Assessing the policy environment for cash crops in MalawiWhat could hinder the achievement of the National Export Strategy objectives?

Hélène Gourichon, Alethia Cameron, Valentina PernecheleFAO Monitoring and Analyzing Food and Agricultural Policies (MAFAP)

Lilongwe, Malawi June 4 2015

Outline

• Analytical framework• Method• Policy environment for export crops in Malawi• Results• Policy implications for achieving National

Export Strategy objectives

National Export Strategy 2013-2018

• Coherent and integrated policy framework for the export sector with the following objectives:– Enhance export

competitiveness – Develop agriculture and

agribusiness towards diversification and value addition

• Clusters:– Oil seed products

including from groundnuts and cotton;

– Sugar cane products– Manufactures– Support to tobacco, tea,

mining, tourism and services

Analytical background

• Analysis of the effects of policies and market dynamics on price incentives for production of:– Cotton; Groundnuts; Sugar; Tea; Tobacco

• Period prior to the formulation of the NES (2005-2013)

• Based on the results from the FAO programme Monitoring and Analysing Food and Agricultural Policies (MAFAP)

How to measure the effects of the policy and market environment on price incentives to producers?

• Effect of domestic policy and market performance

Nominal Rate of Protection

Nominal Rate of Assistance

Market Development Gap

• Effect of policy and market performance + budgetary transfers (public expenditure)

• Reflect excessive and inefficient access costs exchange rate misalignments

In Malawi, producers of export crops faced price disincentives, why?

REGULATORY POLICIES?

BUDGETARY POLICIES?

MONETARY POLICIES?

Is it because of inefficient, weak or inadequate

Budgetary policies: bulk of support to maize

MAFAP Public Expenditure Analysis, FAO, 2014

0

10,000

20,000

30,000

40,000

50,000

60,000

2006 2007 2008 2009 2010 2011 2012 2013

maize cotton sugar tobacco Other

Public expenditures allocated to single commodities (Million MWK)

Maize accounted for about 50% of agricultural-specific PE

Budgetary policies: low support to cash crops

MAFAP Public Expenditure Analysis, FAO, 2014

500

1,000

1,500

2,000

2,500

3,000

3,500

2006 2007 2008 2009 2010 2011 2012 2013

cassava cotton macadamia poultry sugar tobacco wheat

Public expenditures allocated to single commodities except maize (Million MWK)

Tobacco, sugar and cotton: 5% of agricultural specific PE

MAFAP Public Expenditure Analysis, FAO, 2014

Regulatory framework

Market regulation

Price controls

Fiscal policies

Trade policies

• Tobacco market regulated by TCC

• Tea, unregulated market but supervised by TAML

• Cotton, reinforced regulation (CDT, Cotton Act)

• Highly uncompetitive environment despite the creation of the Competition and Fair Trading Commission

Regulatory framework

Market regulation

Price controls Fiscal policiesTrade policies

• Tobacco, sporadic price policy (2006/07) • Cotton, minimum buying price (since 2008)• Tea, price of green leaf set by TAML

Regulatory framework

Market regulation

Price controls Fiscal policiesTrade policies

• Low or inexistent tariff, no export restriction

• Delays in the clearance of goods at the border and acquiring export licences for agricultural commodities

Regulatory framework

Market regulation

Price controls Fiscal policiesTrade policies

• Tobacco, various taxes and levies• No tax identified in other value chains

Monetary policy

Fixed exchange rate Floating exchange rate

2012

Results:Overall disincentives to export commodities production

-2

-31

-28

-40

11

-6

-31

-29

-40

8

-45 -35 -25 -15 -5 5 15

Cotton

Groundnuts

Sugar

Tea

Tobacco

Nominal Rate of Protection Nominal Rate of Assistance

Nominal Rate of Protection and Nominal Rate of Assistance at farm gate level for export commodities, average 2005-2013

Cotton: atomistic market environment transmits international price to farmers

• Precarious but reasonable price transmission • Improved sector regulation by the government• Exceptional circumstances interfered with the

price transmission• Budget support through two national

programmes that targeted both the upstream and downstream segments of the value chain

Incentives to productiono 2008-2009: implementation of the minimum price

policy, but not systematically applied or respected in the following years.

Disincentives to productiono 2011: international price skyrocketed while producer

prices remained steady

NRP -6%

NRA -2%

Sugar: monopsony in the value chain led to disincentives at farm gate

• Poor price transmission due to the monopsony of sugar cane purchase

• High share of processing costs transferred to farmer

• Budgetary transfer could not offset the price taxation

NRP -29%

NRA -28%

Tea: low base price of green leaf and high processing costs penalize farmers

• Low base price of green leaf as fixed by the price model

• Bonus mechanism did not ensure fair returns to farmers as it rapresented a minor component of the final price due to high processing costs incurred by the estates.

• No direct budget support to tea production

NRP -40%

NRA -40%

Additional disincentives due to market inefficiencies along the value chain

• Cost of inefficiencies for the five export crops analysed reached 6 percent of the producer prices

MDG -6%

Effects of the exchange rate misalignment

• Fixed exchange rate depressed farm gate prices by 23 percent on average between 2005 and 2011

Priority actions to achieve NES objectives

• Farmers bear the costs of value chain inefficiencies and poor access to markets (high access costs)

Investments in post-production infrastructure

Trade facilitation and promotion measures (certification, export services etc.)

Affordable access to market

Fair competition

Access to information

Macroeconomic stability

Policy coherence

Priority actions to achieve NES objectives

• Uncompetitive value chains at the auction level but also in transport services

Reinforcement of the role of the Fair Trading & Competition Commission and promotion of fair, transparent competitive markets and contractual relationships

Affordable access to market

Fair competition

Access to information

Macroeconomic stability

Policy coherence

Priority actions to achieve NES objectives

• Lack of market information system that:o Affects farmers bargaining power o Creates uncertainty for all agents

in the value chaino Leads to misinformed policy

decisions

Reinforcement of the Agricultural Market Information System

Affordable access to market

Fair competition

Access to information

Macroeconomic stability

Policy coherence

Priority actions to achieve NES objectives

• Exchange rate policy prior 2012 heavily penalized producers

Maintain a exchange rate policy that averts exchange rate misalignments

Affordable access to market

Fair competition

Access to information

Macroeconomic stability

Policy coherence

Priority actions to achieve NES objectives

• Low budget support and weak regulatory policies

Increase public funding to export crops sector and hard infrastructures (physical infrastructure and information and communication technology)

Develop soft infrastructures for better border and transport efficiency and business and regulatory environment

Affordable access to market

Fair competition

Access to information

Macroeconomic stability

Policy coherence

Thank you

Annex 1. Methodology

• Observed Nominal Rates of Protection (NRP) at farm gate :

where is the observed price gap at farm gate, is the observed reference price at the farm gate.

• Nominal Rate of Assistance at farm gate (NRA):

where PEcsp is commodity-specific public expenditure that has been identified and measured as monetary units per tonne.

• Market Development Gap (MDG) (Value chain inefficiencies ):

where IMG is the international market gap, ERPG is the exchange rate gap, ACGwh is the access cost gap at the point of competition defined as the difference between observed and adjusted access costs at the point of competition and ACG fg is the access cost gap at the farm gate defined as the difference between observed and adjusted access costs at the farm gate.

Composition of Malawian exports

2005 2006 2007 2008 2009 2010 2011 2012

500,000

1,000,000

1,500,000

Others Tobacco, unmanufactured Tea Cotton, lint Groundnuts, shelled Sugar, raw

US$ thousands

Source: NSO, 2014 (tobacco, cotton, groundnuts); TAMA, 2014 (tea); Illovo, 2014 (raw and refined sugar); FAOSTAT, 2014 (others - data for 2012 not available).

Annex 2. Results for tobacco Inconsistent policy and market signals received by

producers

• Protected by the policy environment (av.) but high variability in yearly indicators

• Incentives due to exceptional circumstances• Years with limited price transmission because of

the uncompetitive environment– monopoly of transport services– oligopsony of buyers at auction

• Budgetary transfer (06-09)

Producers received higher prices than the international reference priceo 2007: Introduction of a floor price for producerso 2008: Misleading production forecasto 2012: Low production combined with the

implementation of the floating exchange rate

NRP 8%

NRA 11%

Annex 3. Results for Groundnut New market structure inhibits price transmission

• Shift in the policy and market environment– 2005 to 2011: prices offered by NASFAM

aligned with international prices– From 2012 reduced price transmission

• Budgetary transfer through the FISP difficult to capture; no specific projets/ programmes targeting exclusively groundnuts

NRP -31%

NRA -31%