FRA PRICING MECHANISMS
PRESENTATION AT THE NRG-V
Chilundika and Mulungu
Tuesday, 13 October 2015
Study Aims and Objectives
2

This study aims to investigate and provide an
understanding into FRA’s
 Rationale

for maize floor pricing
The price determination process
 Maize
 And
pricing market effects
to give reccomendations on best practices
based on findings
Why is this Important?
3




Approximately 80% of smallholders grow maize
Maize accounts for 60% of all calories consumed in the
country
Rural poverty levels remain stubbornly high at 77.9%
(twice that of urban poverty)
Conditions for rural smallholders (cultivating less than
5ha) are the worst, with the incidence of poverty at
78.1%
Agriculture marketing before FRA
4




Prior to liberalization, maize marketing was controlled by a
Grain Marketing Boards (GMB)
NAMBOARD set pan-territorial/pan-seasonal producer
prices, and handled GRZ maize imports and distribution
Its heavy involvement in grain marketing scaled back
during structural adjustment in 1980s and 1990s until it was
abolished in 1989
marketing functions were then transferred to cooperativesZCF
Establishment of FRA
5

Through FRA, government has become a major player in
the domestic maize market since 1996

Constituted by an Act of Parliament in 1996 with a
mandate to set up and administer national food reserves

Crop marketing and “market facilitation” were officially
added as FRA functions when the Food Reserve Act was
amended in 2005
Establishment of FRA
6

At this point, FRA changed from a SGR to a GMB

Initially with maize only, the agency has expanded to
include rice and cassava

Maize is the most important crop in Zambia and the
FRA’s emphasis has been almost exclusively on maize
Maize Floor Price Rationale
7
Maize Floor Price Rationale cont’..
8

FRA’s original mandate to secure food reserves and
stabilise maize prices was based on welfare concerns
To establish food security
 To increase the average maize price level

 To
attain low variability of maize prices (stabilise
prices)

However, there is also general perception that FRA
pricing is politically motivated
 Bulk
of the population is engaged in maize
production
Maize Floor Price Rationale cont’..
9



FRA sets a pan-territorial floor price to purchase maize
from smallholder farmers
Between 2003 and 2008, the FRA’s activities have raised
mean maize market prices by 19%, and reduced price
covariance by 36%
Nationally, FRA prices are always above the private
sector prices while at district level they have mostly been
above private sector prices
Maize Floor Price Trends
10
0
20000
40000
60000
Comparison of FRA Prices to Private Prices in Major Towns
1996
1998
2000
2002
2004
Year
lusaka
choma
chipata
fra
2006
ndola
kabwe
kasama
2008
2010
Floor Price Determination
11

Various factors influence the level at which the maize
price floor is set including;
 Level

of production
 Level of expected sales
 Budget funding availabilty
 Elections??
There is always a conflict for government to provide
adequate price incentives for maize production while
keeping food prices low to attain food security
Floor Price Determination cont’..
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Correlation
expsales
expsales
prod
price
purchase
* Significant at 0.01
prod
price purchase
1.0000
0.9816* 1.0000
0.7866* 0.7375* 1.0000
0.9212* 0.9245* 0.6879
1.0000
Floor Price Determination cont’..
13
40000
20000
0
0
500000
Price (ZMK/50kg bag)
60000
80000
Price plotted against expected maize sales
1995
2000
2005
years
Expected Sales
2010
Price
2015
Floor Price Determination cont’..
14



Pricing above market price is common among most
GMBs
For example, Kenya’s National Cereals and Produce
Board (NCPB) also buys at usually above market
price though from large-scale farmers
However this allocation is not efficient
Floor Price Determination cont’..
15
Effect on the market
Floor Price Determination cont’..
16
0
20000
Price
40000
60000
80000
Tracking Price and Election Years
1998
2000
2002
2004
2006
Year
2008
2010
2012
2014
Floor Pricing Market Effects
17



FRA’s activities have raised mean maize market
prices by 19%, and reduced price CV of maize by
36%, However;
Regarding welfare goals, FRA’s policies are
regressive
They harm a large proportion of rural households
who are net buyers of maize (49%) and urban
consumers ( high priced maize = higher mealiemeal
prices)
Floor Pricing Market Effects cont’…
18

FRA maize floor pricing activities have crowded out
the following key players in the maize markets;
 commercial maize producers- there has been a
decline in futures maize contracts
 Commercial millers due to selective subsidy
allocations to millers
 Informal millers as maize has become too
expensive for them
 Small holder traders as they are not competitive
Floor Pricing Market Effects
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Subsidies to Millers
Source: Kuteya and Jayne, 2012
Floor Pricing Market Effects cont’…
20



FRA floor price is not optimal as it is always higher
than the average market price
The floor price causes market distortion and crowds
out private sector participation in maize markets
Planned purchases are always different from what
is actually purchased, an indication of the political
nature of FRA activities
Floor Pricing Market Effects cont’…
21
Source: Kuteya and Sitko, 2014
Key take aways
22



FRA mandate and pricing rationale is based on
welfare and political concerns by the government
The floor price is aimed at providing adequate
production incentives and stabilising maize prices
In effect, floor pricing is regressive for the majority
of smallholder farmers and urban consumers, and
crowds out private sector activity in the market
Key Reccomendations
23

Zambia needs a clear maize marketing bill that
ensures the following;
 That
FRA sticks to its mandate of purchasing only national
reserves
 That floor pricing benefits the rural poor and urban
consumers
 More efforts are targetd towards making farmers
competiitve by increasing their productivity
 Encouraging more competition among milling companies
and other value chain particpant
Thank you for you Attention!
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