Presented by Valentina Pernechele Presented at 2015 Research Symposium Malawi Institute of Management, 4-5 June

1. Assessing the policy environment
for cash crops in Malawi
What could hinder the achievement of the National Export
Strategy objectives?
Hélène Gourichon, Alethia Cameron, Valentina Pernechele
FAO Monitoring and Analyzing Food and Agricultural Policies (MAFAP)
Lilongwe, Malawi
June 4 2015

2. Outline
• Analytical framework
• Method
• Policy environment for export crops in Malawi
• Results
• Policy implications for achieving National
Export Strategy objectives

3. National Export Strategy 2013-2018
• Coherent and integrated
policy framework for the
export sector with the
following objectives:
– Enhance export
competitiveness
– Develop agriculture and
agribusiness towards
diversification and value
addition
• Clusters:
– Oil seed products
including from
groundnuts and cotton;
– Sugar cane products
– Manufactures
– Support to tobacco, tea,
mining, tourism and
services

4. Analytical background
• Analysis of the effects of policies and market
dynamics on price incentives for production of:
– Cotton; Groundnuts; Sugar; Tea; Tobacco
• Period prior to the formulation of the NES (2005-
2013)
• Based on the results from the FAO programme
Monitoring and Analysing Food and Agricultural
Policies (MAFAP)

5. How to measure the effects of the policy and market
environment on price incentives to producers?
• Effect of domestic policy
and market performance
Nominal Rate of
Protection
Nominal Rate of
Assistance
Market
Development Gap
• Effect of policy and market
performance + budgetary
transfers (public expenditure)
• Reflect excessive and
inefficient access costs
exchange rate misalignments

6. In Malawi, producers of export crops faced
price disincentives, why?
REGULATORY POLICIES?
BUDGETARYPOLICIES?
MONETARY POLICIES?
Is it because of inefficient, weak or inadequate

7. Budgetary policies:
bulk of support to maize
MAFAP Public Expenditure Analysis, FAO, 2014
0
10,000
20,000
30,000
40,000
50,000
60,000
2006 2007 2008 2009 2010 2011 2012 2013
maize cotton sugar tobacco Other
Public expenditures allocated to single commodities (Million MWK)
Maize accounted for about 50% of agricultural-specific PE

8. Budgetary policies:
low support to cash crops
500
1,000
1,500
2,000
2,500
3,000
3,500
2006 2007 2008 2009 2010 2011 2012 2013
cassava cotton macadamia poultry sugar tobacco wheat
Public expenditures allocated to single commodities except maize (Million MWK)
Tobacco, sugar and cotton: 5% of
agricultural specific PE
MAFAP Public Expenditure Analysis, FAO, 2014

9. Regulatory framework
Market
regulation
Price
controls
Fiscal
policies
Trade
policies
• Tobacco market
regulated by TCC
• Tea, unregulated market
but supervised by TAML
• Cotton, reinforced
regulation (CDT, Cotton
Act)
• Highly
uncompetitive
environment despite
the creation of the
Competition and
Fair Trading
Commission

10. Regulatory framework
Market
regulation
Price
controls
Fiscal policiesTrade policies
• Tobacco, sporadic price policy (2006/07)
• Cotton, minimum buying price (since 2008)
• Tea, price of green leaf set by TAML

11. Regulatory framework
Market
regulation
Price
controls
Fiscal policiesTrade policies
• Low or inexistent tariff, no export
restriction
• Delays in the clearance of goods at the
border and acquiring export licences for
agricultural commodities

12. Regulatory framework
Market
regulation
Price
controls
Fiscal policiesTrade policies
• Tobacco, various taxes and levies
• No tax identified in other value
chains

13. Monetary policy
Fixed
exchange rate
Floating
exchange rate
2012

14. Results:
Overall disincentives to export commodities production
-2
-31
-28
-40
11
-6
-31
-29
-40
8
-45 -35 -25 -15 -5 5 15
Cotton
Groundnuts
Sugar
Tea
Tobacco
Nominal Rate of Protection Nominal Rate of Assistance
Nominal Rate of Protection and Nominal Rate of Assistance at farm gate
level for export commodities, average 2005-2013

15. Cotton: atomistic market environment transmits
international price to farmers
• Precarious but reasonable price transmission
• Improved sector regulation by the government
• Exceptional circumstances interfered with the
price transmission
• Budget support through two national
programmes that targeted both the upstream
and downstream segments of the value chain
Incentives to production
o 2008-2009: implementation of the minimum price
policy, but not systematically applied or respected in
the following years.
Disincentives to production
o 2011: international price skyrocketed while producer
prices remained steady
NRP -6%
NRA -2%

16. Sugar: monopsony in the value chain led to
disincentives at farm gate
• Poor price transmission due to the
monopsony of sugar cane purchase
• High share of processing costs
transferred to farmer
• Budgetary transfer could not offset
the price taxation
NRP -29%
NRA -28%

17. Tea: low base price of green leaf and high
processing costs penalize farmers
• Low base price of green leaf as fixed
by the price model
• Bonus mechanism did not ensure
fair returns to farmers as it
rapresented a minor component of
the final price due to high processing
costs incurred by the estates.
• No direct budget support to tea
production
NRP -40%
NRA -40%

18. Additional disincentives due to market
inefficiencies along the value chain
• Cost of inefficiencies for the five
export crops analysed reached 6
percent of the producer prices
MDG -6%
Effects of the exchange rate misalignment
• Fixed exchange rate depressed farm gate prices by
23 percent on average between 2005 and 2011

19. Priority actions to achieve NES objectives
• Farmers bear the costs of value
chain inefficiencies and poor
access to markets (high access
costs)
 Investments in post-
production infrastructure
 Trade facilitation and
promotion measures
(certification, export services
etc.)
Affordable access to
market
Fair competition
Access to information
Macroeconomic
stability
Policy coherence

20. Priority actions to achieve NES objectives
• Uncompetitive value chains at
the auction level but also in
transport services
 Reinforcement of the role of the
Fair Trading & Competition
Commission and promotion of
fair, transparent competitive
markets and contractual
relationships
Affordable access to
market
Fair competition
Access to information
Macroeconomic
stability
Policy coherence

21. Priority actions to achieve NES objectives
• Lack of market information
system that:
o Affects farmers bargaining power
o Creates uncertainty for all agents
in the value chain
o Leads to misinformed policy
decisions
 Reinforcement of the
Agricultural Market Information
System
Affordable access to
market
Fair competition
Access to information
Macroeconomic
stability
Policy coherence

22. Priority actions to achieve NES objectives
• Exchange rate policy prior 2012
heavily penalized producers
 Maintain a exchange rate policy
that averts exchange rate
misalignments
Affordable access to
market
Fair competition
Access to information
Macroeconomic
stability
Policy coherence

23. Priority actions to achieve NES objectives
• Low budget support and weak
regulatory policies
 Increase public funding to export
crops sector and hard
infrastructures (physical
infrastructure and information and
communication technology)
 Develop soft infrastructures for
better border and transport
efficiency and business and
regulatory environment
Affordable access to
market
Fair competition
Access to information
Macroeconomic
stability
Policy coherence

24. Thank you

25. Annex 1. Methodology
• Observed Nominal Rates of Protection (NRP) at farm gate :
𝑁𝑅𝑃𝑜𝑓𝑔 =
𝑃𝐺 𝑜𝑓𝑔
𝑅𝑃𝑜𝑓𝑔
where 𝑃𝐺 𝑜𝑓𝑔 is the observed price gap at farm gate, 𝑅𝑃𝑜𝑓𝑔 is the observed reference price at
the farm gate.
• Nominal Rate of Assistance at farm gate (NRA):
𝑁𝑅𝐴 =
𝑃𝐺 𝑎𝑓𝑔 + 𝑃𝐸𝑐𝑠𝑝
𝑅𝑃𝑎𝑓𝑔
where PEcsp is commodity-specific public expenditure that has been identified and measured
as monetary units per tonne.
• Market Development Gap (MDG) (Value chain inefficiencies ):
𝑀𝐷𝐺𝑓𝑔 =
(𝐼𝑀𝐺+𝐸𝑅𝑃𝐺+𝐴𝐶𝐺 𝑤ℎ+𝐴𝐶𝐺 𝑓𝑔)
𝑅𝑃 𝑎𝑓𝑔
where IMG is the international market gap, ERPG is the exchange rate gap, ACGwh is the access
cost gap at the point of competition defined as the difference between observed and
adjusted access costs at the point of competition and ACGfg is the access cost gap at the farm
gate defined as the difference between observed and adjusted access costs at the farm gate.

26. Composition of Malawian exports
200,000
400,000
600,000
800,000
1,000,000
1,200,000
2005 2006 2007 2008 2009 2010 2011 2012
Others Tobacco, unmanufactured Tea
Cotton, lint Groundnuts, shelled Sugar, raw
US$ thousands
Source: NSO, 2014 (tobacco, cotton, groundnuts); TAMA, 2014 (tea); Illovo, 2014 (raw and refined sugar);
FAOSTAT, 2014 (others - data for 2012 not available).

27. Annex 2. Results for tobacco
Inconsistent policy and market signals received by
producers
• Protected by the policy environment (av.) but
high variability in yearly indicators
• Incentives due to exceptional circumstances
• Years with limited price transmission because of
the uncompetitive environment
– monopoly of transport services
– oligopsony of buyers at auction
• Budgetary transfer (06-09)
Producers received higher prices than the international
reference price
o 2007: Introduction of a floor price for producers
o 2008: Misleading production forecast
o 2012: Low production combined with the
implementation of the floating exchange rate
NRP 8%
NRA 11%

28. Annex 3. Results for Groundnut
New market structure inhibits price transmission
• Shift in the policy and market
environment
– 2005 to 2011: prices offered by NASFAM
aligned with international prices
– From 2012 reduced price transmission
• Budgetary transfer through the FISP
difficult to capture; no specific projets/
programmes targeting exclusively
groundnuts
NRP -31%
NRA -31%