Rice Storage as Precautionary Savings: Evidence from Bangladesh

7/28/2019 Rice Storage as Precautionary Savings: Evidence from Bangladesh

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Motivation VDSA Data Econometric Model Results

Rice Storage as Precautionary Savings:Evidence from Bangladesh

Jeffrey D. Michler

SSD Division SeminarLos Banos, Philippines

25 June 2013

Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 1 / 20


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Missing Markets

In absence of reliable financial and insurance markets farmers are

forced to rely on own methods to...

Invest in the future

Insure against catastrophe

A major consideration in post-harvest decision making is the need for

farmers to fill these missing markets on their own.



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Missing Markets

In absence of reliable financial and insurance markets farmers are

forced to rely on own methods to...

Invest in the future

Insure against catastrophe

A major consideration in post-harvest decision making is the need for

farmers to fill these missing markets on their own.



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Roll of Rice Storage

Rice storage plays an important roll in...

obtaining more favorable sales price (investment)

ensuring sufficient caloric consumption (insurance)



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Roll of Rice Storage

Rice storage plays an important roll in...

obtaining more favorable sales price (investment)

ensuring sufficient caloric consumption (insurance)


M i i VDSA D E i M d l R l


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Reasons for Storage

Price Arbitrage

Storage to take advantage of price increases in lean season

Increases farmer profitability

Allows for greater investment in household welfare"Positive motivation"

Precautionary Savings

Storage to insure against future disasters

Reduces consumption activity in the presentLimits ability to productively invest in the future

"Negative motivation"


M ti ti VDSA D t E t i M d l R lt


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Reasons for Storage

Price Arbitrage











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Reasons for Storage

Price Arbitrage











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Reasons for Storage

Price Arbitrage











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Reasons for Storage

Price Arbitrage











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Reasons for Storage

Price Arbitrage











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Reasons for Storage

Price Arbitrage



Allows for greater investment in household welfare

"Positive motivation"








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Reasons for Storage

Price Arbitrage



Allows for greater investment in household welfare

"Positive motivation"








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Relevance

In Bangladesh

75% of ag output is rice

80% of earned income is saved in some form

72% of savings is in the form of stored rice

Post-harvest technologies and training have a large role in the

CSISA Project

It is important to understand the motivations for on farm storage by

rural rice growing households in Bangladesh




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Relevance

In Bangladesh





CSISA Project






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Relevance

In Bangladesh





CSISA Project






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Research Question

What percentage of rice storage is undertaken for precautionaryreasons?




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Methodology

1 We use unconditional rainfall variance as an exogenous proxy for

consumption risk

2 We allow for updating of perceived consumption risk as household

circumstances change

3 We control for potential correlation between household wealth and

risk response




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Methodology


consumption risk




risk response




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Methodology


consumption risk




risk response




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Findings

On average 31% of rice storage is undertaken for precautionary

reasons

But among households highly susceptible to risk, 91% of rice

storage is for precautionary reasons

These are significantly higher percentages than found in a similar

study by Giles and Yoo (2007) on farmers in China




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Findings


reasons








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Findings


reasons








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Survey Data

Survey work is ongoing

Village Dynamic Studies

in South Asia (VDSA)

conducted by IRRI12 representative

villages

Data collected monthly

from 2009-2014

First 32 months of data

released available




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Survey Data





villages


from 2009-2014


released available




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Survey Data





villages


from 2009-2014


released available




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Survey Data





villages


from 2009-2014


released available




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Unique Aspects

Previous studies used annual data

When more than one season in a year, annual data can miss

inter-year changes in storage practicesA good season and a bad season might result in no obviouschange in storage behavior in the annual data

Monthly data allows us to see how farmers react intra and

inter-seasonally to perceived and realized risk




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Unique Aspects









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Unique Aspects









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Unique Aspects









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Giles and Yoo (2007)

Consumption growth follows the standard Euler model

lnCit+1 = + Zit+ mit+ Vjt+ uit (1)

lnCit+1 : growth in consumption from period t to period t+ 1

Zit : area of land managed by the household i in period t

mit : scaled unconditional variance of rainfall

Vjt : village*month dummy variables




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Potential Issues

Correlated measurement errors

Consumption appears in both scaled term and dependent variableUnobserved heterogeneity bias

Household specific term in both scaling variable and householdland variable




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Potential Issues

Correlated measurement errors

Consumption appears in both scaled term and dependent variableUnobserved heterogeneity bias

Household specific term in both scaling variable and householdland variable




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Correlated Measurement Errors

Use an instrumental variable (IV) to control for correlated

measurement errors

We use the scaling term in periods t

1 and t

2 to predictscaling term in period t

By replacing the scaling term mit with its predicted value mit we

eliminate the potential correlation in the errors




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measurement errors


1 and t






C l d M E


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measurement errors


1 and t






U b d H i Bi


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Unobserved Heterogeneity Bias

Use first differencing (FD) to control for unobserved heterogeneity

Replace independent and dependent variables with the firstdifferences

The process of differencing nets out any unobserved time

constant household effects



U b d H t it Bi


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Unobserved Heterogeneity Bias

Use first differencing (FD) to control for unobserved heterogeneity

Replace independent and dependent variables with the firstdifferences

The process of differencing nets out any unobserved time

constant household effects



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Final Model


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Final Model

We combine IV and FD to control for both issues (FDIV)

lnCit+1 = + Zit+ mit+ Vjt+uit (2)



Regression Results


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Regression Results

Table 1:

Precautionary Responses to Risk in Household Consumption

Regressors OLS IV FD FDIV

Landholding -0.22 0.86 15.98*** 13.45**(0.23) (0.72) (6.17) (6.03)

Scaled Rainfall Var 0.14* -0.19* 0.52* 4.21***

(0.09) (0.10) (0.33) (1.35)

Vil*Month Dummy -0.52*** 0.13*** .66*** 1.18***

(0.05) (0.05) (0.06) (0.13)Constant 94.82*** 143.04*** 117.53*** 400.37***

(126.78) (130.66) (126.80) (407.04)

Obs. 12,710 12,252 12,252 12,252



Predicted Effect of Precautionary Behavior


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Table 2:Precautionary Savings as a Share of Total Savings

At 75th Percentile of Scaled Rainfall Variance 35.37%



Table 3:

Precautionary Savings as a Share of Stored Rice








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Table 2:Precautionary Savings as a Share of Total Savings




Table 3:

Precautionary Savings as a Share of Stored Rice






Comparison to Giles and Yoo


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Giles and Yoo (2007) examine 44 villages in rural China from1995-2000

6 annual observations of up to 14,779 households

Compare to 12 villages in rural Bangladesh from 2009-2012

32 monthly observations of up to 12,710 households

Table 4:

Precautionary Savings as a Share of Total Savings

Scaled Rainfall Variance BD China

At 75th Percentile 35.37% 24.6%At 50th Percentile 11.95% 10.3%

At 25th Percentile 3.53% 3.9%





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Table 4:









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Table 4:







Conclusions


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Conclusions

1 Compared to rural households in developed countries,households in Bangladesh hold a higher share of earnings forprecautionary reasons

This suggests that farmers are trying to self-insure against incomerisk in the absences of insurance markets

Policies aimed at fostering insurance markets may alleviate thisunproductive activity

2 A significant percentage of rice is stored for precautionaryreasons, between 30-90% for median to high risk households

This suggests that households are falling to take advantage of

arbitrage opportunitiesPolicies aimed to increase farm profitability through storageefficiencies may be less effective than initially predicted



Conclusions


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Conclusions









Conclusions


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Conclusions









Conclusions


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Conclusions









Conclusions


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Conclusions









Conclusions


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Thank You


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QUESTIONS?


Rice Storage as Precautionary Savings: Evidence from Bangladesh

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