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Tuesday, 22 February 2011

A Broken Maize Marketing Policy

Important insights on the 2010 maize marketing polices from a recent FSRP Working Paper - Who Gained and Who Lost from Zambia's 2010 Maize Marketing Policies? :
The two major GRZ maize marketing policies used to date in the 2010/11 marketing year are: (1) setting an FRA maize buy price of K65,000 per 50-kg bag, which is well above maize market prices and roughly comparable to the price of South African maize landed in Lusaka (the import parity price); and (2) progressively increasing the FRA‟s maize purchase targets throughout the course of the Agency‟s buying campaign and ultimately purchasing 878,570 MT or 83% of expected maize sales by smallholder farmers. These policies have resulted in the following outcomes.

First, the FRA has accumulated massive maize stocks that can only be sold domestically or in regional export markets at a major financial loss. Much of the FRA‟s maize is at risk of spoilage due to inadequate storage facilities and poor prospects for exports. At the end of the day, the FRA‟s 2010 operations are estimated to cost the Zambian Treasury nearly K1.5 trillion.

Second, the FRA‟s activities have put upward pressure on market prices for maize but only a relatively small group of well-capitalized farmers have benefited directly from the high FRA buy price and large volumes purchased and/or indirectly from higher maize market prices. Despite the bumper crop, only 36% of smallholder farmers expected to sell maize during the 2010/11 marketing year and just 4-5% of maize-growing households (approximately 49,000 households) are likely to account for 50% of all maize sold to the FRA and private buyers.

Third, higher maize market prices as a result of the FRA's activities have made maize grain and maize meal more expensive for urban and rural consumers than would have been the case in a bumper crop year without such heavy FRA involvement.

Fourth, because the FRA buy price is comparable to or greater than the import parity price once transportation and other marketing costs are added to the FRA price, millers could obtain maize more cheaply from South Africa than from the FRA unless the FRA's sale price is subsidized by the Zambian Treasury.

Fifth, the FRA's progressive ratcheting up of maize purchase targets caused private traders to delay their entry into the market, which in turn limited access to maize markets for farmers that were unable to sell their maize to the FRA.

And sixth, maize bought at the FRA price is not competitive in regional export markets and US$91-177 is being lost on each ton exported. FRA's willingness to export maize at a financial loss and uncertainty over the timing and magnitude of FRA maize purchases and over GRZ export policies have also discouraged private sector participation in formal maize exportation, which could have relieved the national surplus without imposing huge costs on the Zambian Treasury.
What is more worrying is that we expect even a better harvest in 2011. What is the point of even larger bumper harvests when it all comes at great cost to the tax payer? What is the FRA going to do with all the maize it is holding that it can't sell? Is this for election give-aways?  As the paper demonstrates we are effectively subsidising our regional neighbours since FRA is forced to sell at below market prices. I would propose that our agricultural policy needs a substantial review. Government intervention only makes sense when it is revenue neutral over a given horizon, otherwise it becomes unsustainable.  

The authors have a  good set of alternative policies, which are built around developing a "rules-based" system. It would be good to see what the Opposition may propose around this, but I am not holding my breath.  What baffles me is that all of this is basic economics and yet it seems like rocket science to the folks at the Ministry of Agriculture. The paper is well worth the read. Also do check out the powerpoint  summary of key conclusions from the paper (for those in a hurry!).

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