INDIVIDUAL WEBLOG ASSIGNMENT

Figure 1: Logo BERNAS

Padiberas Nasional Berhad (BERNAS) is a company listed on the Main Market of Bursa Malaysia. Essentially, BERNAS is a large scale firm that produce rice and it is a normal good for the nations. BERNAS Group of companies involved in the processing and procurement of paddy. As the custodian of Malaysia rice industry, they also in charge of importation, marketing, distribution of rice to maintain the nation’s rice stockpile. BERNAS Group of companies is now involved in rice complementary businesses, international rice joint venture, seed and farming activities to increase its existence as a leading player in the rice industry supply chain. Their duties are to maintain quality and sufficient supply of rice to the nations as well as fair and stable prices of rice. BERNAS was privatised in January 1996 and it takes over the role of Lembaga Padi dan Beras Negara (LPN) as the sole rice importer in Malaysia rice and paddy industry. BERNAS continues to fulfil its responsibilities on behalf of government under a Privatisation Agreement 1996. (BERNAS, 2012) BERNAS has made a historical remarkable because the company was recorded on the KLSE main board on August 25 in 1997. Obligations of BERNAS are acting as the buyer of last resort at guaranteed minimum price, provide paddy price subsidy to farmers, maintain national stockpile. Due to food crisis on 2008, the government urged BERNAS to increase the national stockpile level from 92,000 metric tonnes to 292,000 metric tonnes so that there is rice sufficiency and security at stable prices to the nations. Moreover, BERNAS was given the authority to be the only one importer of rice in Malaysia therefore they need to act as the buyer of last resort and purchase at a guaranteed minimum price (GMP). On the authority of the government, BERNAS distributes paddy price subsidies to the paddy farmers so that they can enjoy a low cost of production hence output increases. (BERNAS, 2013)

Figure 2: National Stockpile of rice

BERNAS is the rice import monopoly. As the sole importer of rice on behalf of the government, BERNAS controls approximately 40% of the local market share. Therefore it is the only firm in the market that is given authority and license to import paddy and rice to the nations.  A monopoly is a single firm in an industry or market that the product produced is free from close substitute and significant barriers to entry. Other firms are restricted to the industry due to the legal monopoly which derived from the legal barriers to entry. (Say, 2011) Legal monopoly is a market that is protected and restricted by government law and license. Besides than legal barriers to entry, other firms also faced natural monopoly and economies of scale. Economics of scale and other cost advantages enjoyed by firm that has large capital requirements. A large initial investment or the need to embark in an expensive advertising campaign deter entrants to the industry. In addition, they are the price maker due to its available market power as it is the sole producer in the whole industry. BERNAS have control over the price of their output. BERNAS imports around 30% to 40% of domestic rice yearly to ensure there is sufficient supply to the whole nations. They also distribute to licensed wholesalers and consumers. (EMIS, 2010)

Figure 3: Economies of scale in a long run production

Sources: (Riley, 2006)

BERNAS is categorized as a long run production because it is a large scale firm thus all of the inputs used is changeable in quantity. Due to time given, there are no fixed factors of production and the quantity of fixed factor can be increase and all inputs can become variable inputs. For instance, BERNAS can buy new machineries to increase the process of rice thus output increases. The scale of production for BERNAS is getting increasing returns to scale because when the firm produces more, it uses smaller number of factors for each output. Eventually BERNAS will produce at a lower unit cost. A large scale of firm such as BERNAS will benefit from economies of scale. Economies of scale refers to the benefits of large scale production due to reduce in average cost and increase in efficiency. Based on figure 3, it indicates that in a long run production, a large quantity of output will increase (Q1 to Q2) and at the same time reduce in average cost (C to C1). In a long run production, firms are able to manage administrative and tasks more efficient with better standard of procedures. Therefore the firm reduce average cost and enhances in efficiency. (Riley, 2006)

One of the determinants to change in demand of rice is the taste and preferences. Growth of economy in Malaysia results in the changes Malaysian’s lifestyle especially the behavior of food consumption in their daily life. They are more concern about their health compared to the past, therefore they tend to change their consumption habits by consuming less carbohydrates food such as cereals or fiber grains than the rice. In this case, demand for rice is declining and demand for cereals or fiber grains is increasing. (Soon, 2011)

Figure 4: Paddy Price Subsidy

One of the factors that influence change in supply is the government subsidy. To maintain the nation’s rice stockpile and ensure that the country has sufficient supply of rice at all times, BERNAS controls the distribution of paddy price subsidies to farmers on behalf of the government. Government involvement in BERNAS will pay a subsidy about RM400 million a year to the paddy farmers. (Yusof, 1994)To increase supply of rice to the local demand, government subsidies help the producer to minimize their cost of production. With subsidies, producer can cover their high land, fertilization cost and so on. In addition, subsidies also increases the paddy yield obtained and hence it contributes significantly to local self-sufficiency in paddy and rice production. Government subsidies boost the rice production thus supply of rice increases.

Figure 5: Elasticity of demand for rice

Sources: (Riley, 2012)

                   

Price elasticity of demand measures how responsive or sensitive consumers are to changes in the price of a product. One of the factors that influence the price elasticity of demand is the closeness of substitutes. Rice is considered as a normal and necessity good because rice is the main staple diet to the nations. Although rice has substitutes like wheat, corn and meat, consumer is still willing to consume rice compared to other substitute. According to figure 5, quantity of rice reduces in a small amount, approximately 10% (Q1 to Q2) when price of rice increases a lot, approximately 30% (P1 to P2). It indicates that most of the consumer will not quickly shift their consumption to substitute goods although the price of rice increases. This is because rice is a necessity and staple food to the Malaysian community. The percentage change in the quantity demanded is smaller than the percentage change in price, therefore rice generally has inelastic demand and the price elasticity of demand is less than 1. (Riley, 2012)

Figure 6: Sufficient supply of rice

According to law of supply, there is a relation between price of the good and quantity demand of supply. When the price of the good increases, it is rational for the firm to raise their outputs so to enjoy higher revenue and profit. However not all the firms are able to increase their output when the price of the good increases. One of the factors that influences price elasticity of supply is the time period. During short period, firm like BERNAS is not able to adjust its output level. This is because producers cannot process and distribute the rice in a short time. There is insufficient time for getting new resources and adjusting the output level although the price of rice increases. Therefore price elasticity of supply for rice is inelastic due to the short period of time. Meanwhile price elasticity of supply for rice is elastic during long term time period. In long term, producer like BERNAS have more time to adjust their supply. They have more time to engage more labours and buy new machines to adjust their output level. In a long time period, BERNAS is able to process and distribute rice when the price of rice increases. Thus the firm can gain higher profit and revenue. (Hubpages, 2013)

Food	Income elasticity
Rice	0.7104
Meat	0.5652
Fish	0.5360
Eggs	0.6155
Bread and other cereals	0.4311
Fruits	0.5870
Vegetables	0.6508

Table 1: Income elasticity for food items, Malaysia

Sources: (Yeong-Sheng, 2008)

Income elasticity of demand measures how sensitive or responsive quantity demand towards the change in income level. Malaysia is a developed country, therefore when there is a raise in income level, consumer will prefer higher standard of living and consume more nutrition foods. They will tend to shift their rice consumption to other food such as wheat, meat and vegetables. Table 1 above has shown the income elasticity of demand for rice is 0.7104 and the income elasticity of demand for other food items is between 0.4311 to 0.6155. It is proven that consumer tend to consume less rice than other food items when their income level increases. However the income elasticity of demand for rice is greater than 0 but less than 1, it indicates that demand is income inelastic and rice is not an inferior good but a normal good hence it is still playing its role as primary staple food in Malaysia. (Yeong-Sheng, 2008)

Figure 7: BERNAS rice

In conclusion, rice is the primary staple for the nations. Most importantly, it is a necessity good for Malaysian, therefore when the price of rice increases, people is still willing to consume rice, only small number of the consumer will shift their consumption to other substitutes. On authority of government, BERNAS is responsible to maintain the National Rice Stockpile for the nations. To fulfil the obligation as the rice importer monopoly, BERNAS ensure there is sufficient supply of rice and security at fair and stable prices. BERNAS will try their best to fulfil their responsibilities and role in the rice industry. 

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Reference List

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Say, T. L., 2011. Agreement on monopoly of rice imports extended in M'sia. [Online]
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[Accessed 20 Oct 2013].

Soon, K. W. K., 2011. Demand and Supply for Rice in Malaysia. [Online]
Available at: http://www.articlesbase.com/agriculture-articles/demand-and-supply-for-rice-in-malaysia-5004664.html[Accessed 20 Oct 2013].

Yeong-Sheng, T., 2008. Demand analyses of rice in Malaysia. [Online]
Available at: http://mpra.ub.uni-muenchen.de/15062/1/MPRA_paper_15062.pdf
[Accessed 20 Oct 2013].

Yusof, R., 1994. Bernas subsidies. Bernas outline plans to improve industry, 2 7, p. 7.