Working paper 2b - Do Farmers Really Benefit From High Food Prices? Balancing Rural Interests in Kenya’s Maize Pricing and Marketing Policy

Author(s):  Jayne, Thomas; Yamano, Takashi; Nyoro, James; Awuor, Tom


Introduction

Making economic policy is a process of working out the rules of the economy and balancing the interests of stakeholder groups. Economic policy research can help inform the process by identifying outcomes of pursuing alternative policy choices. This is a case study of balancing the interests of Kenyan farmers – a very heterogeneous group – in the setting of maize pricing and trade policy.

Kenya, like many countries in the Eastern and Southern Africa region, is undergoing rapid transition and adjustment in its agricultural sector. Adjustment does not necessarily imply liberalization, but the private sector has been allowed a greater role in the marketing of strategic crops, including maize, since the country embarked on a program of macroeconomic and sectoral reform in the late 1980s.

However, the reform process has been controversial. Its effects on farmer and consumer welfare have been the subject of speculation driven by preconceived notions on both sides, which has been compounded by the paucity of ground-level information on how farmers and consumers are responding to the reforms.

Partially because of these uncertainties, the Kenyan government has several times reversed its course in the liberalization process, most recently in 1999 by bringing the state-run marketing board back into grain purchase at fixed support prices, coupled with tariffs on maize imports. Both of these measures are intended to protect selected Kenyan farmers from “cheap imports” from neighboring countries and from the world market. One recent analysis indicated that the cost of importing white maize from Durban to Nairobi without tariff was in the range of Ksh 1,300 - 1,450 per 90 kg bag (i.e., US$200 - $215 per ton) during most of 1999 (Nyoro, Kiiru, and Jayne 1999). By contrast, actual wholesale prices in Nairobi and points east have been as high as Ksh 1,600 - 1,900 per bag (US$240 - $280 per ton) and above during the same period. Many government officials contend that supporting maize prices at levels higher than would prevail under market conditions raises the net incomes of Kenyan farmers and promote household food security.

This paper uses information on rural households in 18 districts surveyed in 1997 and again in 1998 to inform current debate on maize pricing and trade policy. Specifically, we determine how farm households are being affected by governmental efforts to support maize price levels. We then examine the implications of these findings for the development of strategies to promote agricultural productivity and rural income growth.

Perhaps the most generalizable conclusion from this analysis concerns the danger of treating farmers within the small farming sector as a homogeneous group for purposes of policy analysis. There are great differences in assets, the crops from which household income is derived, and food expenditure patterns -- even within particular regions of the country -- that make it hazardous to generalize about the impacts of commodity pricing and trade policy without solid empirical information. Our findings indicates that:

• Most rural smallholders, even in the major agricultural areas of the country, are net buyers of maize throughout the year, and are directly hurt by higher maize prices. In the 22 agricultural districts examined, 52% of farmers were net maize buyers.

About 16% of the farm households neither purchased nor sold maize, and the other 32% were net sellers of maize. Less than 9% of the households both bought and sold maize in the same year, and almost all of these were net buyers. However, there were great variations in these figures across regions.

• Kenya’s marketed maize output comes from a relatively small portion of the farm population. Ten percent of the small-scale farmers accounted for 74% of the total maize sold by the small-scale farm sector. Of the 32% of smallholder farmers that were net sellers of maize, only half of them sold more than 10 bags of maize. These farmers are located primarily in the maize-surplus districts of Trans Zoia, Uasin Gishu, upper Kakamega, and Nakuru. When taking into account available data on large-scale farmers, we conclude that the top 10% of farms in the country account for 85% of the domestically marketed maize in Kenya.

• Low-income farm households in Kenya are more likely than high-income households to be net maize buyers. The combination of the NCPB price supports and the maize import tariff have served to raise local prices in Nairobi, Mombasa, and the eastern droughtaffected parts of the country by 250 - 500 Ksh per bag than would be the case without the import tariff. Hence, the maize import tariff is acting as a tax on the rural poor.

• While reports in the local press would lead one to believe that Kenyan maize prices have been artificially depressed due to cheap imports, wholesale maize prices in Kenya are among the highest in the Eastern and Southern Africa region.

• The elimination of the maize import tariff would save Kenyan consumers an estimated Ksh 2,744 million (US$ 36.6 million) per year. Of this, urban consumers would save about 1,400 million (US$18.6 million) on their maize expenditures, while rural consumers would save about 1,344 million (US$17.9 million). To put these savings in perspective, the estimated US$36.6 million cost savings to consumers is about twice the value of the relief maize being imported by donors to alleviate food insecurity in Kenya.

These findings refute the conventional wisdom that most farmers want and benefit from high grain prices. Most farmers in most regions of the country derive the bulk of their cash income from a wide variety of crops and use this income to buy staple grain. In important respects, their views toward grain price levels are consistent with those of urban consumers. Dealing with the agricultural sector as if farmers are a homogeneous group with similar characteristics may give misleading impressions and can have consequences that go contrary to overall sectoral policy objectives.

However, there is a clear economic rationale for moderating extreme price fluctuations for a strategically important crop such as maize. Protection against extreme downside price risk has been a major problem in the liberalization period. The paper concludes by discussing alternative options for addressing the price instability and profitability issues for maize in Kenya.

 

Do Farmers Really Benefit From High Food Prices? Balancing Rural Interests in Kenya's Maize Pricing and Marketing Policy