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

Study Aims and Objectives  This study aims to investigate and provide an understanding into FRA’s Rationale for maize floor pricing The price determination process Maize pricing market effects And to give reccomendations on best practices based on findings 2

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% 3

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 4

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

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 6

Maize Floor Price Rationale 7

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 security To increase the average maize price level To attain low variability of maize prices (stabilise prices)  However, there is also general perception that FRA pricing is politically motivated Bulk of the population is engaged in maize production 8

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 9

Maize Floor Price Trends 10

Floor Price Determination  Various factors influence the level at which the maize price floor is set including; Level of production Level of expected sales Budget funding availabilty Elections??  There is always a conflict for government to provide adequate price incentives for maize production while keeping food prices low to attain food security 11

Floor Price Determination cont’.. * Significant at Correlation

Floor Price Determination cont’.. 13

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 14

Floor Price Determination cont’.. 15 Effect on the market

Floor Price Determination cont’.. 16

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) 17

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 18

Floor Pricing Market Effects Source: Kuteya and Jayne, Subsidies to Millers

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 20

Floor Pricing Market Effects cont’… Source: Kuteya and Sitko,

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 22

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 23

Thank you for you Attention! 24