Implications of pro-competitive
reforms in the Zambian maize sector
on small scale farmers
Cornelius Dube
4th CUTS-CIRC Biennial Competition, Regulation &
Development Conference
&
CREW Project Final Conference
Nairobi, 12-13 December 2015
Background: Maize in Zambia
• Maize is the staple food for Zambia
– occupies about 70% of the total cultivated land
– accounts for majority of the calorie source
• Important policy tool
– Poverty and food security
– Political power
• Over the years, a number of reforms have been introduced
in the maize sector
• Some of the policies have a competition impact
• “Competition impact”
– Affecting farming
– Affecting milling
– Affecting maize wholesaling and retailing
• The presentation focuses on ‘competition impact’ reforms,
specifically on farmers’ welfare
Structure overview
• The central player for maize policy implementation is the Food
Reserve Agency (FRA)
• established in 1996, under the Zambian Food Reserve Act (1995)
• FRA ensures national food security through the national strategic
food reserve function
– purchases agricultural crops from smallholder farmers and distributes to
disadvantaged areas
• Also the avenue through which input subsidies are distributed to
farmers
– Include subsidies to farmers (fertilizer and seed) and maize to millers
(before abolishment)
• FRA also determines the floor prices for maize
– This is mostly the price at which farmers supply maize to FRA, which
must not necessarily be the private sector buying price
• Before FRA, a monopoly, NAMBOARD was in existence
– before abolishment in 1989 to allow, in principle, private sector
participation
Summary of post liberalisation reforms
Activity/Intervention
 Reduction in fertilizer subsidy
 Maize meal subsidy re-introduced before the
elections
 Official producer and selling prices abolished
 Maize market opened to full competition
 Privatisation of the milling industry
 Food Reserve Agency Operational
 FRA subsidised to buy maize from farmers
 Maize and fertiliser subsidies increased
 Government issues export permits to selected
trading/milling firms
 Government provides FRA with de facto
monopoly on the export of maize
 Fertilizer and seed subsidy increased
 Government removes subsidies on millers
Year
1991
1993
1995
1996
2002
2003
2004
2006
2008
2013
Key reforms for assessment
• About 60% of agricultural expenditures has been on two maize
programs
– Subsidising the FRA to purchases maize at prices fixed above
prevailing market prices
– the farmer input support programme (FISP) that distributes
subsidized fertilizer.
• This makes the impact of these two programs worth assessing
• Maize also powers the milling industry, who export to even
neighbouring countries
– the impact of the reforms on subsidised maize to maize millers
also need assessment
FRA Maize floor pricing
• The mid 1990’s saw Zambia experiencing high variability in
maize production, resulting in high price volatility
• The private sector was in the initial stages of establishing itself
after market liberalisation
• Low prices in some areas de-motivated farmers from growing maize
• Floor pricing was established generally for three main purposes
– To stablise maize prices for the farmers
– As a poverty reduction strategy to ensure high earnings for farmers
– To ensure that farmers in remote areas also get market access
• FRA’s activities raised mean maize market prices by 19%, and
reduced price covariance by 36% between 2003 and 2008
• Nationally, FRA prices are always above the private sector prices
Impact of the minimum floor price on farmers
• The high prices benefited only the net maize sellers, but also
affected the net maize buyers who faced higher prices
– Net sellers comprise about 28% of all farming households
– Net buyers constitute about 49%
– No direct effect to about 23% of the farmers
• The net sellers are mostly better off farmers who can produce more
while net buyers include mostly poor farmers
• Most poor households do not sell maize to the FRA
– in 2003/04, only 1% of the smallholder farmers sold maize to FRA
while in 2007/08 this increased to 10%
• Among the buyers are urban consumers who also faced higher
prices for mealie meal and maize
– Especially those buying from private sector players forced to buy at
high prices
• Imposing above competitive prices did not necessarily promote
welfare as intended
Impact of floor pricing (cont..)
• FRA activities also squeezed out the private sector
– In some years, FRA would buy as much as 86% of the marketed
surplus
• This eliminated competition at buying level as FRA activities
constitute an entry barrier
• While FRA gets the first preference, it struggles to pay the
farmers in time, affecting their preparation
• Some private sector actors also compete by raising prices,
becoming a cost driver for the processed products which the
farmers also buy
• Floor pricing thus eliminated competition, which would have
been healthy for the farmer
Farmer Input Support Programme
• Used to be the fertiliser support programme until 2009 when sphere
was expanded
• The programme see farmers receiving subsidised fertiliser from govt
through FRA
• Mostly seen as a poverty reduction strategy tool
• The FISP has a toll on government expenditure but there is no link
between the FISP and poverty reduction
– FISP was scaled up between 2004 - 2010 but poverty also went up
• The existence of FISP meant that the private sector had little room
to enter outside the FRA system
• FISP failed to properly target poor farmers, as wealthier farmers also
got access
• Delays in input distribution under the FRA system common, at a
time when private sector is crowded out
• Private sector generally shuns remote areas with poor access roads
– Demonstrates the importance of FRA in such regions
FISP and Competition
• Benefiting companies (fertiliser) are selected by the FRA through an
open tender system
– Nitrogen Chemical of Zambia (government owned), however, gets a
predetermined allocation of the FISP
• Two companies have dominated the government programme in the
past; Nyiombo and Omnia.
• Each of these companies has an area where they enjoy some big
market share.
• Omnia supplies to the maize farmers while Greenbelt supplies to the
sugar plantations.
• The two are now accused of cartelised behaviour of market
allocation
• Dominance of the two companies is often attributed to bid rigging as
well
• The FISP subsidised fertiliser price also stifles competition from the
private sector unsubsidised fertiliser
• About 33% of the fertilizer leaks into the commercial channels
Maize subsidies to millers
• As a poverty reduction tool, millers were roped into a subsidised
maize program from FRA
– It was expected that the millers would also reduce maize meal prices
– The FRA also provided transport to the millers’ factories and plants
• However, the difference between the inflation adjusted wholesale
maize price and retail meal price actually increased
– Very little of the treasury costs incurred benefited the urban consumers
• Some millers were also excluded from the program
– Unfair competition resulted, as some had higher production costs
• Most consumers of maize rely on the services of the informal and
small/medium millers, who did not benefit
• Prices were not affected when the program was stopped in 2013
• The miller subsidy only distorted competition, increased millers’
revenues but had no much welfare impact on consumers
Conclusion
• Improperly targeted subsidies generally distort competition
with little benefits to farmers
• The floor pricing regime also affects farmers’ welfare
negatively than intended
• The public procurement systems in government programs are
often subject to cartelisation, which also limits private sector
participation
• The miller subsidy program was rightly called off
– Private sector profit orientation defeats the welfare
objectives of the government
– Also distorted competition by limiting beneficiaries
THANK YOU !!!!!!