FRA PRICING MECHANISMS

PRESENTATION AT THE NRG-V

Chilundika and MulunguTuesday, 13 October 2015

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Study Aims and Objectives This study aims to investigate and provide

an understanding into FRA’sRationale for maize floor pricing The price determination process Maize pricing market effectsAnd to give reccomendations on best

practices based on findings

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Why is this Important? 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%

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Agriculture marketing before FRA

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 cooperatives- ZCF

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Establishment of FRA 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

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Establishment of FRA 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

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Maize Floor Price Rationale

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Maize Floor Price Rationale cont’.. FRA’s original mandate to secure food

reserves and stabilise maize prices was based on welfare concerns

To establish food securityTo increase the average maize price levelTo attain low variability of maize prices

(stabilise prices) However, there is also general perception

that FRA pricing is politically motivatedBulk of the population is engaged in

maize production

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Maize Floor Price Rationale cont’..

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

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Maize Floor Price Trends 0

2000

040

000

6000

0P

rice

ZMK

/50k

g ba

g (o

ld c

urre

ncy)

1996 1998 2000 2002 2004 2006 2008 2010Year

lusaka ndolachoma kabwechipata kasamafra

Comparison of FRA Prices to Private Prices in Major Towns

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Floor Price Determination Various factors influence the level at which

the maize price floor is set including;

Level of productionLevel of expected salesBudget funding availabiltyElections??

There is always a conflict for government to provide adequate price incentives for maize production while keeping food prices low to attain food security

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Floor Price Determination cont’..

purchase 0.9212* 0.9245* 0.6879 1.0000 price 0.7866* 0.7375* 1.0000 prod 0.9816* 1.0000 expsales 1.0000 expsales prod price purchase

* Significant at 0.01

Correlation

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Floor Price Determination cont’..

020

000

4000

060

000

8000

0P

rice

(ZM

K/5

0kg

bag)

050

0000

1000

0001

5000

0020

0000

0E

xpec

ted

Sal

es

1995 2000 2005 2010 2015years

Expected Sales Price

Price plotted against expected maize sales

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Floor Price Determination cont’.. 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

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Floor Price Determination cont’..

Effect on the market

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Floor Price Determination cont’..

020

000

4000

060

000

8000

0P

rice

1998 2000 2002 2004 2006 2008 2010 2012 2014Year

Tracking Price and Election Years

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Floor Pricing Market Effects 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)

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Floor Pricing Market Effects cont’… 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

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Floor Pricing Market Effects

Source: Kuteya and Jayne, 2012

Subsidies to Millers

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Floor Pricing Market Effects cont’… 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

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Floor Pricing Market Effects cont’…

Source: Kuteya and Sitko, 2014

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Key take aways 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

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Key Reccomendations 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

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Thank you for you Attention!