Mealie Meal Subsidy removal analysed by Kampamba Shula

The Government of the Republic of Zambia has resolved to remove the subsidy on Mealie meal.

Agriculture and Livestock Minister Bob Sichinga has announced that cabinet has approved the removal of Maize subsidies He said if the current subsidy was to be maintained, it would mean FRA would continue to be in a loss making position and for it to survive it had to stop depending on Government to support such subsidies. Mr Sichinga said currently the FRA had been buying maize at KR65 and selling it to millers at KR60, with a resultant loss of KR5 for every 50 kg bag sold or KR100 per tonne. He said the FRA would this farming season purchase 500, 000 tonnes of maize and any maize that would be left after the private sector buys the maize from the farmers (Lusaka Times, 2013).
In 2010 and 2011, Zambia achieved record maize harvests of 2,795,483 and 3,020,380 metric tons respectively (Nkonde et al. 2011). Towards the year of elections (2011), the FRA purchased roughly 1.5 million metric tons of maize that it could not fully store, mainly due to inadequate storage facilities. Further, the state could not sell its surplus maize profitably, either in the region or in international markets due to the high price at which it purchased maize locally (Mason and Myers 2011). Moreover, regional transport capacity constraints have limited the volumes that Zambia could export even at a financial loss. Hence, in mid- 2011, and leading into national elections later in the year, the country faced the dilemma of how to offload the large and partially deteriorating maize stocks from the 2010 harvest to make room for incoming maize purchases from the 2011 harvest. Starting in September 2011, the government via FRA offloaded maize to millers at US$140 per metric tonne (roughly 35,000 kwacha per 50kg bag). After accounting for the FRA’s marketing costs and storage losses on top of the 65,000 kwacha per 50kg bag purchase price, it is likely that the FRA lost at least 85,000 kwacha ($340 per tonne) on every bag traded during this period. Further, the government continued to subsidize maize exports within the SADC region at a loss despite the country having to incur high production costs. Thus, while the FRA was spending K65,000 (roughly US$260 per metric tonne) to purchase maize from farmers and incurring additional marketing and storage costs of at least $100 per tonne, it was selling the same maize to other countries within the region at a cost of not more than US$170 per tonne (Lusaka Times 2012).
In September 2011, the Government of Zambia started heavily subsidizing the price of maize held by the Food Reserve Agency (FRA) to maize millers. The expectation was that, by receiving maize at subsidized prices, millers would pass along the subsidy to Zambian consumers in the form of lower retail maize meal prices (Jayne, September 2012).
Over the eleven-year period from 2000 to 2011, inflation-adjusted retail prices for breakfast meal have declined. However, after the subsidy was conferred to millers in September 2011, the mill-to-retail marketing margins have increased significantly. Retail maize meal prices have remained virtually constant since September 2011. These findings indicate that very little of the treasury costs incurred in providing FRA grain to millers at below-market prices have benefited urban consumers.
Moreover, the FRA maize subsidies are only conferred to some millers, not all of the maize millers in Zambia. Millers that did not receive the FRA subsidized maize, in particular the informal and small/medium-scale millers were greatly disadvantaged because they could not acquire maize grain at as low a price as millers receiving subsidized maize from the FRA. This has led to an unbalanced playing field between the millers who benefited from the FRA subsidized maize grain and those who did not. Such an un-level playing field will negatively affect the future competitiveness and market structure of Zambia’s maize milling industry.
Policy Implications
First, because the FRA maize subsidies to millers have so far not been transmitted to Zambian consumers, policy makers might reconsider the policy of providing maize to selected millers at highly subsidized prices, if the aim of doing so is to reduce the price of maize meal to consumers. Second, selective subsidies to particular millers disadvantage other millers plus many informal small-scale millers who are not able to receive the subsidy. Over time, this is likely to entrench the market share of the selected millers having access to subsidized maize supplies, force non-selected millers out of business, and adversely affect the degree of competitiveness within the milling industry. Third, for the Government to achieve its goal of lower maize meal prices to help poor urban consumers, policies should be considered that encourage rather than disadvantage the informal and small/medium-scale food millers and retailers, on whom a large share of Zambian consumers rely.
Conclusions
Research findings agree very well with Chapoto and Jayne (2006) as well as Kuteya and Jayne (2011) that maize meal prices in real terms have been declining over time. However, the rate at which these prices were decreasing after state intervention was less than that of maize grain. As such, the impact of this costly move was not felt by consumers. The mill-to-retail market margins increased tremendously immediately after FRA offloaded maize grain to commercial millers at 400 kwacha per kilogram. These maize grain subsidies which drained the state treasury appear to have benefited large millers alone since the move did not reduce mealie meal prices at the same rate as maize grain from FRA. If government’s objective from these subsidies was also to reduce maize meal prices for the benefit of consumers, it does not appear to be supported by the econometric model results (Jayne, September 2012).
Maize subsidies are perceived as government’s indirect support to commercial millers. But it is a well-documented fact that even small millers (hammer mills) play a major role in ensuring competition in the grain milling industry in the country. Therefore, if the playing field is not leveled, their activities are hampered by selective subsidies and as a result lessening competition in the grain milling industry. The end results are high marketing margins between wholesale maize grain and breakfast meal retail prices. The foregone analysis indicates that selective subsidies conferred to certain players in the market do not necessarily have desired consequences when the market is not fully competitive. If the market were competitive, then subsidies conferred to millers would be passed along fully to consumers, which appear not to be the case in Zambia. Subsidies to maize millers have instead proved to be a drain on the government treasury without trickling down anticipated benefits to intended beneficiaries – urban consumers in this case.


References

Jayne, A. N. (September 2012). Is the Government of Zambia’s Subsidy to Maize Millers. Lusaka Zambia: Indaba Agricultural Policy Research Institute (IAPRI).
Lusaka Times. (2013, May 15). Mealie Meal prices set to go up as Government announces removal of Maize subsidies. Retrieved May 16, 2013, from Lusaka Times: http://www.lusakatimes.com/2013/05/15/mealie-prices-set-to-go-up-as-government-announces-removal-of-maize-subsidies/
Nkonde, C., N.M. Mason, N.J. Sitko, and T.S. Jayne. 2011. Who Gained and Who Lost from
Zambia’s 2010 Maize Marketing Policies? FSRP Working Paper No. 49. Lusaka: Food
Security Research Project.
Mason, M.N. and J.R. Myers. 2011. The Effects of the Food Reserve Agency on Maize
Market Prices in Zambia: Are There Threshold Nonlinearities? FSRP Working Paper
No. 60. Lusaka: Food Security Research Project.
Chapoto, A. and T.S. Jayne. 2006. Trends in Breakfast Meal and Maize Marketing Margins
in Zambia. FSRP Policy Synthesis No. 14. Lusaka: Food Security Research Project.
Kuteya, A.N. and T.S. Jayne. 2011. Trends in Maize Grain, Roller, and Breakfast Meal
Prices in Zambia. FSRP Policy Synthesis No. 47. Lusaka: Food Security Research
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