Padiberas Nasional Berhad (BERNAS) Malaysia
Padiberas Nasional Berhad, also known by more as BERNAS, is a public-listed company in Malaysia which is involved in the procurement and processing of paddy. BERNAS is also involved in importation, distribution, warehousing and marketing of rice in Malaysia, as well as international rice joint-ventures and other rice-related businesses. Today, BERNAS controls approximately 24% of the paddy market and 45% of the local rice demand and is a privatised company with 1,700 staffs. (Bernas.com.my, 2013) Under a Privatisation Agreement signed with the Government of Malaysia in 1966, BERNAS's obligations include:
- maintaining the nation's rice stockpile
- acting as the buyer of last resort for local paddy farmers
- managing the Bumiputra Rice Millers Scheme
- distributing paddy price subsidies to farmers on behalf of the government
Did you know that BERNAS had a long history before it was actually named BERNAS?
BERNAS was originally set up in 1933 by the British colonial government. At that period of time, BERNAS was known as Rice Commission. Later on, the Rice Commission became the government agency known as "Lembaga Padi Negara" (LPN) in 1971. Lembaga Padi Negara was then renamed again in 1994 as BERNAS and was privatised on the 12th of January 1996. (Malaysiafactbook.com, 2013) Currently, BERNAS is under Tradewinds which has acquired 53.7% of BERNAS's equity and is now holding 72.57% of BERNAS.
As BERNAS deals with paddy, it's main good sold is rice. In Malaysia, rice is considered a staple food for the majority of the society. People from all levels of income consume rice on a daily basis as it is an Asian culture to have rice with dishes, or even rice cooked with several ingredients such as "nasi goreng kampung", a Malaysian-style fried rice, and "kimchi fried rice", a Korean-style fried rice. Knowing that rice is a staple food in Malaysia, it is a necessity for the local community. All households, no matter what race or income, consume rice and restock them on a regular basis.
In addition, the goods of BERNAS, rice, have an inelastic demand in Asian countries including Malaysia. The inelastic demand of rice is due to several reasons. First, the number of substitutes of rice is not many in the Malaysian market; mainly bread and noodles. Thus, the number of people that will switch to these other alternatives when the price of rice rises are few. Second, the proportion of income spent on rice is low. (Sloman, J., Wride, A. and Garratt, D., 2012) A sack of Jasmine's Super 5 rice (a brand under BERNAS), 10kg that costs approximately RM28 can last a month for a family of four, provided they take 3 meals a day. (Unknown, 2013) This causes the income effect of a price rise to be small. Since the demand of rice is inelastic, when there is an increase in the price of rice, there is a proportionately smaller fall in the quantity demanded for rice.
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| When price of rice increases from P1 to P2, there is a proportionately smaller fall in the quantity demanded for rice from Q1 to Q2. |
The demand for rice in malaysia is affected by festivals. During festive seasons like Hari Raya Aidilfitri, Chinese New Year and Deepavali, the demand for rice will rise. Since meals occur regularly due to visits by relatives, friends and colleagues or even functions held during this festival and family dinners, the consumption of rice increases by a fair amount. In addition, certain festivals, such as Deepavali, use rice as a form of decoration. Coloured rice is scattered on the floor to make a certain design which is portrayed as a form of art and decoration for the Indian culture in Malaysia, especially during the Deepavali period. Such are the examples of the need of rice that causes the demand for rice to increase during the festive seasons. Since the demand for rice has increased, the demand curve for rice shifts to the right as shown in the figure below. Because of the new demand curve, however, the price of the rice also increases during these festive seasons.
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| The demand for rice shifts from D1 to D2 due to an increase in demand for rice during the festive season. |
Even though the demand for rice is high in Malaysia, there has never been a time when shortage of rice occurred. This is because BERNAS closely maintains the nation's stockpile of rice by reserving a certain amount of rice for the nation's consumption.
Furthermore, BERNAS has an oligopoly market structure. This means that there are only a few firms in the market competing with BERNAS - one of them is Serba Wangi Sdn. Bhd. (Malaysiarice.com, 2013) Because there are only a few firms in this market, there exist barriers to entry and exit. Firms will face high set-up costs when entering this market and this becomes one of the barriers to entry. (Economicsonline.co.uk, 2013) To compete in a rice-related business, new firms need to own a rice mill, at least one paddy field and other necessary resources and land to start off the business. Following the high set-up costs, firms will next face high research and development costs due to the constant need for improvement of the quality of their goods and conduct researches to know the changing wants and preferences of the society from time to time. These are barriers to entry as a huge amount of capital is needed to invest on land and to cater for research and development which is a necessity for an oligopoly firm to continue competing with its competitors. Patents and economies to scale are also
BERNAS is also a price maker. This is because there are only few close substitutes and consumers are willing to pay due to brand loyalty even when BERNAS increases the price of its goods. Even so, BERNAS has to respond to pricing strategy of its competitors, whether if its an increase or decrease in price. The goods sold by BERNAS are differentiated products as well.
BERNAS is also a price maker. This is because there are only few close substitutes and consumers are willing to pay due to brand loyalty even when BERNAS increases the price of its goods. Even so, BERNAS has to respond to pricing strategy of its competitors, whether if its an increase or decrease in price. The goods sold by BERNAS are differentiated products as well.
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BERNAS also has a price floor set by the government, the paddy Guaranteed Minimum Price (GMP). (Bernas.com.my, 2013) A price floor is set above the equilibrium market price to be effective. This means that BERNAS buys the rice delivered at a price higher than the equilibrium market price for rice. Since there is a price floor, a surplus occurs as the quantity supplied for rice exceeds the quantity demanded. This brings about a deadweight loss where consumer surplus and producer surplus are reduced and not at maximum. In this case, producer's surplus is more than consumer's surplus. A price floor also causes inefficiency. Since the producers (local rice suppliers) are not producing at minimum cost and the consumer (BERNAS) does not pay at the efficient price, namely the equilibrium market price, and producers are not producing at the profit maximising output, the price floor causes both allocative inefficiency and productively inefficient. (Economics.co.uk, 2013) However, the paddy Guaranteed Minimum Price was set by the government for the benefit of the paddy suppliers to ensure that they are well rewarded for their hard work and supported for their cost of living. Being the buyer of last resort, BERNAS ensures that the welfare of all local rice growers taken care of.
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| The diagram above shows the market failure when a price ceiling is imposed by the government. |
In my personal opinion, instead of competing in an oligopoly market structure, BERNAS could form a collusion together with other companies in the market such as Serba Wangi to compete against its competitors. (Sloman, J., Wride, A. and Garratt, D., 2012) Since BERNAS is a well-known company, it can consider creating a cartel with Serba Wangi and act together as a monopoly to maximise its profits; by acting as a single firm, agreeing on the cartel price and compete against one another using non-price competition to gain a big share of resulting sales. However, BERNAS can also act together with other companies to form a tacit collusion where no formal or even informal agreement is made. Since BERNAS controls 45% of the local rice demand, it controls a relatively large part of the market and may act as the price leader in the rice industry allowing other firms to follow the pricing of BERNAS. The tacit collusion will result in reduced competition for BERNAS if the firms collude.
References
1. Bernas.com.my. (2013) Padiberas Nasional Berhad. [online] Available at: http://www.bernas.com.my/ [Accessed: 23 October 2013].
2. Economicsonline.co.uk. (2013) Monopoly. [online] Available at: http://economicsonline.co.uk/Business_economics/Oligopoly.html [Accessed: 23 October 2013].
3. Economicsonline.co.uk. (2013) Inefficiency. [online] Available at: http://www.economicsonline.co.uk/Market_failures/Inefficiency.html [Accessed: 23 October 2013].
4. Malaysiafactbook.com. (2013) Padiberas Nasional Berhad - Malaysia Factbook. [online] Available at: http://malaysiafactbook.com/Padiberas_Nasional_Berhad [Accessed: 23 October 2013].
5. Malaysiarice.com. (2013) ::: Welcome to MalaysiaRice :::. [online] Available at: http://www.malaysiarice.com/ [Accessed: 23 October 2013].
6. Sloman, J., Wride, A. and Garratt, D. (2012) Economics. 8th ed. Harlow, England: Pearson.
7. Unknown. (2013) [online] Available at: http://www.superbrands.com/my/pdfs/CSB_MY_FA_JASMINE.pdf [Accessed: 23 October 2013].
