1. AAMP Training Materials
Module 4.3: Marketing Margins & Marketing Costs
T.S. Jayne (MSU)
This is the third section of the Trade Module which is part of the AAMP Training Materials.
Exercises in this presentation are found in the excel spreadsheet entitled:
AAMP Module 4.3 – Marketing Margins.xls

2. Objectives
Understand relationships between food prices between countries
Examine the relationships between food prices at different marketing levels

3. Maize price vs. import parity, Lilongwe, Malawi
What can we learn by looking at the relationship between prices in one market and prices in another? If they are linked by market trade, one would expect prices to move together in some way.

4. Maize prices vs. import parity, Blantyre Malawi
Moreover, if markets functioned well, we would expect grain prices in the destination market to NOT exceed the price of grain in the source market. Malawi imports maize from South Africa, so in this particular example, we would not expect prices in Blantyre, Malawi (the red line) to exceed the prices in South Africa + the cost of shipping grain from South Africa to Blantyre (blue line). But alas, there are numerous periods between 1999 and 2009 in which Blantyre maize prices exceeded the cost of importing it from South Africa. Why? What does this mean?

5. Maize prices vs. import parity, Nairobi, Kenya
Here’s a similar example from Kenya. What was happening in mid 2009 that causes prices in Nairobi to exceed – by far – the cost of importing it from South Africa?

6. Wholesale maize grain and maize meal prices, Zambia
This slide shows “vertical margins” for maize, i.e., the difference in the price at different stages in the maize value chain. In this case it shows the margins between the price of breakfast meal in urban areas and the wholesale price of maize in major surplus producing areas of Zambia. A few noteworthy observations from this graph: (1) the price spikes in wholesale markets tend to produce much larger spikes in the price of maize meal…what could explain this? (2) the margins between the retail price of maize meal and wholesale prices of maize show that millers’ and retailers’ margins account for about half of the total retail cost of maize meal.

7. Motivation
Why bother studying the relationship between food prices in one market and another?
Why bother studying the relationship between food prices at one level (e.g., farm-gate) and food prices at another level (e.g., retail)?

8. Definitons Spatial marketing margins Spatial marketing costs
Vertical marketing margins
Vertical marketing costs
- Spatial marketing margins (SMM): the price spread between surplus market i and destination market j = SMM = Pjt-Pit for any given point in time t
- Spatial marketing costs (SMC): the actual cost borne in marketing a commodity from market i to market j. This could be greater or less than the spatial marketing margin. If SMC < SMM for an extended period of time, it indicates that something is not working well with the market, perhaps non-competitive behavior, perhaps government intervention (road barriers, trade bans, etc). It will take more than just price analysis to determine the source of the problem. If SMC=SMM, then at least on the surface, the market is performing about as well as it can in a static sense.
- Vertical marketing margins (VMM): the difference in prices at different stages of the system, e.g., the price difference between wholesale and farm-gate, or the price difference between retail and wholesale.
- Vertical marketing costs (VMC): the marketing costs involved in transforming product from one stage (e.g., farm-gate) to another (e.g., retail). These marketing costs can involve many things: transport, processing, financing costs, spoilage, transit losses, asset depreciation, risk premia, etc. It is not easy to collect data on all the costs involved in transforming product from one stage to another. But at least theoretically, if the market is working well, VMC should come close to equalling VMM, after accounting for a normal profit margin to those involved in providing the various marketing services.

9. Luchenza retail price and farmer-reported prices received in remote villages in Mulanje District, 2009/10 marketing year
Each dot here shows the price that an individual farmer received in the month of sale compared to the retail price of maize in Luchenza retail market (blue line). The difference between each dot and the blue line at any point in time shows the vertical marketing margin between the farm-gate and retail level. Now, if it were possible to obtain data on the actual costs involved in buying from these farmers and transferring the grain for sale in Luchenza’s retail market, we could assess the degree of competitiveness and efficiency in these maize markets.

10. Wholesale maize grain and breakfast meal prices, Zambia (nominal prices)

11. Wholesale maize grain and breakfast meal prices, Zambia (real prices)
Same data but divided by the CPI = real or constant prices

12. Determinants of marketing margins
Spatial margins: 1 2 3
Vertical margins
Some determinants of marketing margins: transport costs, fuel prices, labor costs for loading and unloading, transit losses (pilferage), official government taxation/cess/fees for moving product across districts or borders, unofficial fees (bribes?), etc.
Some determinants of vertical margins: transport costs, processing costs, interest costs on borrowed money to finance operations, risk costs, etc.

13. Why might margins ≠ costs
Spatial margins: 1 2 3
Vertical margins
* lack of competition in the market
* Major risks and uncertainties in the market, leading to differences between margins and costs in a given period – missing information is often at the root of this.
* Government actions of some sort that impose costs and/or risks on marketing actors

14. What does it mean if: Spatial margins < transfer costs1 2 3
Spatial margins > transfer costs

15. Maize prices vs. import parity, Nairobi Kenya
Even though the tariff was removed in late January 2009, transport capacity from Mombasa to Nairobi was only able to bring 140,000 mt per month into Nairobi. But the deficit in Kenya was over 1 million tons. So it was not possible to relieve the deficit immediately after the tariff was removed. It took 4-5 months before the imported supplies were sufficient to satisfy demand and bring prices back down in line with the costs of importing (blue line, import parity). Without this information, one could look at this graph and conclude that perhaps non-competitive behavior was the problem for the red line exceeding the blue line for much of Lesson: local prices over import parity (the cost of landing imports at a particular location) does indeed indicate a problem, but it doesn’t tell us what the problem is. We need additional information to determine that.

16. December 2008, Kenya

17. February 2009, Kenya – tariff removed

18. April 2009, Kenya

19. August 2009, Kenya

20. Exercises Examine maize prices at Compute the spatial price spread
SAFEX
Blantyre, Malawi
& Transfer costs between them
Compute the spatial price spread
Compute import parity prices at Blantyre
On the basis of spatial margins vs. transfer costs, predict the months in which you would expect to see imports occurring
Compare this with actual trade flows
Explain the reasons for what you see
Use the accompanying Excel file of maize prices at SAFEX and Blantyre to do this exercise.