Implementation of Maize Market Liberalization

Research Proposal


Over the past two decades, Kenya like most other developing countries has implemented two major economic reforms in her staple grain markets. In the mid 1980's, the reform of food markets was an important component of the economy-wide Structural Adjustment Programs (SAPs) adopted by developing countries (Minot and Goletto, 2000). The SAPs entailed the privatization and liberalization of staple grain marketing and pricing in over 20 counties in Africa (World Bank, 1994).

In the 1990's, the SAPs were deepened by Kenya's tariff reduction commitments at the multilateral trade negotiations that culminated in the creation of the World Trade Organization (WTO). The key multilateral rules affecting grain trade relate to the Uruguay Round's Agreement on Agricultural (URAA), whose main pillars are improved market access, reduced domestic support and the elimination of export subsidies. Among the WTO modalities, the market access commitments have had the most important impacts on grain marketing in Kenya.

The grain market reforms have been concentrated in the maize sector because of its strategic importance as Kenya's key staple food and a source of income for a vast majority of the population. Prior to the SAPs, maize markets in Kenya were strictly controlled by the government that enforced administratively determined uniform prices across regions and seasons. Maize marketing was monopolized by the National Cereals and Produce Board (NCPB), a state sponsored single-desk marketing board.

Kenya's maize sector reforms began in the mid 1980's and intensified through the 1990's resulting in a fully decontrolled market by the end of 1993. Thus, by the time of signing the URAA in 1995, the country was implementing the SAPs, and had substantially liberalized its grain markets. Currently, the government intervenes in the maize sector via two main policy instruments: the operations of the National Cereals and Produce Board (NCPB) and the application of import tariffs. The NCPB remains active in a liberalized market, but its role has been confined to the management of a national strategic grain reserve and a buyer of the last resort (Wangia et al, 2001).

However, the impacts of trade liberalization on Kenya's maize sector have proved to be controversial. On the one hand, farm lobby groups argue that increased market access lowers producer prices, which serves as a disincentive to production and thus a direct threat to food security (Mghenyi, 2006). Conversely, the elimination of food subsidies under the SAPs in Africa has been thought to exacerbate food insecurity for low income consumers (Jayne and Argwings-Kodhek, 1997). The controversy surrounding the impacts of trade liberalization in this sector has been compounded by the paucity of reliable information on producer and consumer price responsiveness.

Consequently, welfare evaluations are mired in controversy. While the potential gainers and losers have generally been identified, a review of the literature indicates that the magnitudes of these gains/losses and their distributional effects remain largely unexplored. Thus, there exists an empirical gap on these issues.

Purpose of the study

The purpose of this study is to examine and discuss the element of price in detail, both from the marketer's and from the economist's perspective. This study will also discuss the market structure, conduct and performance in a similar manner and the issues of market liberalization, free market regimes, food production and food security issues. The special focus of this study will be given to the discussion of the issues of maize as a major food crop in Kenya, its introduction to the country in mid last century and its role as an incomer earner to the majority of Kenyan small scale farmers. Price of maize will be discussed from both the farmer's and the consumer's perspectives and the role of NC&PB and government policy in the entire value chain.

Market liberalization

The signing of the URAA and the subsequent liberalization of agricultural trade has forced governments throughout the world to put more emphasis on understanding the consequences of agricultural trade reforms. In the literature, there is a broad agreement that a general liberalization of trade improves welfare (Jayne and Jones, 1997; Karp and Perloff, 2002). However, as Karp and Perloff (2002) argue, beyond that limited and unremarkable agreement, controversy exists about the distribution of benefits and about the effects of piecemeal policy reforms.

The four major components of maize market liberalization - trading rule changes, pricing reform, private market development, and reforms in NCPB operations - have affected the maize market in Kenya- Producers, processors, traders, consumers, and the NCPB all have experienced substantial changes. Uncertainty regarding the effects of liberalization, however, remains. Particularly, possible large shifts in maize supply and prices in the liberalized market are major concerns of policy makers.

Gordon and Spooner (1992) assess initial efforts at liberalization. Nyoro (1992) describes structures of maize production in various parts of the country and measures profitability of maize production under market liberalization. Omamo (1994) simulates a possible response of farmers to the reform in Siaya district. Argxwings-Kodhek (1992) and Sasaki (1995) explore private sector maize marketing. The articles ask if the private sector can take over one of the major activities of the NCPB, inter-district movement of maize. Sasaki (1995) looks at private sector storage and marketing activities of farmers under liberalization. Mukumbu (1992, 1994) examines changes in the milling sector and responses of large- and small-scale millers. Effects of these changes on urban poor consumers also are discussed. Ephanto (1992) portrays maize consumption patterns in Kenya, and projects consumption trends. Argxvings-Kodhek (1994) compares three alternative policies that are relevant for Kenyan maize market. Pearson (1992) lays out a conceptual framework for policy instruments of maize price stabilization. Nyoro (1994) calculates the import and export parity prices in Nairobi and suggests a price stabilization policy that allows private sector participation in the maize market. Finally, Pinckney (1988) measures trade-offs among the objectives of stabilizing maize prices, reducing fiscal costs, and avoiding imports.

Implementation of Maize Market Liberalization

Gordon and Spooner (1992) review the implementation of maize market liberalization. The limit on movement of maize across districts increased from 2 bags to 10 bags in 1988/1989, from 10 to 44 in 1991, and to 88 in 1992. These changes appear to have caused reduced marketing margins. Pricing reform was a neglected component of liberalization. As a result, low consumer prices ran down NCPB's stock of maize and the financial losses of the NCPB increased. The NCPB could not maintain market prices within the official producer - consumer price band- To develop the private market, the NCPB licensed over 2,000 Local Buying Agents to deliver maize to NCPB depots. Besides that, little was done to improve private markets. Regarding reforms of NCPB operations, the management structure of the Board was changed and the number of buying centers decreased from over 700 to less than 100. However, the number of permanent depots, much larger in size than buying centers, increased. Decreasing the number of depots was politically difficult and was not a priority of donor conditions.

Four priorities are identified for further liberalization. They are to widen the gap between consumer and producer prices, to reduce the number of depots, to monitor and analyze the market more effectively and respond to the market quickly, and to support the private market. The concrete actions for supporting the private market include public provision of market information, support for private storage, transport, and processing, credit provision for traders, rehabilitation or construction of market facilities, and education for traders in bookkeeping and import and export procedures.

Effects of Liberalization on Maize Production

Maize is grown in almost all parts of the country. Agro-ecological conditions, coupled with individual resource variation, result in large differences in yields among farmers. Large-scale farmers in Trans Nzoia and Uasin Gishu use high levels of intermediate inputs and their operations are capital intensive. Small-scale farmers, who produce 80% of the maize in Kenya, use much less intermediate inputs than large farmers and their operations are labor intensive with limited use of capital. Nyoro (1992) compares regional costs of maize production and derives 'se1f-sufficiency maize prices' to satisfy a target level of consumption ot`28 million bags of maize.

In general, small-scale maize production systems with favorable agro-ecological conditions in Meru, Kisii, and Narok have the lowest average costs, followed by large- scale production systems of Trans Nzoia- Uasin Gishu, and Nandi. Average costs are highest for small-scale production systems in marginal areas such as Kwale, Kitui, and Siaya. Comparison of profitability per acre, using 1991 prices, is based on average cost comparisons.

The data on production costs of various districts in Kenya yields 'average cost supply curves' in Nairobi, the nation's capital city with the largest population. The self- sufficiency prices that induce domestic production of 28 million bags of maize are derived under conditions of good, bad, and actual (i991) harvests. All prices lie in the import/export parity price band that is very wide due to high costs of transporting maize from foreign supply sources to the Mombasa port and from the port to Nairobi.

Uasin Gishu district is chosen to assess profitability of maize compared to that of wheat and dairy. In 1991, dairy had the highest profit per acre, followed by wheat. Maize was least profitable, accounting for only 51% of dairy profit- In 1992, however, maize prices soared and maize became most profitable, followed by dairy. Profit from wheat was lowest, only 29% of maize profit.

Omamo (1994) simulates maize farmer response (change in crop choice) to liberalization in the southern part of Siaya district using an agricultural household model. Mlost farmers in Siaya are small-scale and net buyers of maize, and the district is a net importer of maize. The most important alternative crop in the district is cotton. Despite the higher returns to cotton, maize dominates farming systems- Over 60% of Kenya's maize production occurs in regions with agro-ecological and demographic characteristics similar to those found in southern Siaya. Therefore, an analysis of farmer response in the district may have wider implications in Kenya.

Maize market liberalization, particularly the removal of movement control across districts, is supposed to reduce maize prices in deficit areas by integrating regional markets. With this assumption, deficit farmers (net buyers of maize) and surplus farmers (net sellers of maize) are expected to increase production of cotton and decrease production of maize. The reasons are different. For deficit farmers, lower maize prices would increase their purchasing power and lead to more reliable markets for food, which induces them to produce more cotton. Lower maize prices, on the other hand, would reduce profitability of maize for surplus farmers who subsequently choose to grow more cotton.


Gordon, Henry and Neil Spooner (1992). "Grain Marketing Reform in Kenya: Principle and practice," in Proceedings of the Conference on Maize Supply and Marketing under Market Liberalization, Nairobi, June 18-19, 1992

Jayne. T.S., and Kodhek-Argwings, G., (1997). "Consumer Response to Maize Marketing Liberalization in Urban Kenya." Food Policy 22(5): 447-58.

Mghenyi, W.E., (2006). Welfare Effects of Maize Pricing Policy on Rural Households in Kenya. Unpublished M.Sc. Thesis, Michigan State University.

Minto, N., and Goletto, F., (2000). Rice Market Liberalization and Poverty in Viet Nam. Research Report 114, IFPRI, Washington, DC.

Wangia. C., Wangia. S., and De Groote. H. (2002). "Review of Maize Marketing in Kenya: Implementation and Impact of Liberalization, 1989-1999." 7th Eastern and Southern Africa Regional Maize Conference, Nairobi Kenya.

World Bank (1994). Adjustments in Africa: Reform, Results and the Road Ahead. Oxford University Press, New York

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