LEI April 2008 ECONOMIC ANALYSIS OF THE IMPACTS OF INTERNATIONAL TRADE LIBERALISATION ON SMALLHOLDER EXPORT CROP SUPPLY CHAINS AND PRODUCERS IN MALAWI Singano Dalitso Kabambe Presented by Andrew Dorward

LEI April 2008 Summary (1) The existence and scale of producer and economy benefits from liberalisation depend upon the extent to which –liberalisation leads to increases in international commodity prices, –increases in international commodity prices lead to increases in producer prices, –producers and potential can respond to increases in producer prices by increasing production. If major commodity producer countries exhibit poor price transmission and/or supply responses following increases in international prices, this is likely to increase world prices above levels predicted by models which assume more effective price transmission and supply responses. reduce direct benefits to producers & indirect from higher prices & from expanded production (with upstream, downstream & consumption multipliers)

LEI April 2008 Summary (2) Four export commodities produced by smallholder farmers in Malawi. –Review of models suggests that trade liberalisation is expected to raise world prices for all crops, –Very low price transmission from international to domestic markets for tobacco –Very low supply responses for sugar and tea. –Limited price transmission & supply response for cotton The structure of the supply chain of each commodity showed –the institutional problems facing smallholder producers of commodities with different production, processing and market characteristics –their effects on price transmission & on extensification & intensification supply responses. –Critical features: asset specificity of producer & processor investments; nature of linkages between production & processing; regulation; export market structures.

LEI April 2008 Burley Tobacco P(no transmission) = 0.47 Strongly concentrated oligopsony – 2 companies >90% market share. Investments in mills, specialised warehouses and market intelligence competences are important barriers to market entry.

LEI April 2008 Burley Tobacco supply Large scale & smallholders: Significant area & (similar) production supply response (elasticity of 0.6 to 0.70), no intensification, constrained by finance Prices have been above minimum threshold needed to attract supply? Therefore higher auction prices not passed on? Higher smallholder margins than other crops

LEI April 2008 Tea Elasticity of transmission =0.36 (v weak transmission to smallholders)

LEI April 2008 Tea Large scale & smallholders: very small lagged area responses (e<=0.04) High planted and processing specific assets limit area supply response. Also land constraints? Poor complementary coordination in input supply to smallholders limits intensification response Existing high inputs by estates limits intensification response. Low smallholder margins – due to outgrowers’ weak position?

LEI April 2008 Sugar Elasticity of transmission =0.36

LEI April 2008 Sugar Large scale & smallholders: small area & production supply responses (elasticity less than 0.2). High planted and processing specific assets limit supply response. Good complementary coordination in input supply to smallholders but little scope for further intensification. Monopsonistic outgrower schemes: low smallholder margins

LEI April 2008 Cotton Some post liberalisation price transmission? Elasticity of transmission =0.31 (lint to seed cotton)

LEI April 2008 Cotton Significant area & (smaller) production supply response (elasticity of 0.5 to 0.60) but extensification (output elasticity 0.2 to 0.45). Area response limited by food security concerns. Intensification limited by profitability concerns, credit difficulties & low use of purchase inputs, though 4 firms engage in complementary coordination – cotton prices have been below minimum threshold to attract supply, hence incentives for company investment & moderate smallholder margins?

LEI April 2008 Summary