Presented by Antony Chapoto Presented at Maize Markets Symposium Bingu International Conference Centre - 1st October 2015

1. Indaba Agricultural Policy Research Institute
INDABA AGRICULTURAL POLICY RESEARCH INSTITUTE
by
Antony Chapoto, PhD
Symposium on Making Maize Markets Work For All Malawians
Bingu International Conference Centre
Lilongwe, Malawi, October 1, 2015
POLICY AND PRICE STABILITY: EVIDENCE FROM
SOUTHERN AND EASTERN AFRICA

2. Indaba Agricultural Policy Research Institute
Food Price Dilemma
1
Farmers lobby for higher
maize prices + lower
fertilizer prices
Lower consumer prices,
usually culminating into
consumer subsidies
A never ending Government struggle!!!
Floor Prices
above market
price at
harvest time
Treasury

3. Indaba Agricultural Policy Research Institute
Food Price Dilemma
 Good intentions by government
have had negative effects on the
maize market:
 Zambia: Food Reserve
Agency market participation
has been increasing over time
 Buying beyond budgeted target
 Delayed payments
 Government ad hoc policies
reducing private sector
participation
 High mealie meal prices despite
bumper harvests
2
0
500
1000
1500
2000
2500
Jan-00
Jul-00
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
ZMWMetricTonne
Maize grain Prices
2001-02
2002-03
2005-06
2008-09

4. Indaba Agricultural Policy Research Institute
Government budget
•Long-term productive investments:
R&D, infrastructure, education, etc.
• High social payoffs
• But payoffs come 5-20 years later
• Critical for sustained poverty reduction
• input subsidy programs
• marketing board price supports
• Immediate political payoffs;
• Visible support to constituencies
• contribution to sustained growth /
poverty reduction is unclear
Political economy of public resource allocation

5. Indaba Agricultural Policy Research Institute
Motivation
 Food production fluctuations lead to price
instability
 Food price instability is a major problem
 For farmers
 For consumers
 For governments
 In response to food price instability, some
governments implement “ad hoc” policies to
control trade flows and/or price levels

6. Indaba Agricultural Policy Research Institute
Discretionary (“ad hoc”) trade policies
 If government actions in markets are
unpredictable, this tends to deter private
sector from participating in the market
 Examples:
 timing of export/import bans
o timing of change in import tariff rates
o when, where and at what price will marketing boards
enter the market?
o when will the Board stop buying, and what will the price
be after that?

7. Indaba Agricultural Policy Research Institute
Questions motivating our study
6
1. Do trade restrictions help to keep grain prices
within reasonable bounds for consumers and
producers?
2. Can trade restrictions support medium-term
objectives of increased grain productivity,
agricultural-led poverty reduction, and
improved food security?

8. Indaba Agricultural Policy Research Institute
Results from East and Southern Africa
 Chapoto & Jayne (2009), Minot (2013) finds that:
 Maize price volatility is significantly higher in
countries that actively intervene in their maize
markets than it is in countries that make little or no
effort to manage prices
 Minot (2013)
 Prices in Malawi, Zambia, and Zimbabwe, experience
food price movements that are more than 50 percent
more volatile than in countries that do not have
entities engaged in maize trade

9. Indaba Agricultural Policy Research Institute
DoTrade Restrictions Promote
More Stable Prices?
0
5
10
15
20
25
30
35
40
45
50
55
60
Zambia Malawi Mozambique South Africa Kenya Tanzania Uganda
UnconditionalCoefficientofvariation(%)
1994/95-2013/14 1994/95-2003/04 2005/06-2013/14
Source: Chapoto and Jayne 2009, 2015

10. Indaba Agricultural Policy Research Institute
0.00
3.00
6.00
9.00
12.00
15.00
18.00
Zambia Malawi Mozambique South Africa Kenya Tanzania Uganda
ConditionalCV(%)
1994/95-2013/14 1994/95-2003/04 2005/06-2013/14
DoTrade Restrictions Promote
Price Predictability?
Source: Chapoto and Jayne 2009, 2015

11. Indaba Agricultural Policy Research Institute
0
102030405060708090
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Year/Month
Lilongwe, Malawi Maputo, Mozambique
Maize grain price unpredictability :
Lilongwe, MalawiVs. Maputo, Mozambique

12. Indaba Agricultural Policy Research Institute
11
When grain prices
spike above import
parity, consumers are
being unnecessarily
taxed by an inefficient
market
Import ban/
restriction
When grain prices fall
below export parity,
producers are denied
income opportunities
from crop sales
[Export Ban]
Import and export bans
Please Note !!!

13. Indaba Agricultural Policy Research Institute
Export bans and trade restrictions
 Generally doesn’t
stop trade from
occurring but raises
smuggling costs,
which depress
prices for farmers
and raise costs for
consumers

14. Indaba Agricultural Policy Research Institute
Zambia: Maize Market + Ad-hoc Policies
0
50
100
150
200
250
300
350
400
450
500
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
NominalUS$permetricton
CIF from South Africa Lusaka wholesale price
World Food Crises
Deficit years
Bumper harvest

15. Indaba Agricultural Policy Research Institute
0
100
200
300
400
500
600
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
NominalUS$permetricton
CIF from South Africa Lilongwe wholesale price
Malawi: Maize Prices vs. Import parity

16. Indaba Agricultural Policy Research Institute
Reduced Government Participation
increases private sector participation
Zambia 2013/14 bumper
harvest experience
 Government committed:
 to buy less
 charge commercial mills
economic prices for
maize from the FRA
 Resulted in increased
trader activity, higher spot
prices for farmers, and
increased production the
following season.
0
20
40
60
80
100
120
Percent
% purchases by FRA % purchases by Private Sector

17. Indaba Agricultural Policy Research Institute
4
5
6
7
Conditional CV
Percent
1994-2014 1994-2004 2005-2008 2008-2014
Maize grain price unpredictability :
Nairobi, Kenya
 The more stable trade policy
environment in Kenya between
2005 and 2008.
o Joined East African Commission
trading agreement in January
2005.
o Removal of variable maize
import tariffs from Uganda and
Tanzania (except for a 2.75%
inspection fee).

18. Indaba Agricultural Policy Research Institute
Model 1 Model 2 Model 3
Rely on markets,
government role limited
to:
• Public goods investment
• Regulatory framework
• Strengthening of
institutions / defense of
property rights
• Policies supportive of
private sector entry and
competition
Primary reliance on markets
but role for rules-based
government operations
• e.g., buffer stock release in
response to defend stated
ceiling price
• Marketing board purchases
at stated floor price
announced in advance
• Transparent rules for
initiating state imports
Role for markets and
discretionary government
intervention
• Based on premise that
private sector cannot
ensure adequate food
supplies in response to
production shortfalls
• Justification for
unconstrained role for
state interventions in
markets to correct for
market failures
Conclusion & Recommendations
3 competing models of roles of government and private sector in food markets:

19. Indaba Agricultural Policy Research Institute
Conclusion & Recommendations
 Government operations in markets are costly.
 Not clear improvements in price stability and food security
 Government actions should be predictable.
 set clearly defined and transparent rules for triggering
government intervention with regard to changes:
 in parastatal purchase and sale prices ,
 import and export decisions,
 tariff changes and stock release triggers
 Government actions should facilitate regional trade,
because of its potential to:
 raise farm-gate prices in areas of surplus
 reduce consumer prices in areas of deficit

20. Indaba Agricultural Policy Research Institute
19
Unpredictable
policies
Mistrust
between
Private sector
and
Government
Limited
private sector
investment
and market
participation
Conclusion & Recommendations

21. Indaba Agricultural Policy Research Institute
Zikomo Kwambili
20

22. Indaba Agricultural Policy Research Institute
Bonus Slides
21

23. Indaba Agricultural Policy Research Institute
 3 recurrent processes
 Examples from Zambia
Strategic interactions between public
and private sector in food markets

24. Indaba Agricultural Policy Research Institute
National food
production
shortfall
anticipated
Who’s going
to import?
And how much?
State announces
plan to import
X tons
Private traders
sit on
sidelines
State incurs
delays in
contracting for
imports
Supplies dwindle;
prices skyrocket
“EVIDENCE THAT
MARKETS FAIL!”
Process # 1
Zambia- 2001/02, 2002/03

25. Indaba Agricultural Policy Research Institute
National food
production
shortfall
anticipated
Trader arranges
to import;
asks for waiver
on import duty
Government
delays in
waiving import
duty rate
Supplies dwindle;
prices skyrocket
“EVIDENCE THAT
MARKETS FAIL!”
Private sector
delays
importation;
intrigue over
timing of
waiver
Process # 2
Zambia: 2005/06

26. Indaba Agricultural Policy Research Institute
National food
production /
balance sheets
indicate adequate
harvest
Prices rise as
actual supplies
dwindle
Charges of
hoarding and
trader
manipulation
of market
Supplies dwindle;
prices skyrocket
“EVIDENCE THAT
MARKETS FAIL!”
Import licenses
applied for but
not granted
Process # 3
Zambia: 2008/09

27. Indaba Agricultural Policy Research Institute
Government Failure or Market Failure?
26