FRA PRICING MECHANISMS PRESENTATION AT THE NRG-V Chilundika and Mulungu Tuesday, 13 October 2015
Jan 18, 2018
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!