Does Government Intervention Help or Hinder Agricultural Markets? Evidence from Malawi's Maize Market

Like many developing country governments, the government of Malawi has intervened in the country’s agricultural markets in an effort to ensure adequate food supplies at reasonable prices.

The maize market in particular has received significant government attention over the past decade on both the production side and the marketing side. However, according a new policy note from IFPRI’s Malawi Strategy Support Program (MSSP), these government interventions can actually do more harm than good if they are not properly designed or consistently implemented.

Malawi’s maize market is particularly thin, meaning that more people engage in producing maize than in buying or selling it. Only one in six Malawian maize farmers sells their product; approximately 55 percent of maize farmers only purchase maize to supplement their own stocks and around 27.4 percent of farmers produce only enough maize for their own use, neither buying nor selling. The result is a market in which only 10 percent of the maize produced within the country is formally traded.

This market structure leads to significant, and erratic, price volatility. While maize experiences some inherent seasonal volatility because it only has one growing season in Malawi, an overwhelming amount (60 percent) of the price volatility seen in Malawi is due to unexplained, and thus unpredictable, factors rather than consistent seasonal patterns.  In the face of such unpredictable price swings, farmers are often reluctant to produce surplus crops to trade in the market because if prices drop unexpectedly, they may not be able to recoup the cost of production. Similarly, maize traders need to plan for transportation and storage costs in advance; in the face of unpredictable prices, traders will often charge a higher premium for their services as a way to ensure they can pay for these costs. These higher premiums result in lower payments for producers, making farmers even less likely to invest in producing surplus crops for trade.

It is into this uncertain, risk-fraught environment that the Malawian government has stepped to try to help producers, traders, and consumers. As the report points out, however, the government’s interventions have tended to be highly discretionary. They have included such strategies as export bans, the acquisition of maize stocks through a National Food Reserve Agency (NFRA), support for parastatal marketing boards (ADMARC, the Agricultural Development and Marketing Corporation), and the setting of minimum farm-gate prices.

The problem with many of these programs, according to the MSSP report, is that they often are not transparent. This means that producers, traders, and consumers are unable to properly factor government programs into their planting, selling, and buying decisions.  In essence, these interventions just add one more level of uncertainty to an already unpredictable situation.

For example, ADMARC purchases maize from smallholder farmers, especially those in more remote areas; the board often makes these purchases at above-market prices in order to provide producers with added incentive and then sells at subsidized prices. However, there are no set rules governing the board’s purchasing or marketing activities, and these activities have tended to be very inconsistent year to year; thus, farmers and traders do not know when during the season the board will make its purchases, how much maize it will purchase, or from where. Government attempts to set minimum farm-gate prices also have lacked transparency, often being revised without warning or explanation.

Similarly, the government’s use of export bans have also contributed to market uncertainty. The enforcement of export bans during times of domestic food shortage appears to be inconsistent; there is evidence that both formal and informal exports have in fact taken place during periods when bans have been in effect, says the report. There is also a lack of official government announcements about the imposition and lifting of bans, and bans tend to be inconsistent from year to year.

The 2014-2015 season saw particularly unusual price movements in the maize market. Prices averaged around MK78/kg from April to August, which is when farmers typically sell their produce; this price was 33.7 percent lower in real terms than that seen during the same period in the 2013-2014 season. While prices typically peak during the marketing season, they remained generally stable during this past season, reaching only about MK80/kg. Prices spiked in March of this year after reports that production would drop by 40-50 percent, but later stabilized somewhat when production losses ended up only reaching 30 percent. The report cites that while weather-related events may have accounted for some of this reduction, losses can also be explained by the fact that larger estate farmers allocated 17 percent less land to maize this season.

The report suggests this unusual price behavior, as well as some farmers’ decisions to plant less maize, may stem from various government interventions. For example, while the government had recommended a minimum farm-gate price of MK100/kg, market prices stayed well below those levels; when the NFRA intervened in October and November 2014, its purchase price was only MK95/kg, still below the government-set minimum. These pricing behaviors could have impacted the production decisions of larger farmers who produce for the market.

Taken together, Malawi’s current mix of policies may contribute to the thinness of the country’s maize markets and discourage farmers from producing surplus maize crops. This puts the country at risk of food shortages in times of drought, flood, or other shock, and it also presents a large stumbling block for efforts to make the country’s agricultural sector more commercially oriented and its economy more market-based. To truly be effective at reducing price volatility in the maize market, the government of Malawi needs to establish transparent, rule-based policies. The report calls for open dialogue between the government and private sector actors and an improvement in the country’s data collection system. These steps will go a long way toward making the maize market more transparent and reliable, encouraging more farmers to engage in the market, and ultimately enabling maize to become an important cash crop.

By: Sara Gustafson, IFPRI