Pricing Policies to Promote Rice Production and Marketing · Pricing policies on Inputs and Outputs...

Pricing Policies

to Promote Rice Production and Marketing

November 17, 2015

at Pre-Conference Seminar of the 6th CARD General Meeting

Takanori SATOYAMA

General Coordinator

CARD Secretariat

Outline

1. Introduction

2. Critiques vs Justifications

3. Pricing Policies on Farm Inputs

4. Pricing Policies on Farm Outputs

5. Conclusion

1. INTRODUCTION

1. Introduction

Our desire is farmers to increase their rice production

Need to understand their economy, influencing decision making:

• Production Quantity = f (inputs, land, labor, water, climate and other factors)

• Revenue = Products Quantity x Price of Farm Products

• Cost = sum(InputCost , LaborCost, Rent, WaterCost, MarketingCost)

• Profit = Revenue – Cost

Three scenarios; Positive, Negative, or Zero

Risks and other limiting factors: e.g. Postharvest loss, Market access, financial capacity, limited access to land and waterRisks and other limiting factors

Profit = Revenue – Cost

For farmers to produce more, their profit should be large

enough and their risks should be lowered

Profit = Revenue (produce x price) – Cost sum(inputsC, rent, labor C, MktingC, other factorsC)

Pricing policies on Inputs and Outputs can increase Farmers revenue

e.g. Introduction of new technologies (varieties, chemical), Crop

insurance, improved storage, irrigation and land development,

financial service provision,

1. Introduction

Risks and other limiting factors

Profit = Revenue – Cost

e.g. Price support,

Price Stabilization

e.g. Subsidy, Grant

Counter measures against risks and other limiting factors

Main focus of this presentation is to answer the

following questions:

Is Pricing Policy bad news or good news for private

sector ?

If it helps private sector, How it should be done?

1. Introduction

2. CRITIQUES VS JUSTIFICATIONS


< Critiques >

• Markets should not be distorted

Alternative measures:

For Revenue- Social Safety net, more liberalized trade, private stock

Market-oriented risk management schemes such as insurance

For Cost – credit service, extension services, infrastructure

• Pricing Policies are too costly

Empirically, Input subsidy program can go far more than half of agricultural

budget (Howard and Mungoma, 1997) and Food price stabilization mechanism

can cost 3-5% of countries’ GDP (Jayne and Jones 1997, Minot and Rashid, 2013) .

(e.g. Cost of FISP in Malawi, Maize purchase program in Zambia, rice purchase

program in Japan and Thailand,)

• Gov’t interventions in input/output markets kill private sector

Public interventions will deprive private business opportunities (e.g. NMC

experience in Tanzania, fertilizer market in Malawi, cereal trade in Zambia)

• Pricing Policies are not sustainable


< Justifications>

• Free market does not work since market is already distorted by politics at the

other side of the world (e.g massive subsidies on agriculture in developed countries)

• Market failure in Africa (due to weak infrastructure and institution, disorganized

markets, disintegrated value chain and asymmetric information)

• Considering its importance and impacts on society, Increasing Self Sufficiency

rate of major staple food crops can be justified for Food Sovereignty, food

security, political and national security

• This is critical in the Volatile World Food Market - particularly in thin and volatile

domestic and international rice markets

• Cost of “absence” of pricing policies (Though costly, it can be cheaper than

other options such as food aid and import, depending on methods and degree)

• Import substitution (preventing drain of foreign exchange)

• Killing Private sector ? Not necessarily.

(e.g. Early period of Malawi FISP, subsidy on seeds in Burkina Faso)

• Sustainability is not the question for main staple food crops

Anyways pricing policy globally prevails (Demeke et.al 2007),

and “How” is very important

3 PRICING POLICIES ON FARM INPUTS

Profit = Revenue(produce x price) – Cost sum(inputC,rent, labor C,MktingC,other factorsC)

<Reasoning of public Interventions on farm inputs>

- Low productivity of African farming due to low usage of improved

technologies

- Improving productivity requires the increased use of

technologies.

- Farmers cannot afford inputs if they are left alone or Using these

inputs does not pay for most African farmers (Revenue increase

can be not large enough considering the incremental cost)

- Thus government has intervened (often with subsidy programs)


But the success is still limited…. Why?

<Trend over the input subsidy>

• Until the 1970s input subsidy widely prevailed in Africa.

• From 1980s to 1990s, subsidies were eradicated/ reduced under the

Structural Adjustment Program(SAP) (Washington Consensus –

freer markets, freer trade, privatization and small public expenditure)

• Criticism against SAP on stagnant productivity and poverty rate (e.g.

Kherallah et al., 2002, Dorward et al., 2004)

• Contributions of SAP – Better macroeconomic performance and

stability (Sala-i-Martin and Pinkovskiy, 2010), that drove donor

supports to general budget supports

• Other pushes – Increased investment in agriculture (Maputo

declaration 2003), and specially fertilizer (Abuja declaration 2006)

• In this context, input subsidy was revived in Africa since the mid

2000s, triggered by the big success in Malawi

– USD 1 billion for input subsidy in 10 African countries in 2011

(Rashid and Jayne, 2013)


3. Pricing Policies on Farm InputsA Case Study – Malawi Farm Input Subsidy Program (FISP)<Background>

• Chronic food insecurity after Structural Adjustment Program in the 1980s

(Started to affect maize production from the mid-1980s)

• Very poor harvest year in 2004/5 season (Less than 60% of domestic

demand was met) – 4 million people fell malnutrition, reported by WFP

• To address this critical situation, the Government decided to invest in

subsidizing agricultural inputs, despite the objections by economists and

development partners “Enough is enough. I am not going to go on my

knees to beg for food” - H.E. President Mutharika

[Source]

Denning et al. (2009)

<Implementation - 2005/6 to 2008/9>

• Objectives: To ensure food security and poverty reduction,

• Fertilizer and seeds of improved varieties are distributed to target maize

farmers at the subsidized prices (2-4 kg of maize seeds and 50-100 kg of

fertilizer)

• Target beneficiaries are selected by local communities (village dev’t

committee) together with Ministry of Agriculture and local government.

• Inputs are distributed through voucher coupons which were usable at

both public and private retailers (in 06/07 to 07/08 seasons)

• Increasing reliance on private sector fertilizer imports through open tender

Year Total Cost

(million)

Approx Voucher

Value (fert.)

Redemption Price

per 50kg bag

Subsidy

Rate

Share of Target

beneficiaries

2005/06 USD 51 MK 1,750 MK 950 63% 50%

2006/07 USD 91 MK 2,480 MK 950 73% 54%

2007/08 USD 117 MK 3,299 MK 900 79% 59%

2008/09 USD 265 MK 7,951 MK 800 91% 65%

[Source] Developed based on Dorward and Chirwa (2011)

3. Pricing Policies on Farm InputsA Case Study – Malawi Farm Input Subsidy Program (FISP)

<Impacts - 2005/6 to 2008/9>

Increased fertilizer sale and use, increased yield, increased

production, also backed up by favourable weather (Became self

sufficient in 2006, maize exporter and food aid provider in 2007)

• FISP increased farmers purchasing power, thus expanded

fertilizer market - benefited private traders (importers, retailers

and transporters) as well Win-Win situation for all

But unfortunately, good news continued only until 2008

Year Incremental Fertilizer Use

(MT) – Baseline 2002/03

season ( MT 84,673 )

Yield (t/ha) Maize

Production

(MT)

National Self

Sufficiency Rate

2004/05 n/a 0.81 1.22 million 57%

2005/06 98,541 1.48 2.61 million 118%

2006/07 113,547 2.65 3.22 million 153%

2007/08 140,760 1.64 2.63 million 115%

2008/09 181,800 2.22 3.58 million 149%

[Source] FAOSTAT and Dorward and Chirwa (2009).


< Changes in implementation of FISP and their results>

• Exclusion of private sector from fertilizer retailing from 2008/09

season

Crowding out of private fertilizer retailers

Subsidy can promote private sector only when it is implemented

with full utilization of private commercial channels

• Increasing target population and program cost

[Source] Dorward and Chirwa 2011, IFPRI 2014, Malalwi Financial Report 2014/15 Ministry of Finance, Economic

Planning and Development, World Bank

Fiscal burdens became intolerable

Marginal impacts of FISP gets diminished. (because farmers

gets only FISP, not other supports)

Year Number of

beneficiaries

Intn’l Fertilizer price

(USD/MT) – Urea

Total Program

Cost (USD )

Share in

National Budget

2005/06 1.2 million (2005) 184 – 232 50 million 5.6 %

2008/09 1.7 million (2008) 225 – 770 265 million 16.2 %

2013/14 1.5 million (2013) 299 – 411 130 million 8.4 %


<Reflection and Analysis on FISP >

• FISP has definitely contributed to improve Malawians’ food security

• Program should be reformed because of excessively large cost

• Reform is needed because current design of FISP does not lead to

agricultural transformation (Forgone opportunities are too large to be

justified)

• Need to redefine the objective of FISP

Humanitarian assistance? Or Investment for Development?

• Need to reallocate resources more for invests on longer-term

solutions for economic development of the country

• FISP should make full use of private sector in its implementation

[Source]

IFPRI, USAID, and Lilongwe University of Agriculture and Natural Resources, Proceedings of FISP National

Symposium, 2014


• Pricing Policy on inputs can be an effective measure to boost

production

• It should be a measure for agricultural development (Social

safety net is more efficient to address household food insecurity)

• The target beneficiaries should be potential farmers with less risk

and likelihood of high return (not necessarily large scale)

Degree of supports to those farmers can be lower, thus

reduces the total program cost

• Need to consider the nature of target crops (staple food vs cash

crops)

3. Pricing Policies on Farm Inputs- Summary -

• Saved financial resources can be allocated for activities for

longer term agricultural development such as R&D and

infrastructure

• Pricing policy on inputs can expand the input markets, thus the

business opportunity for private sector

• Pricing policy should be implemented with full utilization of

existing private players. If not, it will hold back private

business, thus the healthy economic development of the country.

3. Pricing Policies on Farm Inputs- Summary - (Cont’d)

4. PRICING POLICIES ON FARM OUTPUTS

Profit = Revenue(produce x price) – Cost sum(inputsC,rent, labor C,MktingC,other factorsC)

<Reasoning of public Interventions on farm outputs>

- Low commodity price and price volatility discourage investment in farming

production

- So, the commodity price should be kept high and/or stabilized.

<Options>

Price stabilization for producers – e.g. Floor price, Government Purchase for

buffer/reserve stock, import ban, tariff and export subsidy, production quota,

Price stabilization for consumers – Ceiling price, release from buffer/reserve

stock, export ban, import subsidy,

Other measures - e.g. Income supports, crop insurance

International markets – e.g. controlling financial markets on food crops,

international stocking

4. Pricing Policies on Farm Outputs

4. Pricing Policies on Farm Outputs- Arguments -

For pricing policies: (e.g. P. Timmer, P. Abbot)

• Low commodity price discourages the production

• Price volatility discourages the investment

• Pricing Policy in other countries affects international markets, thus markets

in other countries

• International price stabilization mechanism is necessary

• National level interventions are necessary in short run because

international community cannot agree on price stabilization mechanism

and trade framework in a short run (or even long run)

Against pricing policies (e.g. T. Jayne, S.Rashid, D. Byerlee)

• It is impossible to control the market price (Pricing policies often do not

result in stable price)

• Pricing policies are too costly

• Careless public interventions discourages the private sector

4. Pricing Policies on Farm Outputs- Experiences supporting pricing policy -

Influence on & from International Market - 2008 food price hike

Food price started to rapidly increase in 2007, then…..

• International rice price increase sped up due to export ban of Viet Nam

and India and the open talk in Thailand of withholding stocks from the

market (Gouel 2013)

• Increased international price affected the rest of world including Africa -

e.g. food riots in Africa (Berazneba and Lee 2013) , political turnover in

Haiti (Gouel 2013) – “Governments have to be seen that they are

doing something” for their political survival (Poulton et al. 2006)

• Some countries with strong pricing policy such as China and India

managed food price well (Slayton 2009, World Bank 2010, Timmer 2010)

• Can the International Market be stabilized through the international trade

negotiation?

No - at least in the short run (Long trade negotiation under GATT & WTO)

4. Pricing Policies on Farm Outputs- Experiences against pricing policy -

Pricing policies do not stabilize the price

• It is impossible to control commodity prices (Newbery and Stiglitz 1981)

• Kenya, Malawi and Zambia (Strongest interventions in south and east

Africa) has higher maize price volatility compared with other countries with

milder interventions such as Uganda, Tanzania and Mozambique.

(Minot 2012, Pauw and Edelman 2015, Sarris and Morison 2010)

• In other parts of the world such as Asia and Latin America, pricing policies

have been rather successful in some countries, but its cost-effectiveness

is quite doubtful (Rashid et al, 2007)

• African countries are adjacent to 3.6 countries on average - it is difficult to

control informal trade (trade control measures cannot stabilize the national

price)


Costly Pricing Policies on Farm Outputs

• Food price stabilization mechanism can cost 3–5% of countries’ GDP

- Evidence of maize purchase program in Zambia, NCPB operation in 80s

in Kenya, rice purchase program in Japan, US and Thailand) which are

always the subject of big argument (Jayne and Jones 1997, Minot and

Rashid, 2013)

• If it should be done, it has to be done to the minimum extent (Knudsen and

Nash 1990)

• Emergency reserve with reasonable amount is effective to respond to

short term emergency needs for small countries (Timmer 2011, Minot and

Rashid 2013, )


Effect of Pricing Policies on private business

• Crowding out of private traders has happened in Maize market in

Malawi due to ADMARC (Pauw and Edelman 2015), in Zambia due to

FRA, in Tanzania before by NMC (Minot 2010) and in ‘80s in Kenya due to

NCPB (Minot and Rashid, 2013)

• Unpredictable and ad-hoc public interventions (e.g. export ban, tariff,

public import) add another uncertainty and risk for private business,

and cause crowd out private sector – resulting in thinner trade market and

players that causes higher price fluctuation.

(Minot and Rashid, 2013, Pauw and Edelman 2015)

Unpredictable policies kill Private Sector, and increase price volatility

Future rice demand in International market

• Projection is 112 million MT by 2040, against 40 million MT

currently, and 40 % will be for Africa (Mohanty/ IRRI, 2015)

• Most rice trade happens outside Africa, and the Rice

consumption is increasing there too, while that in Africa grows

the fastest

High competition over rice import (if income of Africans cannot

overtake that of non-Africans, there will be no rice for Africa)

So maybe no need to protect domestic markets anyways

Producers’ benefit vs Consumers’ benefit

• Also producers benefit is often undermined in policy (more

benefit for consumers) – Price stabilization is often not for

producers

Need to have smart policies to satisfy needs of both sides

4. Pricing Policies on Farm Outputs- Other elements to consider -

• Low and unstable price does not help producers or investors

• But the effect of pricing policy is doubtful especially in Africa

• Also the cost of pricing policies tends to be too large

• Ad-hoc and unpredictable public interventions crowd out private sector,

and it can increase price volatility

• Yet, benefit of consumers also matters, and pricing policies are

unavoidable for political reasons

• If needs to be done, it should be done to a minimum extent in a mart

manner

• Projection suggests that more competition for rice in international market

in future – so maybe Africa will not need to protect its markets from Asian

rice

• It makes sense to focus more on the production side, support to reduce

production cost for larger profitability and competitiveness.

4. Pricing Policies on Farm Outputs- Summary -

5. CONCLUSIONS

• Input subsidy can significantly impact on food security

• The balance (to what degree) is important - If too much budget is

allocated for the pricing policy programs, fiscal burden and forgone

opportunities would be too large

• Subsidy on inputs can expand input markets, thus the private

business opportunities (Win-Win – early days of FISP in Malawi)

• It happens only when inputs are distributed through private

commercial channels

• Right Targeting (beneficiaries and areas) is critical. Define objective

of subsidy (should be for development, thus potential farmers are to

be targeted – the most vulnerable farmers can be covered by safety

net)

This will lower the cost and maximize the impacts of this policy

• Pay attention to natures of target crops in designing subsidy program

5. Conclusions<Pricing Policies on Farm Inputs>

• Very costly

• The effect is not clear in most African countries especially due to

incontrollable informal cross border trades

• So maybe not the best options (Production supports make more

sense)

• Pricing policies will also affect consumers, thus should be balanced

(benefit of consumers vs that of producers) - Justification depends on

the position of target crop (Rice as staple, or rice as cash crops) in

economy and food security

• If it should done, do it to the minimum extent

• Unpredictable public interventions crowd out private sector from

commodity trade, thus can result in higher volatility

- So don’t do it ! (All interventions in farm commodity markets

should follow clearly pre-set rules )

5. Conclusions<Pricing Policies on Farm Outputs>

• Projection shows the higher competition for rice in international market

in future. - African countries might not need to block Asian rice (Asian

rice might not come to Africa in near future)

• Maybe better put more focus on reducing production cost, not on

the revenue side.

However, the sound options and approaches should be determined by

each country, depending on financial capacity, market structure,

agricultural potential, capacity of private sector, and position and

priority of rice in national economy and food security.

5. Conclusions<Pricing Policies on Farm Outputs>

Thank you

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