rice storage as precautionary savings: evidence from bangladesh
TRANSCRIPT
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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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Motivation VDSA Data Econometric Model Results
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.
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 2 / 20
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Motivation VDSA Data Econometric Model Results
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.
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 2 / 20
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Motivation VDSA Data Econometric Model Results
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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Motivation VDSA Data Econometric Model Results
Roll of Rice Storage
Rice storage plays an important roll in...
obtaining more favorable sales price (investment)
ensuring sufficient caloric consumption (insurance)
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 3 / 20
M i i VDSA D E i M d l R l
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Motivation VDSA Data Econometric Model Results
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"
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 4 / 20
M ti ti VDSA D t E t i M d l R lt
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Motivation VDSA Data Econometric Model Results
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"
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 4 / 20
Motivation VDSA Data Econometric Model Results
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Motivation VDSA Data Econometric Model Results
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"
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 4 / 20
Motivation VDSA Data Econometric Model Results
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Motivation VDSA Data Econometric Model Results
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"
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 4 / 20
Motivation VDSA Data Econometric Model Results
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Motivation VDSA Data Econometric Model Results
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"
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 4 / 20
Motivation VDSA Data Econometric Model Results
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Motivation VDSA Data Econometric Model Results
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"
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 4 / 20
Motivation VDSA Data Econometric Model Results
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Motivation VDSA Data Econometric Model Results
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"
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 4 / 20
Motivation VDSA Data Econometric Model Results
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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"
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 4 / 20
Motivation VDSA Data Econometric Model Results
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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
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 5 / 20
Motivation VDSA Data Econometric Model Results
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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
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 5 / 20
Motivation VDSA Data Econometric Model Results
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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
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 5 / 20
Motivation VDSA Data Econometric Model Results
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Research Question
What percentage of rice storage is undertaken for precautionaryreasons?
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Motivation VDSA Data Econometric Model Results
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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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Motivation VDSA Data Econometric Model Results
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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
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 7 / 20
Motivation VDSA Data Econometric Model Results
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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
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 7 / 20
Motivation VDSA Data Econometric Model Results
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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
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 8 / 20
Motivation VDSA Data Econometric Model Results
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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
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 8 / 20
Motivation VDSA Data Econometric Model Results
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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
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 8 / 20
Motivation VDSA Data Econometric Model Results
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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
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 9 / 20
Motivation VDSA Data Econometric Model Results
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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
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 9 / 20
Motivation VDSA Data Econometric Model Results
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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
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 9 / 20
Motivation VDSA Data Econometric Model Results
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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
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 9 / 20
Motivation VDSA Data Econometric Model Results
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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
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 10 / 20
Motivation VDSA Data Econometric Model Results
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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
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 10 / 20
Motivation VDSA Data Econometric Model Results
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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
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 10 / 20
Motivation VDSA Data Econometric Model Results
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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
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 10 / 20
Motivation VDSA Data Econometric Model Results
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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
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 11 / 20
Motivation VDSA Data Econometric Model Results
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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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Motivation VDSA Data Econometric Model Results
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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
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 12 / 20
Motivation VDSA Data Econometric Model Results
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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
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 13 / 20
Motivation VDSA Data Econometric Model Results
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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
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 13 / 20
Motivation VDSA Data Econometric Model Results
C l d M E
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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
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 13 / 20
Motivation VDSA Data Econometric Model Results
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
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 14 / 20
Motivation VDSA Data Econometric Model Results
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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Motivation VDSA Data Econometric Model Results
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)
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 15 / 20
Motivation VDSA Data Econometric Model Results
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
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 16 / 20
Motivation VDSA Data Econometric Model Results
Predicted Effect of Precautionary Behavior
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Predicted Effect of Precautionary Behavior
Table 2:Precautionary Savings as a Share of Total Savings
At 75th Percentile of Scaled Rainfall Variance 35.37%
At 50th Percentile of Scaled Rainfall Variance 11.95%
At 25th Percentile of Scaled Rainfall Variance 3.53%
Table 3:
Precautionary Savings as a Share of Stored Rice
At 75th Percentile of Scaled Rainfall Variance 91.01%
At 50th Percentile of Scaled Rainfall Variance 30.74%
At 25th Percentile of Scaled Rainfall Variance 9.08%
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 17 / 20
Motivation VDSA Data Econometric Model Results
Predicted Effect of Precautionary Behavior
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Predicted Effect of Precautionary Behavior
Table 2:Precautionary Savings as a Share of Total Savings
At 75th Percentile of Scaled Rainfall Variance 35.37%
At 50th Percentile of Scaled Rainfall Variance 11.95%
At 25th Percentile of Scaled Rainfall Variance 3.53%
Table 3:
Precautionary Savings as a Share of Stored Rice
At 75th Percentile of Scaled Rainfall Variance 91.01%
At 50th Percentile of Scaled Rainfall Variance 30.74%
At 25th Percentile of Scaled Rainfall Variance 9.08%
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 17 / 20
Motivation VDSA Data Econometric Model Results
Comparison to Giles and Yoo
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Comparison to Giles and Yoo
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%
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 18 / 20
Motivation VDSA Data Econometric Model Results
Comparison to Giles and Yoo
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Comparison to Giles and Yoo
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%
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 18 / 20
Motivation VDSA Data Econometric Model Results
Comparison to Giles and Yoo
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Comparison to Giles and Yoo
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%
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 18 / 20
Motivation VDSA Data Econometric Model Results
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
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 19 / 20
Motivation VDSA Data Econometric Model Results
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
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 19 / 20
Motivation VDSA Data Econometric Model Results
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
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 19 / 20
Motivation VDSA Data Econometric Model Results
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
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 19 / 20
Motivation VDSA Data Econometric Model Results
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
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 19 / 20
Motivation VDSA Data Econometric Model Results
Conclusions
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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
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 19 / 20
Motivation VDSA Data Econometric Model Results
Thank You
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QUESTIONS?
Jeffrey Michler (Purdue University) Rice Storage as Precautionary Savings 25 June 2013 20 / 20