Find us on Google+

Wednesday, 8 June 2011

A Costly Harvest

A half-billion dollar reason fromZAMACE's Brian Tembo on why you may not want to celebrate the bumper harvest just yet :
"The projected K2 trillion, expected to be spent on the close to two million tonnes from small-scale farmers, is above the budgeted K1.23 trillion allocated to the agriculture sector in the national budget.....But can the country sustain this kind of expenditure?...Whichever way you look at it, for the government to continue subsidising production and purchases, the US$400 million deprives the citizens of the much needed services and also goes to subsidise the region as we will store and sell at lower prices for the benefit of the region. There is a problem with this sort of business model. The other key issue is that the majority of the maize is smallholder grown and there are therefore quality concerns discounting our maize price on the international market further......

When it’s time to export, when you factor in the storage and transport and finance charges, we shall effectively sell our maize at a loss. The point is that the country only expects to consume 1.3 million tonnes of this commodity and we have carryover stocks from last season of over 800,000 tonnes and a bumper crop of three million tonnes! So the surplus will therefore be exported...The traditional destination is Zimbabwe. Zimbabwe will not buy maize until their lean season around September. So factor in storage and also note that they will not just look at Zambia but Malawi (cheaper source) and South Africa (much cheaper source). For export add a differential of about $60 to our price....."
We have previously touched on Zambia's broken maize marketing policies. Not sure when this madness will end but good to see Mr Tembo standing up for common sense. 

18 comments:

  1. The maize subsidy is a very expensive way of not fixing agriculture's problems. It should be phased out gradually over about 5 years and the money spent on rural road maintenance, improving farmers access to credit and the restoration of an agricultural extension system. However it has had some beneficial side effects. The abundance of maize created a beef shortage (no villager sold a cow due to starvation) which increased the beef prices and doubled the demand for chicken and goat.
    Exported maize is being sold at a loss without even counting storage or transport costs as is the maize sold locally. Subsidising other countries mealie meal is definately not a good use of your taxes.
    We could export at a profit simply by devaluing the kwacha which is currently overvalued due to the export of copper. All other export crops would then also become more viable and the benefits would extend to other sectors like tourism which is suffering severely from the high cost of business in Zambia as compared to the neighbors.
    If we are not willing to devalue the kwacha to export maize then we should aim to grow only enough for consumption, no more. This would require a major rethink of the whole system. A plan would be needed to stabilize prices without causing famine or bumper harvests which under free market pricing tend to lead to enormous price fluctuations. Enormous price fluctuations make the farmers and consumers suffer. The winners are the speculators and traders.

    ReplyDelete
  2. Hi R Henson,

    Just a few thoughts.

    1) Kwacha Devaluation

    The Kwacha is already being devalued through government borrowing. The currency is barely benefiting from record copper prices anyway.

    2) We need a change in economic thinking.

    The way I see it, your approach is basically monetarist, and therefore free market/neoliberal.

    I do not buy into this race to the bottom approach, where developing countries try to outdo eachother in low wage, environmental and other standards. We need more than low valuation of the national currency. In fact, the idea of Zambia as an exporting country, outside of copper and copper products, leaves a lot to be desired. What we need is to create internal markets, and stop importing as many finished goods as possible.

    To lower unemployment, Zambia needs to start producing it's own clothes, shoes, furniture, bricks, etc. That is the only way toward raising incomes on a sustainable way, as well as protect the economy against external shocks, like a drop in the price of copper, a global recession or depression, etc.

    From that point of view, we need a strong currency, so that our entrepreneurs can import non-domestially produced capital goods to use in their businesses - tractors, farm machinery, mining equipment, cars, etc. The higher the value of the Kwacha, the cheaper these goods become.

    We need low lending rates for entrepreneurs. I still don't know what the 24% lending rates are comprised of, though it is not for lack of asking. No one seems to be able to give me a straight answer on exactly why lending rates are this high. And of course savings rates are about 2%.

    Could it be:

    - government borrowing from commercial banks making money unavailable
    - kartel type agreements among banks on keeping rates this high
    - IMF directives to commercial banks to keep money in circulation by driving it out of bank accounts
    - lack of home addresses or formal income among borrowers (doesn't explain why people who do have a formal address and job can't borrow at normal rates)

    ReplyDelete
  3. Mrk
    Only BOZ Governor Dr Caleb Fundanga can explain to you why interest rates are slightly above 24%. The Bank of Zambia is supposed to be the manager of Zambia's monetary policy but Fundanga and his BOZ have never been open about their lending rates to the commercial banks. You would expect Fundanga to inform Zambians about this issue during his quarterly briefings but he usually uses this opportunity to announce copper production figures! I am not sure that this is part of his remit. I am of the opinion that BOZ is minting money from these abnormal interest rates. I am sick of Fundanga's 'appeals' to commercial banks to reduce interest rates. He should first tell us at what rate he is lending to commercial banks and only then would we be able to tell as to who is deliberatly fleecing Zambians? Afterall bank corporate tax in Zambia is pegged at 45%. It is therefore in the best interests of BOZ and the govt to allow this thing to continue because they and the commercial banks are profiting. It is a pure case of racketeering!

    ReplyDelete
  4. MrK
    Not having formally studied economics I'm not sure what "monetarist, and therefore free market/neoliberal" means. I have however spent a long time studying how to survive the Zambian economy and have many times nearly been bankrupted by poor Government decisions.
    Devaluing the Kwacha is just the simplest way of taxing imports. We could alternatively just tax finished products and allow equipment in untaxed but the Government keeps signing free trade agreements....
    Alternatively we could do something about reducing the very high costs of doing business in Zambia. This would require much greater understanding from Government about the problems businesses face and a willingness to listen that has been conspicuously absent of late.
    As a farmer my success depends on employment levels in town as this creates the market for food. Employment for production of chitenge material, clothes, furniture etc has largely been exported to China and South Africa.
    Employment in tourism has been hit hard by poor Government policies which overtax both the tourist and the tour operator.
    The main employer in my town is now Government I think. Things look a bit bleak and if the price of copper drops things will get worse as the government will then squeeze the rest of us harder.
    I'm all in favour of local production but the Zambian consumer does not buy local if imported is cheaper and our current policies are keeping it that way.

    ReplyDelete
  5. R. Henson said...

    Not having formally studied economics

    Then you have a head start in discussions about economics. :)

    I'm not sure what "monetarist, and therefore free market/neoliberal" means.

    The free market people, instead of having direct government planning of the economy, or having restrictions on trade and investment, think they can direct the economy and currency by manipulating the currency through manipulation of interest rates.

    This is what they have instead of actual regulation of investment, etc.

    As we all know, there is no such thing as a free market. Also, all the restrictions on business in Zambia seem to only apply to foreign business, not local micro, small and medium enterprises.

    Local business is especially undermined by allowing foreign governments (which do have import and other restrictions on investment) to dump low quality goods on the Zambian market.

    Most of the goods in the US or Zambia will therefore turn out to have been Made In China. There are lots of used Japanese cars - Japan grew into a car exporting country by very closely guarding their vertically integrated car industry, and not allowing non-Japanese to set up car factories in Japan.

    Countries do not develop because of 'free trade', they develop by protecting their own industries from competition.

    I have however spent a long time studying how to survive the Zambian economy and have many times nearly been bankrupted by poor Government decisions.
    Devaluing the Kwacha is just the simplest way of taxing imports. We could alternatively just tax finished products and allow equipment in untaxed but the Government keeps signing free trade agreements....


    The problem is that devaluing the currency, like lowering interest rates, is a very blunt tool.

    For instance, when the currency is devalued, not only do imported consumer goods become more expensive, so do capital goods that local manufacturers could use for producing goods for market that would exist if it hadn't been saturated by cheap imported goods from China.

    ReplyDelete
  6. Alternatively we could do something about reducing the very high costs of doing business in Zambia. This would require much greater understanding from Government about the problems businesses face and a willingness to listen that has been conspicuously absent of late.

    That depends on what kind of business. The government benefits foreign business, not local business. They even give foreign mining companies loans, indefinite tax exemptions, etc. Local businesses are lucky if they get a 24% interest loan at all. And then actually have to pay the 35% tax rate.

    Why is it difficult for anyone to see why local businesses are not thriving, why there is high unemployment, and why so many informal businesses resist becoming part of the official economy?

    As a farmer my success depends on employment levels in town as this creates the market for food. Employment for production of chitenge material, clothes, furniture etc has largely been exported to China and South Africa. Employment in tourism has been hit hard by poor Government policies which overtax both the tourist and the tour operator.

    Exactly, that is what I have been saying over and over. Local businesses (including farms) need local markets.

    And that means putting or keeping more money in the pockets of people who are highly likely to spend it at a local level - like the poor and middle class.

    Compare that to Glencore AG, which was 'selling' copper to it's Madagascar front to avoid declaring a profit. They are making profits hand over fist, however, they all get stored in corporate accounts in Switzerland, New York, Sydney, etc. or get reallocated to mining projects elsewhere on the planet.

    Here is a sound economic principle: you can tell the economic success of a community by the times a Kwacha changes hands within that community.

    In other words, Glencore ships it's profits overseas, never to be seen again by the Zambian economy or by the revenue authorities.

    However, if someone grows cabbages locally, he or she takes the money, spends some to buy food, spends it at the local hairdresser, maybe goes to town to buy a (locally made preferrably) handbag, buys (locally made) shoes. Maybe even drives home using locally grown biofuel.

    And in the process, the cabbage grower supplies a small part of the income of a hairdresser, a shoemaker, a food retailer, a biofuel farmer, etc.

    This is the benefit of policies that stimulate local production. This is also a model that is almost impervious to external shocks. It would not matter to the cabbage grower what price of oil was, whether there was a global recession, even what the price of copper was. It creates social stability, because it creates economic stability.

    I think it (localisation) is a model for the entire planet.

    I'm all in favour of local production but the Zambian consumer does not buy local if imported is cheaper and our current policies are keeping it that way.

    That is why we need to end the IMF decreed 'globalisation'. What are needed are policies that protect local producers (including farmers), such as:

    * import tariffs on goods and food produced in Zambia only
    * preferential treatment for local business in government contracts
    * taxation of the mining industry, whose taxes will be used for...
    * investment in infrastructure
    * unionisation to ensure a living wage
    * a minimum wage that equals or exceeds the living wage (JCTR food basket is a guide)
    * low or no taxation on employment (today, the workers are taxed instead of the mines)
    * universal education and healthcare, free of charge
    * single digit lending rates for entrepreneurs (today it is 24%, which is usurious)
    * locally produced solar and biofuel, instead of Saudi oil

    It would be great if there were low interest business loans available for UNZA graduates. You teach people a profession, then give them the opportunity to start their own business after they finish school, if they don't have someone to go and work for.

    ReplyDelete
  7. For those of you who dont understand how business works, FRA borrows money from commercial banks to fund the purchase of maize that has not been secured by government funds. Today, in Zambia, there are commodity brokers who buy directly from the farmer and resell to millers or export. Last year these private companies bought over 750,000 tonnes of maize. We are not as backward as you think. You are just ignorant of the goings on in Zambia.

    ReplyDelete
  8. Chance,
    What we object to is FRA doing this at taxpayers expense for political gain. It actually discourages the private sector to an extent because they are not subsidized by the tax payer they are expected to pay tax. If FRA had to sell maize at purchase cost plus finance and storage charges then it would be a different situation altogether. Instead they are selling far below cost and the money paying for this loss is money that is now not grading my road, not financing the local school and not putting more staff in the clinic. A choice I for one am not happy with.

    ReplyDelete
  9. No No No!

    FRA offers K75,000 per bag where the private sector offers K60,000 per bag. FRA pays in 30 days where the private sector pays cash. FRA resell the maize and return the money back to government (with profit) in order to purchase more agricultural inputs (seed & fertilizer). Tax payers money is not wasted at all. It is recycled.

    With every harvest, the private sector is taking on more and more of the maize, thus reducing the burden on FRA to buy it all. Furthermore, competition in the private sector has pushed the cash price up from K60,000 to K65,000.

    This is how we are building the market. Govt is acting through FRA only as a catalyst. In 5 years time, FRA will not need to buy anymore maize unless to control exploitation of the farmers by the private sector.

    Zambians are sorting out their issues therefore i suggest you guys sort out yours. You are in no position to tell us how to run our affairs when you failed yourself and were struck by a credit crunch, recently.

    Its better to learn from us than to critisize all the time when you dont understand issues.

    ReplyDelete
  10. And Maize is "Zero Rated" in terms of tax.

    ReplyDelete
  11. Chance
    Who is 'we' and who is 'you guys' ? My understanding- from your writing-is that you are a Zambian who is fully engaged with the Zambian economy. I know as well, that Ruth Henson is fully engaged with the Zambian economy and Zambian issues.
    R. Henson as far I can see has no problems with FRA and indeed govt or any Quasi govt entity coming onto the market. Provided this entity is not burning Tax payers money needlessly. What she is asking is why is FRA losing K20-30,000 on every bag it sells. This is not a sustainable business model for any Company or entity and especially for a cash poor government like GRZ. Is losing money on every maize-bag you sell the best way of using taxpayers money?

    The principle on which FRA is founded is not in dispute. It is the implementation of that mandate. What is the right price to buy the maize? what is the right price to sell that maize? the devil is in the details as they say. And I for one is not naive enough to assume that the world market price is the right price for Zambia at all times. But over time the average of the Zambian price and the world price should not be too far off.

    The fact that we do not agree on issues does not create a 'them' and 'us' scenario. We are simply seeing things from different perspectives. We are all Zambians and it our quest to air issues that require closer inspection.

    ReplyDelete
  12. Chance,

    You can't deny there are serious problems whenever there is a bumper harvest.

    Generally: there should be facilities to use maize on an industrial scale.

    How about distilleries, cornflakes, etc?

    ReplyDelete
  13. But who said FRA makes a loss? Where do you guys generate these ideas from? FRA buys maize and sells it to milliers at a profit. You need to do more research.

    ReplyDelete
  14. The US is currently subsidizing farmers with tax payers money for political expedience. Why are we not telling Obama to stop the rot?

    ReplyDelete
  15. Because when a white man does it, it is for food security and in national interest. But when an African does it, he is automatically considered to be a complete buffoon. Wait a minute! Obama is a mixed blood (coloured). So where does he stand?

    ReplyDelete
  16. Chance
    I don't know where you get your figures. FRA bought at K65000 and sold at K45000. The private sector is currently buying at around K40,000 direct from farmers COD. FRA is still offering K65,000.
    Taxpayers are also subsidizing fertilizer and seed as Government is selling them at less than 25% of market price.
    I don't object to FRA stabilizing the market or to a small subsidy on production but the current subsidies are huge, expensive and unsustainable.(FRA was originally conceived as the buyer of last resort not the highest price buyer in the market.)
    Money channeled into roads, health and education would be much more beneficial in the long term.
    There are better, cheaper ways of fixing agriculture's problems.
    The most important is to tackle the lack of employment. The price of mealie meal is only an issue to the unemployed. If employment doubled all the farmers would be under pressure to increase production to meet the increased demand instead of struggling to market their produce. I would love to see policy changes that promote employment and improve the business environment. I doubt it will happen though, because I have yet to find anyone in Government who even understands the issues let alone is willing to do anything.

    ReplyDelete
  17. Hi R. Henson,

    If employment doubled all the farmers would be under pressure to increase production to meet the increased demand instead of struggling to market their produce.

    Unless they are competing with unregulated goods imported from China or around the region. What you are saying is correct, if there are protections in place for local producers, like import tariffs.

    I would love to see policy changes that promote employment and improve the business environment.

    The question though is - whose business? Local people's business environment, or the environment for transnational corporations, like SASOL, De Beers, etc?

    Because people often make the mistake to presume that a business environment that is good for the one is good for the other too.

    The MMD have said often enough - we want to create 'an enabling environment for business' - and then proceed to throw open the borders, seize enforcing labour and environmental regulations, and refuse to collect taxes or dividends.

    So the crucial question is - whose business is being enabled? Transnational corporations, not tutemba owners.

    I would love to see policy changes that promote employment and improve the business environment. I doubt it will happen though, because I have yet to find anyone in Government who even understands the issues let alone is willing to do anything.

    Sometimes I think they don't want to see development, because the present system is one where a small local elite benefits from being the benefiaries of the bribes paid by big business. Neither of which want to see small businesses and farms thrive.

    ReplyDelete
  18. Chance
    I indeed have done the research on FRA. As Ruth says FRA is buying at K65,000 per 50kg bag. FRA sold maize at US$ 200 /tonne to millers and to our neighbours at the beginning of this year. This works out to about K45,000.00 per 50kg bag. There is a loss even before transport, storage, admin, finance cost etc are brought into the equation.

    And so ,if FRA wasn't selling at such a huge loss then maybe there would be less of an outcry.

    I am not suggesting that it is easy to determine what level to peg the price at the beginning of the season. But I would suppose production cost,export parity prices would be two definite factors to put on top of the list . There is a paper by Burke, Hichaambwa, Banda and Jayne, March 2011 (http://www.aec.msu.edu/fs2/zambia/wp50.pdf) that sheds light on production costs in Zambia for 2010. The averages for the best province were as low as K34,000 and the highest was K53,000. I think FRA could benefit if they looked and utilized available research to guide them in the setting of the purchase price and relied less on politicians.

    ReplyDelete

All contributors should follow the basic principles of a productive dialogue: communicate their perspective, ask, comment, respond,and share information and knowledge, but do all this with a positive approach.

This is a friendly website. However, if you feel compelled to comment 'anonymously', you are strongly encouraged to state your location / adopt a unique nick name so that other commentators/readers do not confuse your comments with other individuals also commenting anonymously.