DISCRETIONARY POLICY INTERVENTIONS IN MALAWI:AN ANALYSIS OF EXPORT BANS AND MINIMUM FARMGATE PRICES

Bob Baulch, Cynthia Kazembe & Athur Mabiso

International Food Policy Research Institute

Based on Final Report to MOIT by Brent Edelman, Karl Pauw (FAO), Michael Johnson, Cynthia Kazembe, Emerta Aragie (FAO) Athur Mabiso(NAPAS), Valentina Pernechele (FAO) & Bob Baulch

Capital Hotel, Lilongwe

25 August 20161

Project Overview• Builds on IFPRI research on oilseeds exports in 2014

• 12 month project for Studies on ‘Export Bans and Minimum Farm Gate Prices’ begun Feb 2015

• Funded by ASWAP-SP Multi-Donor Trust Fund

• Focus on maize and soya beans

Events

• Closed meeting on Making Maize Markets Work, 3 June 2015

• Maize Marketing Symposium, 1 October 2015

• Closed Dissemination Workshop, 25 April 2016

Outputs

• Inception report, 3 project reports (price and trade analysis, economy wide effects, farm-level decision making), Final Report (submitted, 8 July 2016)

• 2 Policy Notes (24 and 25) + 2 Working Papers (15 and 16) already ‘published’ on MaSSP website (http://massp.ifpri.info/); 1 more Policy Note & Working Paper forthcoming

2

An Overview of Agricultural Trade Restrictions in Malawi

• Control of Good Act (MOIT-under review); Agricultural General Purposes Act and Special Crops Act (both MoAIWD-little used)

• Maize: aims to protect national food security‒ Export ban on maize and maize flour more or less continuous since 2005: lifted

temporarily from August 2007 to March 2008, August 2009 to November 2011

• Soya: aims to promote domestic value addition (by domestic vegetable oil processors & poultry industry)

‒ Short, sporadic export bans between 2010 and 2012: June-July 2010, June-October 2011, and March-September 2012

‒ September 2013: scrapped soya export bans as trade policy tool but in late 2015 and early 2016 began exploring other measures including export levy, structured markets

• Other crops - raw cotton for the last 2 decades- coffee and tea have been declared ‘special crops’ in the past

3

Maize Prices and Trade Restrictions

4

Soya Prices and Trade Restrictions

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The Soyabean Export ‘Paper Trial’ in Malawi

Source: Institutional Analysis by IFPRI (see MaSSP Policy Note )

In 2014 (when there was no export ban or levy for soya) exporting soyabeans from Malawi required:

- 15 unique official documents- 11 separate office visits- dealing with 8 different Government institutions

6

‘Route Map’ for Remainder of This Presentation

• So if the purpose of trade restrictions is to reduce domestic prices, it is not clear that they have achieved their objective

• Furthermore, trade restrictions may have unintended side effects on:

Minimum farm gate prices Cynthia

Commercial maize production Athur

Smallholders’ crop allocation decisions Athur

The macro-economy Bob

7

Minimum Farm Gate Prices for Maize

8

Minimum Farm Gate Price

• Issued by MoAIWD once a year- Based on gross margin analysis- Apply throughout the marketing season

• To motivate traders to pay farmers high prices- Ministry price data and field reports show very little enforcement

of MFG price in practice

• A minimum price that is pan- seasonal and pan-territorial is problematic because of:

- Different costs of production, yields & marketing conditions- Variations of prices at across space and time

9

Farm Gate Prices & MFG price for MaizeApril 2006 to Feb 2015

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Farm Gate Prices & MFG price for MaizeApril 2006 to Feb 2015

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Main Findings

• In nominal terms, the MFG exceeds government reported prices & exceeds the price at which government procures maize for SGR

• In USD terms, the MFG exceeds the market price and at times exceeds the regional import parity price

• MFG sometimes too low, sometimes too high

• By promoting MFG, government appears to be advising traders to pay and farmers to expect unrealistic prices

12

Large-scale Maize Producers: Qualitative Study

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Large-scale Producers Interviewed& the Crops they Grow

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Pigeonpea 9%

Seed Maize 39%

Tobacco 14%

Seed Soya 10%

Maize, 6%

Soya 6%

Groundnut 8%

other9%

14

Main Findings

• Malawi has large-scale ‘subsistence’ farmers who• Only grow maize for their laborers;

• Are reluctant to produce surplus maize for the market

• Specialized international agribusinesses avoid producing maize altogether

• They grow maize seed, which is more profitable and is subject to less Government intervention

• Large-scale farmers would be willing to allocate more land to maize, if given opportunity to export

• Majority willing to sell to Government in years of shortage if the terms are clear, agreed consultatively in advance and are legally binding

15

Constraints to Commercial Maize Production

ProfitabilityGovernment interventions

Inputs

Access to finance

Access to markets Macro -economy

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Note: Circle sizes are determined by the product of ranking and frequency. 16

Some Quotes from Large-scale Farmers

• “We are not allowed to export. This is one of the biggest single issues that we are not allowed to export maize…I think this stops the farmers from growing because the price of maize is controlled. So how much we exported, zero because we are not allowed to export.”

• “The market is being undermined by government policy related issues. Under this we have the FISP…we are surrounded by smallholders who are given fertilizer for free, so their cost of production is much lower; this undermines us. We cannot compete commercially. So when you create a two tier system, deliberately, you eliminate the second tier…”

17

Farm-Level Decision Making and Uncertainty: Examples from Oilseeds and Maize

18

Motivation and Method

• Maize and soya prices are more volatile than for other major crops (tobacco, groundnuts)

• How would farmers respond if faced with more stable prices?

• What potential is there for maize to be a commercial crop?

• Use mathematical programming farm-level risk model to simulate policy interventions in 3 districts s in Central Malawi

19

The Case of Soya

• Policy scenarios:a) Reduce the volatility of farmgate soya prices by 25 percent (SB market)b) Introduce a loan package for soya inputs (SB loan)

• Conducted both without and in the presence of tobacco input loan package (TB loan)• Two types of districts: (1) low (LLW) and high (MCH) price volatility

• Key findings: 1) SB market: farmers expand soya planting in both districts (more in LLW)2) SB loan: soya planting increases in both districts (more in MCH)3) Combined effect of SB market with TB loan: soya increases even more than

under SB market alone in MCH (less in LLW)4) Combined effect of SB loan with TB loan: soya expands even more than

under SB loan alone in LLW (less in MCH)

20

The Case of Maize

• Policy scenarios: a) Remove the fertilizer subsidy (No subsidy) b) Determine price at which maize becomes profitable as a marketed crop without a

fertilizer subsidy (No subsidy + price change) c) Remove food-security constraint and allow farmers to rely on the market to satisfy

maize consumption requirements (No subsidy + no consumption constraint)

• Key findings:1) No subsidy: farmers reduce intensification (fertilizer use), allocate more land to

meet consumption needs, diversify less 2) No subsidy + price change: FG price must increase by 35 percent to make maize

profitable, some land allocated to maize-GN intercrop, no intensified maize production; rather, purchase tobacco inputs

3) No subsidy + no consumption constraint: no maize sole-cropping; tobacco, soya, maize-GN intercropping all increase

21

Farm Income & Area Allocation for Maize Simulations in Mchinji

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375 265 264 470Farm Income(MK,000)

22

Economy Wide Impacts of Export Restrictions

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Economy Wide Impacts of Export Restrictions (1)• A Computable General Equilibrium (GCE) model of the Malawian economy is used to

analyze the economy-wide impacts of export restrictions on maize and soya

Simplified Representation of General Equilibrium Model

• CGE model distinguishes between welfare in the short-run (‘within season’) and the long-term (‘between seasons’), between rural and urban, and poorer and richer households

24

Economy Wide Impacts of Export Restrictions (2)

• In the short-run, the impacts of exports restrictions are consistent with their intended impacts- export bans reduces the domestic price of maize and increases its consumption- export levies can promote value addition (but only if the revenue raised is recycled as a production subsidy for soy and other oilseed producers

• In the long-run, export bans and levies are self-defeating: as they distort markets and create disincentives to producers reducing both maize and soya production

• Exports bans are also regressive (anti-poor) because they benefit the urban non-poor and rural non-farm households; poorer rural farm households experience income losses

25

Summary and Conclusions• It is not clear that trade restrictions have achieved their objective of promoting food

security, reducing domestic maize prices and increasing value added for oilseeds

• While trade restrictions may reduce domestic food prices and increase domestic value addition in the short run, they have numerous unintended consequences in the longer run. These include

o Increased maize price volatility,

oDisincentivize commercial maize production

oDiscourages crop diversification by smallholder farmers

oHurt poorer rural farm households

o Favor urban consumers and better off farmers

• Greater predictability and transparency in trade policy would increase aggregate welfare and economic growth

26

Policy Recommendations

• Convene a formal platform for open communication on maize production, prices and trading

• Refrain from ad hoc interventions in trade to ensure more stable markets

• Under present conditions, debate on export bans are essentially ‘moot’: domestic prices > export parity, so no incentive to export

• Conditions should be agreed that allow commercial producers to export maize in surplus years

• Government should follow through on its commitments on prices, procurement & trade, and engage in predictable, rules-based market operations

27

Further Reading

• Challenges to soya export promotion: An institutional analysis of trade policy in Malawi. MaSSP Policy Note 20

• Are Malawi’s maize and soya trade restrictions causing more harm than good? A summary of evidence and practical alternatives. MaSSP Policy Note 25

• Have maize market policies turned Malawi’s large scale farmers into subsistence maize producers?MaSSP Policy Note 24

• Discretionary policy interventions in Malawi: An analysis of export bans and minimum farm gate prices. MaSSP Working Paper 16

• Achieving food security and industrial development in Malawi: Are export restrictions the solution?MaSSP Working Paper 15

(Policy Notes and Working Papers are downloadable from: http://massp.ifpri.info/category/publications/)28