sugar market for better understanding of food price volatility in Bangladesh. The prices of essential commodities such as rice, potato, sugar and edible oil exhibit periodic upward spirals, and persistent downward rigidity. They adjust quickly to an increase in world price, but do not tend to show agility when responding to world price fall. A substantial increase in prices during the month of Ramadan every year implies a failure of inter-temporal arbitrage in Bangladesh. Collusion in some layers of the supply chain and the resulting market power are believed to be responsible for such asymmetric price response, failure in inter-temporal arbitrage and other apparent price anomalies. Based on such beliefs, the government of Bangladesh (GoB) has banned “Deliver Order” (DO) layers for some of the essential supply chains. The GoB abolished the age-old DO system alleging that speculative behavior in the DO market is the main culprit to price volatility in these markets. However, there are plausible alternative explanations based on non-collusive behavior for the observed price patterns. For example, bottlenecks in storage or transport may also explain coexistence of upward price flexibility and downward price rigidity. Speculation in competitive storage and herd behavior driven by common price information can explain periodic price spirals. To test the competing explanations we need to understand the entire supply chain for each of the essential commodities. The aim of this study is to gather evidence on the nature of marketing institutions for sugar and to assess competition at each layer of the sugar distribution chain in Bangladesh. Despite being a case study, this should provide us a basis for informed policy making in food markets in Bangladesh. This will serve as a background work for other extensive studies in relevant sectors. Obviously, the testing of main hypotheses about the sugar price level and its volatility will require time series data on prices at various layers of the sugar supply chain, fob and world market prices of raw and refined sugar and related variables. Data on import price and quantity along with tax information will be collected from the National Board of Revenue (NBR). Information on prices charged at different layers will be collected from the Department of Agricultural Marketing (DAM), Trading Corporation of Bangladesh (TCB) and Bangladesh Tariff Commission. Using the reduced-form approach, this study will analyze the pattern of cost transmission following a discrete change in the world price of imported raw sugar. Imported raw sugar price accounts for about more than 80 percent of the total cost of refined sugar in Bangladesh which makes such tests based on cost pass-through especially attractive in our case. Since direct import of refined sugar is in place, the pass-through of the fob prices of refined sugar will also be explored in this study.