Outline This section of the course deals with two issues:
I. The general world trade and farm policy situation as it impacts on LDCs
II. Maize marketing in Zimbabwe, as an illustration of the difficulties and problems.
Re-read Food Mountains and Famines for an overview of the major dimensions of the problem.
As a possible preliminary suggestion as to the major dimensions, it might be helpful to consider the following diagram (invented by your lecturer).
I. Possible Starting representation of Trade, Aid & Food Security Considerations:
The top part of this picture represents the classic balance between supplies and demand. Sen (Nobel Prize winner, 1998, argues strongly that food insecurity (and the acute manifestation of this as famines) are the consequence of demand failure rather than supply failure - failure of factor returns, either because of limited factors or because of inefficient use of factors, coupled with mal-distribution of factor earnings.
Aid, according to this picture, needs to be directed towards improving factor earnings and distribution of these earnings, and also to improve the marketing and distribution systems of food and the necessary inputs. Streeten encapsulates the necessary elements of an effective economic system for the production and distribution of food under the 6 I headings: Innovation (technology, especially irrigation, varieties of crops and livestock, and appropriate management practices; Incentives (the right prices for outputs and inputs); Inputs (need to be accessible); Infrastructure (transportation and storage, as well as properly functioning markets, including the management of risk); Institutions - the rules and procedures and accepted practices rather than the specific organisations, especially for credit, marketing and land ownership & operation); Information - the extension of techniques as well as marketing information and credit availabilities. With these elements in place, it is possible to expect the market system to deliver appropriate and affordable supplies in the right places at the right times and in the right forms.
Peter Hazell, International Food Policy Research Institute, Washington, presents a brief but highly relevant and articulate summary of the problems facing the world in securing food supplies without compromising the environmental base on which it depends in the Introduction to a Special Issue of the journal: Agricultural Economics (Elsevier) on Agricultural Growth, Poverty, and the Environment, Vol 19, Nos 1-2, September, 1998. In summary:
1950s - 1960s: generated the requirements for agricultural growth as the 6 Is above.
1970s - 1980s: focus shifted to reduce poverty and food insecurity, and added six 'equity modifiers' to the 6 Is for growth, as follows;
Zimbabwe is typically a maize exporter, though needs imports in those not infrequent years when the rains fail (as happened often during the late 1980s and early 1990s). Most of its exports, in the good years, have tended to move north into Zambia etc. The food maize is white maize, rather than the north american yellow corn. The only non-african source of white maize if Argentina, imports from which have to come (if at all) through Mozambique - the cost of rail/road transport through South Africa being prohibitive, even if the politics allow it.
There are four major agro-climatic regions in the country. The High Veldt (more reliable rainfall and more temperate climate due to the elevation - the main food surplus area) lies in a strip from the south west to the north east of the country, including Kwekwe and Harare (the capital). North west and south of this belt lies the Mid Veldt (including Bulawayo, the second city of the country), with less reliable rainfall. The Low Veldt lies south again, bordering the Limpopo river, and is typically hot and dry (and food deficit). Mutare, in the east, lies in a range of mountains in which some tea and coffee can be grown. Typically, the further south one goes the dryer and the more remote the water sources become.
The Grain Marketing Board (GMB) has been the official purchaser of maize and supplier of maize to the commercial milling sector. It also set purchasing and selling prices, and controled domestic stocks and trade (generally exports to other Southern African countries, though occasionally in drought years also importing maize from the world market).
Since independence, the GMB has:
The major regulations surrounding maize marketing were as follows (these have now been substantially changed, following the analysis and recognition of problems as explored below):
Maize production and yields for the large scale commercial (LSC) sector and for the small scale commercial (SSC) and communal areas are shown below, as are the grain intakes by the GMB from these two sectors. As can be seen, the communal areas are now producing more maize than the (European) LSC sector, though with very much lower (and rather less variable) yields, reflecting in part the much poorer land operated by the communal farmers. The communal areas now also deliver more maize to the GMB, in spite of retaining, typically, a larger share of the total harvest for their own local use.
The Effects of the previous Marketing Policy: The GMB's marketing policy severely curtailed the development of the private marketing system (deliberately in the past, because of fears of capitalist exploitation of both producers and consumers). It tends to siphon grain out of the communal areas (where those farmers producing surpluses are encouraged to deliver grain to the GMB in return for the loan access which these sales provide - see GMB sales in the deficit (low rainfall) areas in the chart below).
The following chart illustrates the conditions (1989/90 season) in two high rainfall (typically surplus producing) areas and four low rainfall areas, where the area as a whole is typically in deficit for food maize.
The vertical axis measures proportions of total production (for sales) and of total consumption (for purchases). As can be seen, even in the surplus areas, some 20% of households are actaully deficit in grain and have to purchase their supplies from either the local market, or from the GMB (which sold very small quantities back into the local area), or from local shops (where commercially milled maize is available at a price). In the deficit regions, the proportions of deficit households is much higher, at 60 - 80%.
Maize marketing policy forced those communal area which are less than self sufficient in maize production to make good the deficit through the GMB and commercial millers (see the low rainfall areas in the chart above). The latter produce highly refined and milled meal, which is not regarded as superior to locally ground ("straight-run") meal by rural consumers. In addition, these imports of meal from distant urban areas are also more expensive than would be the case if more local maize and meal could be obtained. As a result, food shortages in the deficit communal areas can be pronounced - a paradox in a country which is normally more than self-sufficient in maize.
Pan seasonal and pan territorial pricing can only be operated by the GMB so long as private trades are severely restricted. If private trades were allowed, millers and traders would buy direct from producers early in the season, at prices somewhat below the uniform GMB price, and from the GMB late in the season, when the private market prices had risen above the GMB uniform price to cover storage and carrying charges. As a result, the GMB would not make sales early in the season but would later in the season - increasing its operating costs as a result of the un-recouped storage charges. Likewise, private traders and millers would sell directly to wholesalers and consumers close to depots (at a rather lower price than the GMB average) rather than to those more distant, where the GMB selling price effectively subsidises the transport costs. Again the transport operating costs of the GMB would rise.
Urban maize milling is dominated by four private firms, with the largest 2 covering 85% of the market. These millers produce two forms of meal: super-refined at a 60% extraction rate; roller milled meal at an 85% extraction rate. Maize milling margins are based on costs of production supplied by the millers, with grain purchase prices and meal selling prices controlled by the government. Since informal maize millers are not legally entitled to buy grain in urban areas, nor bring grain in from outside urban areas, the large commercial millers effectively have a monopoly of the urban market (and the local import markets for deficit areas). Survey evidence suggests that informal millers, straight-run hammer millers rather than roller mills, could substantially undercut the commercial prices. Current commercial miller margins on roller meal are Z$305/tonne and Z$530/tonne for the super-refined meal, while the margins required for the production of straight-run hammer meal in the informal sector are only Z$125/tonne. Thus informal straight run meal could be made available at substantially lower prices than the present meals from the commercial millers. In addition, there is again survey evidence that the straight run meal is an inferior product, that the higher income consumers prefer the roller milled or super-refined meal, while the lower income consumer is prepared to purchase (and may even prefer) straight run grain. Thus the effective monopoly of the commercial millers is especially disadvantageous to the poorer urban (and rural) consumers.
The formal market is depicted on the RHS of this diagram - where the supply curve is normally sloped, and the GMB's purchase price is shown as PP (currently Z$270/tonne), calling forth S(GMB) deliveries to the Board (agents or collecting points), with deliveries to the GMB expected to increase (to S') as producer prices are raised - to PP').
The informal market is depicted (in mirror image terms) on the left hand side of the figure. The supply of grain maize to the informal market is shown as SI, upward sloping from the floor price set by the GMB's buying price PP. If a higher price than PP (less any transport and marketing costs on deliveries to the GMB) is offered to producers, then we would expect grain to be sold locally rather than being delivered to the GMB. There is, however, an effective ceiling placed on the price which could be charged in the informal market for maize grain:- the local price of commercial meal from the commercial millers in the urban areas (controlled by the government) puts an upper ceiling on the price of meal in the communal areas. Thus the ceiling on the local grain price is this meal price less the costs (including any physical extraction loss) of local milling (the hammer-mill or crushing 'straight run' milling cost or margin). This ceiling price is shown as PMM - MC on the figure.
The demand for maize on the informal market depends on the population and also on the price of maize or meal. Dreq on the LHS of the figure depicts the total net demand in nutritional requirement terms (net of each household's own production). However, incomes in the communal areas (and in the poorer urban areas) are not necessarily high enough to allow this quantity of grain to be purchased. Hence the informal market demand DI is shown as kinked above a certain (undetermined) price, showing that at higher prices, effective quantities demanded decline with increases in price. The intersection of DI with SI gives the informal market equilibrium quantity traded on the informal local market and also determines the informal market price, as Qsi = Qdi = QI and PI respectively.
NOTE: There is an oddity about this analysis. What is it? Think before you read on!
Why would any sensible producer in the communal areas sell anything to the GMB if the informal market price were above the GMB price, as it is in the above diagram?
Surely all grain would be sold in the informal market until the informal price falls to the GMB buying price. In which case the appropriate supply curve to the informal market ought to be horizontal (perfectly elastic) at PP up to current production quantities, thereafter increasing to show the supply consequences of increasing prices? In which case, informal market demands would be met first, with no sales to the GMB until and unless the informal market price falls to the GMB buying price. In fact,
i. There are direct transactions and marketing costs associated with the informal market (as there are with deliveries to the formal market). In the limit, the transactions and marketing costs in the informal market (shifting grain between surplus and deficit households and arranging for the trades) might make up the full difference between PP and PI. In effect, this argument makes SI a supply curve including informal market transactions and marketing costs - it will be flatter: a) the more open and widespread is the access to the GMB collection points and buying agents within the area, since the closer are producers to these access points, the lower are the transport costs associated with delivery to the GMB - since the effective floor price for deliveries to the informal market is the GMB buying prie less any costs associated with delivering grain to the GMB buying point; b) the more competitive is the informal market - monopoly rents on informal trades would make the effective supply curve to the informal market steeper; c) the smaller the quantity of informal trade, since one would expect that the supply of marketing services, especially transport of grain from surplus to deficit households, is in inelastic supply, ie. the more marketing is required, the greater the cost per unit of providing the marketing services. However, there are likely to be some economies of scale in this local marketing system, which would offset this effect.
ii. A seasonal argument: The GMB buys immediately after harvest at its stated pan seasonal price. At this time, most households are surplus in grain for immediate needs, but are facing a cash-flow problem and are in need of income - hence sales to the GMB are attractive while prices on the informal market would be expected to be low (below the effective GMB price). It is only later in the season, when grain stocks are depleted, that the informal price moves above the (constant) GMB price, as household stocks become depleted. - Notice, in this case, allowing the GMB to re-sell maize later in the season would remove this problem for deficit households, though, if the GMB continues to operate its pan territorial and pan seasonal prices, then it might compromise the ability of the GMB to meet its operating costs.
iii. Input and credit supplies: The fact that at least some credit provided to communal farmers is tied to deliveries of maize to the GMB means that producers must deliver grain to repay loans. Presumably, they only take these loans because the effective rate of interest is lower than that offered by other credit sources (if any). Hence the effective price offered by the GMB is higher than the nominal buying price because of the credit access and advantage offered by GMB deliveries.
For these reasons, we will continue to use this analytical framework, in spite of the apparent anomaly that it requires producers (sellers) to behave irrationally - since this irrationality is simply a reflection of the simplicity of the analytic representation, not of actual behaviour. In short, the diagram represents the end-result of the marketing transaction cost differences between the formal and informal market, whose main elements are the three identified above (one direct and two indirect marketing transaction costs).
Effect of increasing Producer prices (GMB buying prices) to encourage greater production:
If we increase PP (the GMB buying price) in the above diagram, the effects are obvious - The quantity delivered to the GMB increases, from S to S', SI shifts to SI' and the informal market price increases with consequent drop in the informal quantity traded - to QI', resulting in a loss for deficit households, albeit to the gain of surplus households, and hence increasing food insecurity for the vulnerable households.
Deficit areas: The above analysis refers to a grain surplus communal area - it is self-sufficient in maize, not demanding imports of grain or meal from outside the area, in spite of the fact that total grain supplies are less than the nutritional requirements (Dreq - QI, which might represent an index of food insecurity, in this case resulting from a 'simple' lack of income, and which would increase in the event that producer prices are increased). A deficit area is shown below.
In this case, the informal demand curve is further to the left (more is demanded it each price). It now intersects the ceiling price in the informal market, as the price of commercial meal less the local milling costs, implying that the balance of food demand not met by the local informal market is supplied from the commercial millers (identified on the diagram as meal purchases (= Qmm - QI)). Demands for meal are met first from local grain through the informal market since there is a preference (in value for money terms by the poorer households of the rural areas) for straight-run meal, only available through the local informal market. Only as a last resort do these households turn to bought-in meal from the commercial millers. In this case, increasing the GMB buying price would have no effect on the informal market price, already at its ceiling. It would, however, increase the dependence of the deficit area on purchased commercial meal, and increase purchases of commercial meal, thus damaging maize deficit households.
Removal of Internal Trade Restrictions To analyse the consequences
of removing the internal marketing restrictions between communal areas
(ie. to all the private trade to buy in surplus areas and sell in deficit
areas) consider the following diagram. This combines the deficit area (LHS,
though ignoring the official supply from this market for simplicity) and
surplus area (RHS) analysis from above, and connects the two through a
trade diagram using excess supply from the surplus region (XSs) and excess
demand from the deficit area (XDd). [The construction lines for these excess
supply and demand curves are shown - make sure you understand how they
are derived!] 
Before trade between these areas is allowed (ie under the old policy) the informal market prices in the deficit and surplus areas are PId and PIs respectively, with QId being the informal traded quantity in in the deficit region and Qi in the surplus region. Qmm - QId is purchased as (expensive) commercial meal in the deficit region, as before.
When trade is allowed, the equilibrium trade price (ignoring transport costs) is given by the intersection of the XS and XD curves, as PI'. At this price, T (Qs' - Qd') is 'exported' from the surplus region to the deficit region, were it makes good the excess demand at price PI' of Qd' - Qs' in the LHS of the diagram. Hence, consumers in the deficit region and producers in the surplus region are made better off, while producers in the deficit region and net consumers in the surplus region are made worse off. Notice, too, that in this case, there is no need for imports of expensive commercial meal into the deficit region (nor would this be expected so long as Zimbabwe as a whole remains in a net surplus position).
Losers and gainers from policy change to liberal marketing:
The losers are thus:
Caveats This analysis assumes that the grain maize market would operate competitively in the absence of present marketing controls. However, if there are significant limits on transport, local hammer mills, credit, etc. than these potential advantages may not materialise. This implies that, although the policy reform indicated here might "get the prices right" and lead to potential social gains, this does not eliminate the need to ensure that markets can get what they demand in terms of information, materials, inputs and management improvements.
Summary and Issues