Agricultural Exports, Price Volatility and Monopsonistic Markets

An Analysis of the Myanmar - India Pulses Trade

Duncan Boughton (Michigan State University)

Paul Dorosh (IFPRI)

Cho Cho San (MOALI)

Jenny Cairns-Smart (IFPRI)

Asia ReSAKSS Conference, Bangkok, Thailand, December 13, 2017

Background

• Pulses are Myanmar’s largest agricultural export by value and India is the major buyer

• After almost 30 years of trade, India imposed import quotas in August 2017 that caused a collapse in farmgate prices in Myanmar

• Gains from trade for Indian consumers and Myanmar farmers are potentially at risk

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Objectives

• Examine the underlying causes of price volatility that led to the imposition of an import quota on pulses by India

• Evaluate options for reducing price volatility for Indian consumers and Myanmar producers

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Key findings and implications

• Myanmar-India pulse markets vulnerable to high price volatility:• India’s demand and Myanmar’s supply both inelastic in the short run

• Pulse production (supply) in both India and Myanmar is unstable

• India and Myanmar supply shocks can be positively correlated

• Myanmar-India pulse markets are reasonably integrated in terms of price signals: no evidence of international price manipulation (statistical analysis confirms graphical impressions)

• G2G trade “deal” to overcome volatility technically difficult to implement and little appetite from Myanmar traders / government

• Medium to long-term solutions for both countries lie in more elastic demand and supply through diversification of markets

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Outline

1) Background statistics for India and Myanmar as trading partners

2) Relationship between demand and supply elasticity and price volatility

3) Overview of pulse production and trade for India and Myanmar Focus on black gram (urad) and pigeon

pea (tur)

Evolution of Market Prices 2011 to 2017

4) Trade Policy Options Short run

Medium and long run

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India and Myanmar in contrast:

Variable India Myanmar Ratio

Population (m) 1,324 53 25:1

Share Rural Pop 65% 67% 1:1

GDP ($ billion) 2,264 67 34:1

Ag Share of GDP 17% 38% 0.45:1

Arable Land per cap (ha) 0.12 0.21 0.6:1

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Key issue: Myanmar-India pulse trade is co-dependent

For both pigeon peas and black gram, Myanmar-India trade accounts for a large share of total trade for each country.

o India purchased 92 percent of Myanmar’s pigeon pea exports in 2016-17; for black gram the share was 80 percent.

o Myanmar accounts for 49 percent of India’s total pigeon pea imports; for black gram the share was 70 percent.

Thus, Myanmar is heavily dependent on India as a buyer of these products; and India is only slightly less heavily dependent on Myanmar as a supplier of these products.

Impact of a supply shift on domestic prices with inelastic demand (good production season in India)

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Impact of a demand shift on domestic prices with inelastic supply (case of India import ban on Myanmar)

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Pulse Production in India (L) and Myanmar Exports (R)

Source: Authors’ calculations based on Myanmar Agriculture Statistics 1998–2010 (MOAI 2010)

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2011-12 2012-13 2013-14 2014-15 2015-16 2016-17

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Black Gram ('000 tons) Pigeon Pea ('000 tons)

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Pulse Production in India (L) and Myanmar Exports (R)

Source: Authors’ calculations based on Myanmar Agriculture Statistics 1998–2010 (MOAI 2010)

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2011-12 2012-13 2013-14 2014-15 2015-16 2016-17

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Black Gram ('000 tons) Pigeon Pea ('000 tons)

Pigeonpea prices in India and Myanmar 2011-17

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Black gram prices in India and Myanmar 2011-17

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G2G Agreement to the rescue?

Government of India offered Government of Myanmar a five-year agreement for up to 1 million tons of exports per annum at a sales price linked to the India minimum price plus a marketing margin

G2G potentially attractive from a political economy perspective: Protects Indian consumers from excessively high prices in a short supply year

Protects Myanmar farmers from excessively low prices in a high supply year

Major technical challenges to reaching an agreement: Price? (zero sum game)

Quantity? (what quantities can Myanmar commit to; what penalties for default)

Who covers price deviation profits/losses for participating Myanmar traders?

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Alternative Options for a Negotiated Sales Price

• Option 1: Sales price equal to the Minimum Support Price (adjusted for a marketing margin) would provide stability, but could result in a wide disparity between the negotiated sales price and market prices.

• Option 2: Sales price equal to the wholesale Delhi lagged six months, (plus a marketing margin) provides no stabilization relative to the market, but does facilitate planning for both buyers and sellers.

Note: The Minimum Support Price (MSP) and Delhi wholesale hypothetical sales prices use

constant marketing margins to Yangon.

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2012 2013 2014 2015 2016 2017

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Historical (Yangon) MSP

Delhi (lag 6m) Ave. MSP, Delhi (lag 6m)

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Alternative Options for a Negotiated Sales Price

• Option 3: Average of the Minimum Support Price and the lagged wholesale market price (both adjusted for margins) results in increased stability with some responsiveness to market forces.

• Ultimately, the size of the margins used (to translate the Minimum Support Price or wholesale Delhi price to an equivalent Yangon price) and the weights could be determined in future trade negotiations.

Note: The Minimum Support Price (MSP) and Delhi wholesale hypothetical sales prices use

constant marketing margins to Yangon.

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2012 2013 2014 2015 2016 2017

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Historical (Yangon) MSP

Delhi (lag 6m) Ave. MSP, Delhi (lag 6m)

Obstacles for Myanmar to respond to GoI offer

Myanmar traders have little incentive to commit to an agreement: Geographical price arbitrage: trader margins unaffected by

presence/absence of a deal

Speculators (temporal price arbitrage): price instability an opportunity

Value added exporters: not interested in selling to India (perceived as low quality / low value trap)

Myanmar government has to balance desire to support farmers with significant obstacles to implementing and agreement: Lack of fiscal resources to underwrite trader losses

Potential for false declarations by traders if Myanmar government agrees to cover losses

Danger of setting a precedent that could be demanded by other sectors (e.g., rice)

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Additional options should aim to make demand and supply more elastic

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More elastic supply (or demand) results in smaller price fall with demand (or supply) shocks

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What policy interventions promote more elastic markets?

• Expand government stocks (India) or increase access to low interest loans (Myanmar) traders to hold stocks

• Myanmar allocated $11 million in loans to traders (enough for 35,000 tons) but needs approval from parliament to increase

• Expand Myanmar farmer post-monsoon crop options through improved irrigation access and control

• Encourage domestic consumption of pulses in Myanmar• Purchase pigeonpeas or blackgram instead of chickpea for military,

schools, hospitals, and prisons

• Requires investment in processing and promotion of recipes

• Diversify export destinations / import sources• India already sourcing from eastern and southern Africa

• Myanmar could expand export destinations through investment in processing

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Thank you for your attention!

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