Making markets work

Editor's Notes

• #3: Why do governments intervene in staple food markets? High levels of poverty, food insecurity mean that many African governments assume responsibility to ensure adequate domestic food supply at reasonable prices Implication for Malawi, where staple food is maize: (1) maize price and (2) access to maize are arguably the country’s two most important political, social, and economic variables What are some of the important characteristics of Malawi’s maize market? And do these traits warrant government intervention in the maize market? How can governments act to stabilize staple food markets? Current situation: in particular, we’ll look at the 2014/15 marketing season What’s next for Malawi? How sustainable are input subsidies for a population of 30 million in 2034? (NSO projections) How will Malawi’s rural population produce enough to feed itself and an urban population of 6.6 million in 2034? (NSO projections) What are the tools at government’s disposal to incentivize farmers to produce a surplus to feed this urban population?
• #4: First, we looked at the market structure of Malawi’s maize market: Market is thin: few buyers and sellers relative to the number of producers Out of 2.5 million farmers, only 5% produce more than 3 MT (IHS3) Only 8.5 percent of farmers are outright sellers of maize, i.e., they only sell maize and do not buy any maize (these are all maize farmers) A further 8.9 percent operate as both buyers and sellers of maize 55.3 percent only purchase maize to supplement own stocks 27.4 percent are autarkic, i.e. they neither buy nor sell maize This thin market structure means that abrupt changes in supply or demand result in disproportionately larger fluctuations in price, i.e., higher price volatility Indeed, Malawi’s maize prices are volatile: Highest maize price volatility in the region Part of this is seasonal: to be expected to a certain extent when you have one dominant crop and a single growing season But 60% of Malawi’s maize price volatility is due to unexplained/unpredictable factors, i.e., factors other than seasonality Transition: what can government do to reduce this volatility?
• #5: When you have thin markets susceptible to sudden shifts in supply and demand, it’s understandable that government acts to facilitate access to staple foods and stabilize prices What are government’s options? In essence, there are 3 categories of interventions: (1) Support private sector activity to make the market less thin, to make it function better Do this by either directly investing in or facilitating investment in infrastructure, providing consistent regulatory oversight and market information, providing extension services But experience has shown that supporting purely market-based institutions cannot guarantee that prices will remain within an acceptable range This means a more active role for government is often warranted; the question is then: how? (2) Rules-based interventions Government engages in the market only when certain criteria are met These criteria are based on transparent criteria that are made publically available Example: government sets a predetermined price band; if price goes outside this band, government commits to selling/buying staple food until price returns to within band Result: actions are entirely predictable, market agents can factor these criteria into decision-making: both short-term market engagements and medium-term investments (3) Discretionary interventions: Government engages in market in an ad hoc manner, i.e., without rules or criteria governing its intervention Examples: imposing export or import bans without notice, changing trade tariffs, procuring grain (often at artificially high prices), disposing of grain (often at subsidized prices), or setting prices directly Challenges: discourages private sector from engaging in market (making market thinner), results in increased price volatility and unpredictability How has Malawi intervened in its staple food market? Can think of examples for each category Create infrastructure to facilitate productivity and investment: Greenbelt initiative, support of WRS development and regulations, AMIS and APES Also intervenes more directly in market through input subsidies to encourage production (FISP): more or less predictable Others are not predictable: national food reserve agency (NFRA), parastatal grain marketing board (ADMARC), ad hoc trade restrictions (export bans) Transition: cross-country analysis shows that there is a relationship between discretionary policy and more unpredictable prices; the current marketing season provides at least some circumstantial evidence
• #6: 2014/15 has been particularly challenging for producers and traders Explain figure: Heavy black-dashed line: expected real price of maize throughout the marketing season, is based on data from previous 6 marketing seasons Green dashed line: 95% confidence interval, range within which one would expect the price to be based on last 6 years of maize prices Solid blue line: 2014/15 maize price in real terms How should we interpret this? Prices throughout entire season have been well below expected price range Abnormally low post-harvest prices: in nominal terms, the April-Aug 2014 price was 18.4% less than in the previous year In real terms, 2014/15 early PH price was 33.7% less than previous year For traders, once you incorporate storage and finance costs, unlikely to be able to sell and cover these costs Explanations and implications? Prices did not follow the typical seasonal trend, what were the drivers of unpredictability? Will this season’s abnormally low maize prices serve as a deterrent to production for the current season? Reported 30-50% decrease in production, in part due to flooding and drought, but can some of these decrease in production be explained by low prices? Medium term: this season’s prices will increase the unpredictable component of price movements, unlikely to encourage surplus production in the future
• #7: Main conclusions: Malawi’s staple food market is thin, which makes it susceptible to sudden shifts in supply and demand and prone to price volatility Malawi has the most volatile maize prices in the region, 60% of this volatility is unpredictable, i.e., not seasonal If government intervenes in a discretionary, ad hoc manner, it can introduce even more price unpredictability into the maize market 2014/15 season: prices were abnormally low, difficult to explain, will these low prices affect future production? What’s next for Malawi? Act to reduce maize price uncertainty and unpredictability Continue to invest in infrastructure that enhances productivity and makes markets function better When possible, avoid intervening in the market discretionarily In other words, determine criteria in which government will intervene in market and make these criteria transparent Government can then respond quickly and appropriately when extreme market conditions arise Just as important, however, this predictability will encourage farmers and traders to engage more in the market, making the market more functional In the medium term, this predictability should lead to increased private investment in the agricultural sector, increased production, and a more food secure Malawi.