“an Empirical Analysis of Market and Price Structure of Maize Sector in Kenya” Essay

Research Proposal “An Empirical Analysis of Market and Price Structure of Maize Sector in Kenya” GILBERT KIMUTAI ARAP BOR REG. NO. D. PHIL/046/07 MOI UNIVERSITY SCHOOL OF BUSINESS & ECONOMICS DEPARTMENT OF MARKETING AND MANAGEMENT SCIENCE January 2010 CHAPTER ONE 1 Background to the study Maize is the staple food for the majority of Kenyans, as it is to many low-income populations across the countries of Eastern and Southern Africa. According to the USAID policy synthesis, it accounts for 50% of the low-income household expenditure in Kenya.

Argwings-Kodhek and Jayne (1997)indicate that since the full liberalization of the market for maize in December 1993, average maize meal prices have declined by 31%, 51% of this decline being attributable to a decline in milling margins and the remaining 49% being due to lower grain prices in 1995 in response to a favorable harvest. Over the past two decades, Kenya like most other developing countries has implemented two major economic reforms in her staple grain markets. In the mid 1980’s, the reform of food markets was an important component of the economy-wide Structural Adjustment Programs (SAPs) adopted by eveloping countries (Minot and Goletto, 2000).

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The SAPs entailed the privatization and liberalization of staple grain marketing and pricing in over 20 counties in Africa (World Bank, 1994). In the 1990’s, the SAPs were deepened by Kenya’s tariff reduction commitments at the multilateral trade negotiations that culminated in the creation of the World Trade Organization (WTO). The key multilateral rules affecting grain trade relate to the Uruguay Round’s Agreement on Agriculture (URAA), whose main pillars are improved market access, reduced domestic support and the elimination of export subsidies.Among the WTO modalities, the market access commitments have had the most important impacts on grain marketing in Kenya. The grain market reforms have been concentrated in the maize sector because of its strategic importance as Kenya’s key staple food and a source of income for a vast majority of the population. Prior to the SAPs, maize markets in Kenya were strictly controlled by the government that enforced administratively determined uniform prices across regions and seasons.Maize marketing was monopolized by the National Cereals and Produce Board (NCPB), a state sponsored single-desk marketing board.

Kenya’s maize sector reforms began in the mid 1980’s and intensified through the 1990’s resulting in a fully decontrolled market by the end of 1993. Thus, by the time of signing the URAA in 1995, the country was implementing the SAPs, and had substantially liberalized its grain markets. Currently, the government intervenes in the maize sector via two main policy instruments: the operations of the National Cereals and Produce Board (NCPB) and the application of import tariffs.The NCPB remains active in a liberalized market, but its role has been confined to the management of a national strategic grain reserve and a buyer of the last resort (Wangia et al. , 2001). The application of import tariffs was effected in the 2009 maize shortage period when the government was forced to lift the existing import duty on imported maize as a price-cushioning strategy to ensure millers would not raise consumer prices. The reverse action was applied to local supply side when the Ministry of Agriculture imposed and export ban on Kenyan produced maize, to chagrin of maize farmers in the main grain roducing districts who had started to cash in on high export prices, mainly obtainable from South Sudan. The impacts of trade liberalization on Kenya’s maize sector have however, proved to be controversial.

On the one hand, farm lobby groups argue that increased market access lowers producer prices, which serves as a disincentive to production and thus a direct threat to food security (Mghenyi, 2006). Conversely, the elimination of food subsidies under the SAPs in Africa has been thought to exacerbate food insecurity for low income consumers (Jayne and Argwings-Kodhek, 1997).The controversy surrounding the impacts of trade liberalization in this sector has been compounded by the paucity of reliable information on producer and consumer price responsiveness.

Another study by Argwings-Kodhek an Jayne concluded that maize market liberalization has conferred substantial benefits to urban consumers and that the negative effects of eliminating subsidies on refined maize meal have been largely compensated by relaxing controls on private grain trade, which raised consumer access to less expensive whole maize meal distributed through the emerging informal markets.A value chain is a chain of activities. Products pass through all activities of the chain in order and at each activity the product gains some value. Consequently, welfare evaluations are mired in controversy.

While the potential gainers and losers have generally been identified, a review of the literature indicates that the magnitudes of these gains/losses and their distributional effects remain largely unexplored. Thus, there exists an empirical gap on these issues. 2 Statement of the problem Since 2005, there has been a reduction in tariffs on maize as a result of EAC protocols on rade and yet there has been no empirical study to understand the impact of this on prices and margins accruing farmers, traders, millers and consumers. Through estimation of the impact of trade liberalization on the margins, we can derive welfare effects on producers and consumers. According to the Kenya Maize Development Programme (ACDI-VOCA), each year, the average Kenyan consumes 98 kilograms of maize, the staple of the Kenyan diet. At the same time, maize prices in Kenya are among the highest in sub-Saharan Africa, and the poorest quarter of the population spends 28 percent of its income on the crop.

Inefficient production and marketing in the maize subsector contribute to economic stagnation and poverty in Kenya. Increased productivity and efficient markets, in conjunction with rational government policies, can dramatically alter the economic contribution of the subsector. In spite of the reforms that have been put in place, the Kenyan maize industry is still riddled with problems, ranging from government intervention in the price system, poor rains, a reduction in planting after the 2008 post-election violence, and a decrease in fertilizer application due to higher prices, resulting in lower harvest yields for smallholder farmers.All these have contributed to Kenya becoming a net importer of maize, with the deficit being filled by informal cross-border trade from Uganda and Tanzania. The current deficit is however, so large (estimated at 400,000 to 700,000 MT) that imports from the international market have been required (ACDI-VOCA). In the past two decades, developing countries have been liberalizing their agricultural markets in line with the SAPs that were made stronger and irreversible through their commitment at the UR multilateral trade agreements.

The underlying philosophy has been that more liberal trade benefits all countries owing to differences in relative factor endowments. However, the notion that open international trade helps all poor countries is now in dispute (Dixit and Grossman, 2005). Thus, a growing concern about the welfare impacts of trade liberalization in many developing countries, especially on poverty, has arisen (Boussard et al. , 2004). The purpose of this study is therefore, to examine and discuss the element of price in detail, both from the marketer’s and from the economist’s perspective.This study will also discuss the market structure, conduct and performance in a similar manner and the issues of market liberalization, free market regimes, food production and food security issues. The special focus of this study will be given to the discussion of the issues of maize as a major food crop in Kenya, its introduction to the country in mid last century and its role as an incomer earner to the majority of Kenyan small scale farmers.

Price of maize will be discussed from both the farmer’s and the consumer’s perspectives and the role of NC&PB and government policy in the entire value chain. 3 Significance of the studyMaize is the main staple food in Kenya and is an important source of calories to a large proportion of the population in both urban and rural areas. Maize consumption is estimated at 98 kilograms per person per year, which totals to roughly 30 to 34 million bags (2. 7 to 3. 1 million metric tons) per year (Jayne et al, 2005.

) This estimation at 2009 population projection of 40 million Kenyans would put this figure at 43. 5 million bags! Maize is also an important crop, accounting for roughly 28 percent of the value of all the country’s gross farm output from the small-scale farming sector (Jayne et al. 2001). Apart from being the staple food, it is the major ingredient for all livestock feeds, from dairy to beef and from poultry to pig production.

In spite of the important roles of the maize crop in the country, Kenya has progressively become a net importer over the last decade and beyond. The worst situation was witnessed soon after the infamous January 2008 post election violence when a lot of un-harvested maize crop was destroyed in farms and that which had been harvested was burned in granaries.The post election violence displaced a substantial number of farmers in the country’s grain basket districts of Trans Nzoia, Uasin Gishu, Nakuru, Bomet and Narok. 4 Objectives of the study The objectives of this study are: i. To assess the price responsiveness of cereal grain producers, wholesalers and consumers in Kenya resulting from NC&PB price determination ii. To quantify the market and welfare impacts of trade liberalization on maize producers, wholesalers and consumers in Kenya iii. To discuss the implications of the results for future food policy and agricultural trade policies in Kenya.

. To estimate the effect of EAC trade liberalization on maize prices and marketing margins 2. To determine the welfare impacts on producers and consumers resulting from the above. 3. To discuss the implications of maize marketing policy in Kenya and recommend appropriate policy regime for implementation by the government. 5 Research Questions 6 Hypotheses 7 Isolation of the Main Variables 8 Scope (Delimitation) of the Study 9 Limitations of the Study 10 Operational Definition of Terms Organization of the Thesis CHAPTER TWO REVIEW OF THE LITERATRUE Market liberalization The signing of the URAA and the subsequent liberalization of agricultural trade has forced governments throughout the world to put more emphasis on understanding the consequences of agricultural trade reforms. In the literature, there is a broad agreement that a general liberalization of trade improves welfare (Jayne and Jones, 1997; Karp and Perloff, 2002). However, as Karp and Perloff (2002) argue, beyond that limited and unremarkable agreement, controversy exists about the distribution of benefits and about the effects of piecemeal policy reforms.

The four major components of maize market liberalization – trading rule changes, pricing reform, private market development, and reforms in NCPB operations – have affected the maize market in Kenya- producers, processors, traders, consumers, and the NCPB all have experienced substantial changes. Uncertainty regarding the effects of liberalization, however, remains. Particularly, possible large shifts in maize supply and prices in the liberalized market are major concerns of policy makers.Gordon and Spooner (1992) assess initial efforts at liberalization. Nyoro (1992) describes structures of maize production in various parts of the country and measures profitability of maize production under market liberalization.

Omamo (1994) simulates a possible response of farmers to the reform in Siaya district. Argwings-Kodhek (1992) and Sasaki (1995) explore private sector maize marketing. The articles ask if the private sector can take over one of the major activities of the NCPB, inter-district movement of maize.Sasaki (1995) looks at private sector storage and marketing activities of farmers under liberalization. Mukumbu (1992, 1994) examines changes in the milling sector and responses of large- and small-scale millers.

Effects of these changes on urban poor consumers also are discussed. Ephanto (1992) portrays maize consumption patterns in Kenya, and projects consumption trends. Argwings-Kodhek (1994) compares three alternative policies that are relevant for Kenyan maize market.

Pearson (1992) lays out a conceptual framework for policy instruments of maize price stabilization.Nyoro (1994) calculates the import and export parity prices in Nairobi and suggests a price stabilization policy that allows private sector participation in the maize market. Finally, Pinckney (1988) measures trade-offs among the objectives of stabilizing maize prices, reducing fiscal costs, and avoiding imports. 2 Implementation of Maize Market Liberalization Gordon and Spooner (1992) review the implementation of maize market liberalization. The limit on movement of maize across districts increased from 2 bags to 10 bags in 1988/1989, from 10 to 44 in 1991, and to 88 in 1992.These changes appear to have caused reduced marketing margins. Pricing reform was a neglected component of liberalization. As a result, low consumer prices ran down NCPB’s stock of maize and the financial losses of the NCPB increased.

The NCPB could not maintain market prices within the official producer – consumer price band- To develop the private market, the NCPB licensed over 2,000 Local Buying Agents to deliver maize to NCPB depots. Besides that, little was done to improve private markets.Regarding reforms of NCPB operations, the management structure of the Board was changed and the number of buying centers decreased from over 700 to less than 100. However, the number of permanent depots, much larger in size than buying centers, increased.

Decreasing the number of depots was politically difficult and was not a priority of donor conditions. Four priorities are identified for further liberalization. They are to widen the gap between consumer and producer prices, to reduce the number of depots, to monitor and analyze the market more effectively and respond to the market quickly, and to support the private market.The concrete actions for supporting the private market include public provision of market information, support for private storage, transport, and processing, credit provision for traders, rehabilitation or construction of market facilities, and education for traders in bookkeeping and import and export procedures. 3 Effects of Liberalization on Maize Production Maize is grown in almost all parts of the country. Agro-ecological conditions, coupled with individual resource variation, result in large differences in yields among farmers.Large-scale farmers in Trans Nzoia and Uasin Gishu use high levels of intermediate inputs and their operations are capital intensive. Small-scale farmers, who produce 80% of the maize in Kenya, use much less intermediate inputs than large farmers and their operations are labor intensive with limited use of capital.

Nyoro (1992) compares regional costs of maize production and derives ‘se1f-sufficiency maize prices’ to satisfy a target level of consumption of 28 million bags of maize.In general, small-scale maize production systems with favorable agro-ecological conditions in Meru, Kisii, and Narok have the lowest average costs, followed by large- scale production systems of Trans Nzoia- Uasin Gishu, and Nandi. Average costs are highest for small-scale production systems in marginal areas such as Kwale, Kitui, and Siaya. Comparison of profitability per acre, using 1991 prices, is based on average cost comparisons. The data on production costs of various districts in Kenya yields ‘average cost supply curves’ in Nairobi, the nation’s capital city with the largest population.

The self- sufficiency prices that induce domestic production of 28 million bags of maize are derived under conditions of good, bad, and actual (1991) harvests. All prices lie in the import/export parity price band that is very wide due to high costs of transporting maize from foreign supply sources to the Mombasa port and from the port to Nairobi. Uasin Gishu district is chosen to assess profitability of maize compared to that of wheat and dairy. In 1991, dairy had the highest profit per acre, followed by wheat. Maize was least profitable, accounting for only 51% of dairy profit.

In 1992, however, maize prices soared and maize became most profitable, followed by dairy. Profit from wheat was lowest, only 29% of maize profit. Omamo (1994) simulates maize farmer response (change in crop choice) to liberalization in the southern part of Siaya district using an agricultural household model. Most farmers in Siaya are small-scale and net buyers of maize, and the district is a net importer of maize.

The most important alternative crop in the district is cotton. Despite the higher returns to cotton, maize dominates farming systems.Over 60% of Kenya’s maize production occurs in regions with agro-ecological and demographic characteristics similar to those found in southern Siaya. Therefore, an analysis of farmer response in the district may have wider implications in Kenya. Maize market liberalization, particularly the removal of movement control across districts, is supposed to reduce maize prices in deficit areas by integrating regional markets.

With this assumption, deficit farmers (net buyers of maize) and surplus farmers (net sellers of maize) are expected to increase production of cotton and decrease production of maize.The reasons are different. For deficit farmers, lower maize prices would increase their purchasing power and lead to more reliable markets for food, which induces them to produce more cotton. Lower maize prices, on the other hand, would reduce profitability of maize for surplus farmers who subsequently choose to grow more cotton. 4 Pricing as an element of the marketing mix Pricing is a dynamic element in the marketing mix since it directly dictates the susceptibility of the consumers to try or purchase the products or services being offered.In this regard, pricing has been a strategic tool among business organizations throughout the life cycle of products and services in the market because the prices offered affect how customers will behave in the long term along with its implications on the perception of the market on the value proposition of the goods.

Pricing in a fluid environment can single-handedly maneuver the long-term corporate profitability. An average 1 percent price increase can lead to a 12 percent improvement in the producer’s operating margin which is four times as profitable as a 1 percent increase in its equivalent production or output volume.The contrary is likewise true and problematic since a price decrease of 5 to 10 percent can eliminate most of the producer’s profit margin (source? ).

Pricing decisions, like the other elements of the marketing mix, are of critical importance, more so, as it takes place within a dynamic environment. It affects profitability of producers as much as it affects purchasing power of consumers (Jayne and Kodhek, 1997). It is therefore imperative to continually reassess producer prices and the processes and methods employed in arriving at these prices.

The key starting point in any organization is to “clearly articulate what objective it seeks to achieve through its pricing policies and then evaluate the factors likely to impinge upon strategies it seeks to adopt in pursuit of these objectives” (Crawford, FAO, 1992). Furthermore, within a given market structure, various pricing strategies are utilized by business organizations and industries in which they are apt to employ strategies that serve their own market conditions and their own current position in the market.Issues on price discrimination among different markets, predatory pricing strategy, multipoint strategy, and experience curve pricing strategy make pricing strategies particularly in the national setting complex and politically as well as economically problematic. These pricing strategies threaten other members of the market since most of these are utilized to serve the interest of few capitalistic industries and business organizations.Consumers likewise become victims of these unethical and to some extent illegal pricing strategies since they avail products and services characterized with unequal market opportunity. Maize prices and availability are highly politicized issues in Kenya and the views of both extremes of the maize value chain – the producers (farmers) on the one hand and the consumers on the other hand is that it is the government’s responsibility to ensure their objectives are fulfilled, that is, the farmers obtain market prices for their produce, while the consumers obtain prices that are within their means.The government has often had to use maize to advance its political agenda by intervening in its pricing and marketing and has therefore been met with the twin-dilemma: • If government intervenes too little, it risks price fluctuations and other market outcomes that are politically and socially undesirable. • If government intervenes too frequently and unpredictably, it risks discouraging traders’ participation in markets.

Resulting low private sector activity then forces government to intervene in the market in order to achieve its social objectives. Maize Consumption in Kenya Per capita maize consumption in Kenya is estimated to be 98 kilogrammes (Source? ). Consumption in Kenya is at four levels: Whole maize grain cooked or roasted or boiled green and often eaten as a snack; semi-dry and dry whole maize cooked as a mixture with beans (popularly known as githeri), consumed as a major diet of Central Kenya, but has since been adopted throughout the country and in institutional settings – boarding schools, colleges, universities, hospitals and prisons.The third level is whole “posho” meal, milled in rural and peri-urban low-income settlements by small-scale privately-owned hammer mills and consumed primarily in these areas. The fourth level is that of refined sifted maize meal, processed by the large scale millers and packaged in 1kg, 2kg or larger sized packets for sale to urban consumers through the retail channels of supermarkets, estate shops and kiosks. 6 Maize Prices in Kenya “Because of its strategic position in Kenyan agriculture, maize dominates national food security considerations.Indeed, maize pricing was the central theme during the implementation of liberalization and privatization of key sectors in agriculture.

Prior to these reforms, Kenya had government-controlled maize trading environment and agricultural input delivery system. The government was responsible for setting panseasonal and pan-territorial maize prices, as well as prices of inputs such as seeds and fertilizers. Maize marketing was monopolized by the National Cereals and Produce Board (NCPB), a grain marketing board run by the government” (Mghenyi, 2006).Prices at these four levels exhibit spatial and seasonal variations. Green maize for roasting, boiling, or cooking with beans for githeri is sold on a per cob basis and fetch prices ranging from as low as 1/- per cob at farm-gate to 10/- per cob in the major cities.

The next level of dry maize for cooking githeri is sold between 20/- and 40/- per kg. These two levels fetch the lowest prices as they undergo no processing. Level three, whole “posho” maize meal is sold at prices ranging from 40/- per kg to 60/- per kg, depending on the geographical location of the market and the season.The last level, the largest –scale sifted or refined maize meal attracts the highest price as the millers incur high processing and marketing costs. Prices for these range from 80/- to 120/- per 2kg packets. Price differentials are also observed by brand and quality. In a study carried out in August 2009, Owuor (2009), reported evidence of maize prices being still unaffordable to both rural and urban poor, notwithstanding duty waiver for imported maize.

He reckons that consumer expenditures have been stretched for a long time by the high basic commodity prices (maize meal). CHAPTER THREERESEARCH METHODLOGY 1 Research Design The study will use a combination of primary and secondary data. Primary data will be collected in a survey of participants in the maize value chain – farmers, small, medium and large traders, assemblers, transporters, small-scale posho mill operators, large millers and the NCPB. Secondary data will be collected through desk research to study and analyze available information from other researchers, publications, newspaper reports and government documents.

This study will review the theoretical approaches to analyze the effects of agricultural trade reforms.It is intended to guide the choice of an appropriate framework to address the problem at hand. The key approaches used to analyze the effects of agricultural reforms can be grouped into econometric and simulation models. Both approaches comprise of a system of mathematical equations and depict selected relationships in an economy. Econometric and simulation models differ in how values are assigned to the parameters (McKitrick, 1998). 2 Target Population The target population of this study covers all the participants in the maize value chain in Kenya.

3 Sampling Design Sample 5 Sampling Techniques 6  Data Collection 7 Sources of data 8 Data Collection Instruments 9 Research Procedures 10 Validity and Reliability Assurance 11 Data Analysis 12 Limitations and Delimitation of the Study and 13 Ethical Considerations 14 Time Table/Research Time Schedule 15 Budget for the Research References ACDI-VOCA Website Boussard, J. M. , Gerard, F. , Piketty, M.

G. , Christensen, A. K. , Voituriez, T. (2004). May the Pro-Poor Impacts of Trade Liberalization Vanish Because of Imperfect Information? Agricultural Economics 31(2): 297-305 Dixit. D.

nd Grossman. G. (2005). The Limits of Free Trade”. Journal of Economic Perspectives 19(3): 241-45 Gordon, Henry and Neil Spooner: (1992). “Grain Marketing Reform in Kenya: Principle and practice,” in Proceedings of the Conference on Maize Supply and Marketing under Market Liberalization, Nairobi, June 18-19, 1992 Jayne.

T. S. , and Kodhek-Argwings, G.

(1997). “Consumer Response to Maize Marketing Liberalization in Urban Kenya. ” Food Policy 22(5): 447-58. Mckitrick, R. , (1998).

The Econometric Critique Of General Equilibrium Modeling: The Role of Functional Forms.Economic Modeling 15 (January) 543-573 Mghenyi, W. E. (2006): Welfare Effects of Maize Pricing Policy on Rural Households in Kenya. Unpublished M. Sc. Thesis, Michigan State University.

Minto, N. , and Goletto, F. , (2000). Rice Market Liberalization and Poverty in Viet Nam. Research Report 114, IFPRI, Washington, DC. Owuor, B (2009): Maize, the Troubled Subsector: Is Our Path Worthwhile? http://www.

hbfha. com/downloads/Maize- The_Troubled_Subsector_by_Booker_Owuor_Oct. pdf Accessed 22 December 2009 Wangia. C. , Wangia. S. , and De Groote.

H. (2002). Review of Maize Marketing in Kenya: Implementation and Impact of Liberalization, 1989-1999. ” 7th Eastern and Southern Africa Regional Maize Conference, Nairobi Kenya. World Bank (1994). Adjustments in Africa: Reform, Results and the Road Ahead.

Oxford University Press, New York • Maize prices exhibit substantial intra-year seasonality. Prices are low when the markets are flooded with maize during harvest-time and prices are high prior to the next harvest. • Milling industry consists of hundreds of small-scale mills serving rural areas and handful of large-scale mills serving urban consumers. Complex marketing channels including: o Many small-scale under-capitalized traders o Minimal storage capacity o Few large trading enterprises with national or international operations.

• Political sensitivity of maize prices, leading to attempts to support, suppress, or stabilize prices. Fragmented sales by small numbers of farmers: ? Less than one-quarter of maize farmers sell any maize. ? Farmers are predominantly selling small amounts of maize in the village to traders.

? Aggregation is time consuming and costly, contributing to low farm prices. Farmers lack information about prices in nearby markets and also lack cost-effective means of transporting maize individually. However low levels of trust between farmers limit collective sales or transportation. Policy uncertainty is a major limiting factor for maize production across sub-Saharan Africa. Given the importance of maize in national consumption and production governments often justify intervening in the marketing of maize to ensure food security. This can be in the form of export or import bans, or national food security stocks of maize.

For example, export bans are introduced by the Tanzanian government when maize shortages are forecast, maize is the primary commodity stored in national food security stocks of the governments of Benin and Tanzania, and in Malawi the government-run marketing body guarantees a set price band for maize. Furthermore, government and donor interventions can also cause uncertainty and provide market advantages to private sector traders who gain contracts to supply public entities with maize.