By Kaela B Mulenga
When there is a restriction that prevents a price from falling below a certain level, it is known as floor price. Sometimes the government may feel that the market price is too low, hence it orders one above the market equilibrium price. This action normally causes a surplus. A simple graphical working of this price control policy is shown in the diagram below.
As we can see from the diagram above, the price flor (FP), which is above the market price (at point E) – the output demanded at that price is only Qd, which is well below the enticed output supplied (Qs). The excess surplus (shaded area) caused is the difference between Qs and Qd. When that occurs, the issue now becomes on what to do with these surpluses.
EU countries, Canada and USA often use this pricing policy instrument. In particular USDA (US Department of Agriculture) frequently uses it to boost the profits or incomes of milk or grain producers. Faced with surpluses generated from these policies – US government buys them and either stores it for future use; donates them as food aid to poor countries like Zambia or intentionally destroys them. Our surpluses would be used as food for the people.
Earlier this year Agriculture Minister Emmanuel Chenda set the price-floor of K65,000 per 50kg bag of maize or K1,300,000 per tonne. The Minister basically maintained last year’s price. By this order, FRA (Food Reserve Agency), the major purchaser of agricultural produce was not allowed to pay farmers less than this price – hence the name floor.
Of course the maize producers are happy, just as the 13 million plus Zambians should be. But some quarters – including the World Bank, charge that this is a subsidy on maize which is already enjoying other subsidies to small scale farmers through FISP (Farmers Input Support Programme) in form of seed and fertilizer supports. This is in addition to the beefed up extension services. Instead, World Bank recommends that Zambia continues with a policy of non-interference with prices.
The reasons advanced by the Minister were quite clear, among others: - since maize is a staple food, government wants to secure continuous supply of sufficient food stocks. Aside from food security, government cites exploitation of farmers by the private produce buyers, who have a tendency of undercutting the FRA prices. They want to buy cheap from farmers and sell at maximum profits. Because of the desperation of farmers during the marketing season (when some produce might rot), sometimes they do accept these abnormally low bids.
At the risk of being criticized by some of my readers, I strongly support Government policy. First, it is indeed essential to have large surpluses of food for the people – most of whom cannot afford anything else other than ‘nshima and relish’. Currently food supplies are stable but who knows what happens next?
Apart from food security issue, having surpluses is the best way to keep in check food prices. We’ve seen that in the last three years or so when Zambia produced enough (even exporting some to Zimbabwe and Kenya), food prices have tended to fall. Partly this is also because FRA was able to sell at a cheaper price to millers for local meal mealie supply than to all others like – traders, exporters and communities. But in short, the more we produce the cheaper will be our staple.
If Zambia continues to produce surplus maize, as it has done in the last few years – we will not only be locally food sufficient, but could become an important regional breadbasket, to rival South Africa which is currently the largest regional grain supplier. We must stay ahead of Malawi or before Zimbabwe is reinvigorated. Food before cash – is the philosophy.
At this floor-price of K65,000 per 50kg also implies that any private buyers who bought last year’s crop at the market price of say K50,000 per 50kg bag stands to gain. With low export sales, last year - the year of huge surpluses, somebody might have stored some of it. But those who bought it at K65,000 per bag will just break-even.
Those who believe solely in markets being ruled by the law of supply and demand, claim that during periods of oversupply (harvesting season for example), private buyers and not FRA (government) should be expected to set prices. This would be nice if the system was free of Kangaroo tactics. Our markets are never smooth, so we shouldn't pretend that they are.
Fears that price floor on maize might suffocate other commodities, is true to some extent. But with careful planning and monitoring, a good balance can be established.
More importantly, if this policy works to induce large surpluses in maize, year in and year out, why abandon it? In fact, shouldn’t it just be extended to other crops to play the same magic? High valued cash crops such as Soya Beans, Wheat, Tobacco, and Cotton can also benefit from these supports. Indeed, why not use it to promote livestock as well other non-traditional commodities like: - rice, sorghum, barley (a new one), groundnuts (peanuts) and cassava in the same way? These and several others can benefit from a deliberate policy adjustments similar to maize.
If that can be done, that would be the true expansion of the agricultural sector and diversification from mining to agriculture in earnest. Moreover, when agricultural surpluses are generated, we should not be thinking of only exportation to the neighboring countries because export prices might in some cases even be lower than the floor prices themselves, resulting in losses. Hence, we need a holistic plan.
While surpluses are good for the sustainability of food stocks, they’ve to be managed well. To begin with, government must make sure that enough storage facilities are built. Otherwise losses through rot, rain, wastage or even theft could wipe out all surplus benefits.
Further, if enough planning was put in place – these surpluses, through value addition, could be used to create jobs. Labor on expanded small scale farms and in processing plants would go a long way in reducing unemployment especially among our youth. For example maize could be processed into vegetable cooking oil, corn flakes, feed stock, and other products not to mention biofuels. In USA, over 40 percent of maize is processed into biofuels. Surpluses from other crops like cotton could also help in resuscitating the textile mills; and barley for brewing. We cannot afford to dispose off these excesses at a loss.
Neither does it make sense to continue producing agricultural raw materials for the benefit of Multi National Corporations. Our focus should be to produce for ourselves – in terms of food and then as inputs for our local manufacturing plants. Exporting only the excesses.
These initiates have to be planned for by government in partnership with private investors. It would be a mistake to assume that these projects can be undertaken only by the private sector. In undeveloped economies, free entry and exit by private players are only encouraged by government incentives. Therefore, for a change, I would like to see Zambia demonstrate leadership in this area. Deliberate policies like price floors or ceilings and others must be designed, implemented and seen through. We can boost a lot of things by simply taking some tough decisions.
When Anglo Americans walked on Pres Levy Mwanawasa, he came up with a package which brought mining investors. The same could be done for the agricultural sector and tourism. We need a high level of investments in agriculture and related industries. Offering incentives such as concessions, tax holidays, free land, duty free on equipment, importation quotas and others, could create a boom for the agricultural processing industries.
Those critics, who insist that the market must be left alone to play the trick, want us to wait until end of time. Besides, we do not want to go back to the Frederick Chiluba way – who sold/privatized more than 200 Zambian public companies at no benefit at all to the ordinary people. People are tired of one-sided benefits accruing to foreign investors. Ordinary Zambians must also have some hope to see light at the end of the tunnel. Americans – through World Bank and IMF have counseled us enough. It is time we tried something on our own. Who wouldn’t want food surpluses or bumper cotton or tobacco outputs?
Moreover, these market lovers are ignoring few things. First, as alluded to earlier, competition and free prices do not work as efficiently as we might think in emerging economies. There are too many obstacles. Those with money for example, always try to manipulate things at the farm gate so that they can accumulate market power. This manifests itself when private produce buyers out maneuvers small and peasant farmers. They offer “take or leave it’ prices to rural producers who’ve sometimes no choice. A situation whereby a buyer is offering K2,000 per kg when the seller demands K3,200 per kg must be solved somehow. But exploitation of the farmer can’t be tolerated.
Also, we must underscore that – sometimes theories do not conform to ‘reality economics’. That is why you have market failures. Other times especially in underdeveloped economies, government intervention becomes a necessity.
Therefore, so long as the PF government will use these instruments in a measured manner and selective way and not as the order of the day – relying on price controls is tolerable. But that said we do not want to repeat what UNIP did by socializing everything ending up with a broken economy and long queues. Neither do we want Chiluba’s model which basically transferred all our major assets into the hands of non-Zambians.
As the country embarks on this road to solve food security once and for all, if the price control is the magic bestowed upon us, so be it. After all, USA and other countries use it, who are we not to take advantage of it? In this regard, the World Bank’s (WB) advice to Zambia should be ignored. In fact, somebody should remind WB that we tried SAP (Structural Adjustment Programme) under a more compliant Pres. Chiluba and it didn’t work for us.
Our vested interest should be in wanting to become the breadbasket in Southern Africa. If possible we should try to out-compete South Africa. Our weather and water resources are better than theirs. So all we need to do is to outthink them when it comes to agriculture, making no apologies along the way. Endowment in natural resources should help us to be competitive.
Just as maize production is successfully being increased, we can do the same to say beef. Subsidies for drugs, breeding stock, and feedstock – coupled with cheap financing can do the same trick. Therefore, we must resist all those who are trying to discourage us from using subsidies. As I said, every country relies on subsidies if it suites them.
The maize forecast for this year – the 2012/2013, is estimated at 2.85 million tones against the national demand of 2.59 million tones. This would leave a surplus of 260,000 tones. Last year Zambia produced a record 3.0 million tones with a surplus of 770,900 tones. Adding this to a previous surplus gave us a comfortable surplus margin. This is the way we want to keep it.
If we can improve productivity and cut production costs on farms – especially the smaller ones, lots of jobs could be created not only on the farms themselves, but through down the stream industries and services. That this is feasible does not require any consulting. It is obvious! The only missing link would be – policy and action.
Whenever we see a commodity experiencing persistent short supplies, we must never hesitate to look closely at that item and see what can be done to boost it up. You want more beef or goats for Middle Eastern market – study and see how you can improve the productivity in that area. Thus, the new price floors on maize should not be looked at in isolation. Price controls by nature are the tools available to manipulate the different outcomes (yield levels/incomes) in the agricultural sector.
As soon as we master how to raise surpluses from one crop (say maize) and be able to sustain it, that would be the key we need which can be extended to other crops and products. And this is the basis on which to commend Mr. Chenda’s intuition. We all must support him. Cheers!
Dr. Kaela B Mulenga, a Fulbright Scholar, taught economics for many years as a Senior Lecturer at the University of Zambia. He is one of standing contributors on Zambian Economist. More of his contributions can be found here.