Is Malawi’s Mix of Maize Market Policies Ultimately Harming Food Security?

Karl Pauw & Brent EdelmanMalawi Strategy Support Program, IFPRI1 October 2015

Objectives

• Consider features of Malawi’s maize markets • Evaluate effectiveness of policies in achieving

objectives of food security & price stability• Review international experience; form

guidelines for domestic policy that improves functioning of the market

• Reflect on responsibilities of other players, e.g., private sector and aid agencies

Why do governments intervene?

• Maize is strategically important, both in terms of economic activity and food security

• Government has a mandate to ensure adequate availability of food at reasonable prices, especially when markets fail to do so

• At a minimum government should: – Invest in infrastructure– Provide regulatory oversight & market information; and – Promote institutions such as commodity exchanges

• But more direct interventions also common in developing countries; for example in Malawi: – Producer support (input subsidies & minimum farm gate prices)– Price stabilization activities (ADMARC & NFRA)– Restrictions on trade (export bans on maize & other crops)

A balancing act…

• From a food supply perspective prices should be high enough to serve as an incentive to producers (FAO 2015)

• But food consumption inversely tracks food prices (Kaminski et al. 2014), so from food security point of view we prefer low prices

• We also need some degree of seasonal price variation to encourage storage, as this helps regulate food supply over the course of the marketing season

• But most importantly, we want price stability—or more correctly, prices that follow predictable trends

Yearly price indexes, 2011–2015

Source: Agricultural Market Information System (AMIS) 20072015

20-May

2-Jun15-Ju

n28-Ju

n11-Ju

l24-Ju

l6-Aug

19-Aug1-Se

p

14-Sep27-Se

p10-O

ct

23-Oct5-N

ov

18-Nov

1-Dec

14-Dec

27-Dec

9-Jan22-Ja

n4-Fe

b

17-Feb1-M

ar

14-Mar

27-Mar

9-Apr

22-Apr5-M

ay50

100

150

200

250

Expected price

2012/13

2013/14

2014/15

Why are unpredictable prices so undesirable?

• Risk averse, resource-poor farmers become subsistence-oriented when markets or prices are uncertain (Fafchamps 1992; Alwang & Siegel 1999)

• Unexpected price shocks have adverse welfare implications; consumers cannot effectively plan for the lean season

• Unpredictability imparts major risks to seasonal storage (Chapoto & Jayne 2009); seasonal price gaps could widen if fewer traders are willing to engage in temporal arbitrage

• Credit institutions become unwilling to provide finance when crop is offered as collateral; major challenge to warehouse receipt systems

Price stabilization policy approaches

• Complete reliance on markets; state role limited to public goods investment, regulation, institutional support, etc.

• Primary reliance on markets, but rules-based interventions permitted in response to undesirable market outcomes (i.e., predictable, transparent)

• Complete discretion to engage in markets in an unconstrained manner, based on the premise that private sector cannot adequately correct market failures

Features of Malawi’s policy interventions [1]

• National Food Reserve Agency (NFRA)– Price setting strategy unclear; timing of strategic grain

reserve purchases change from year to year, causing prices to deviate from expected seasonal trend

– Contracts awarded in a non-transparent manner; recent use of commodity exchange trade platform commended

• ADMARC– No publicized strategy for pricing, timing, magnitudes, or

location of transactions– Claim to operate in remote locations not reached by private

sector; or is it a case of private sector being discouraged?

Features of Malawi’s policy interventions [2]• Export bans

– Rationale unclear: • “Fend off perceptions of food insecurity” (Chirwa & Chinsinga 2013)• “Bans reflect mistrust in crop production estimates” (Jayne & Rashid

2013)• Protect the “huge investment in FISP” (Face of Malawi 2013)

– Decision-making process unclear and undocumented– Maize export bans may be redundant (considering export

parity prices) or ineffective (considering porous borders), but likely contribute to lack of commercial cultivation of maize

– Bans on non-maize crops create disincentives to crop diversification and directly oppose the ideals of the national export strategy

Where does Malawi fit?

• Malawi’s maize market policy is more discretionary than rules-based

• In general, price stabilization policies in Africa “only occasionally contributed to price stability, and in many cases has exacerbated” it (Jayne 2012)

• Policy unpredictability contributes to this country having the most volatile maize price in the region (Chapoto & Jayne 2009)

• Discretionary policy drives the unpredictable component of price volatility; up to 60% of overall maize price volatility in Malawi is unpredictable (Kaminski et al. 2014)

• Rather than offering clarity, coherence and transparency to markets, interventions in Malawi create uncertainty

Madagascar• Liberalized market, but high import

tariffs to protect domestic rice producers

• Rice production shortfall in 2004 coincided with rising world prices and sharp currency depreciation

• Private sector slow to respond put out tenders for commercial imports, with possibility of tariff rebates

• However, also set official government sales price at below tariff-inclusive import parity price

• Private sector imports discouraged resulting shortfalls led to sales rationing and parallel market at above import parity price

Bangladesh• Price crisis averted during

“massive” 1998 flood through private sector importation of 2.4m tons of rice

• Information systems: continuous monitoring of domestic and international prices; analysis of traders’ letters of credit; open dialogue with traders

Examples: Dealing with food crises

By destroying incentives for private trade government may

unintentionally exacerbated price instability; more transparency and

openness to private sector participation can help stabilize prices at import parity levels

(Dorosh 2008)

Recommendations [1]

1. Continue to invest in infrastructure, provide regulatory oversight, and develop market institutions

2. Adopt a rules-based approach to government intervention– Enable government intervention when necessary, but only

when necessary– Buffer stock release to defend a stated ceiling price– Marketing board purchases at stated floor price,

announced in advance– Transparent rules for initiating state imports, or restricting

trade only under special circumstances

Recommendations [2]

3. Utilize markets and engage private sector trade in price stabilization efforts, not just public sector stocks or government trade– Import when prices are high and vice versa– Promote private sector participation in trade; more cost

effective and efficient– “Thicker” markets contribute to price stability– Public stocks can discourage private trade and are costly

4. Strengthen statistical systems to inform rules-based interventions– Better and more timely production estimates and

domestic/international price information are fundamental to transparent policymaking