Zambia intervenes in the maize market

Zambia intervenes in the maize market

On 25 August 2019, we learned that the Zambian government has placed a price cap of $199 per tonne on maize (approximately R3 023) and has justified its actions by noting its concerns over rising maize prices, which could disadvantage many poor Zambian households.

The maize prices have increased notably over the past couple of months due to a 16% year-on-year decline in Zambia’s 2019 maize production to about 2 million tonnes. While the market has reacted to this decline in harvest, Zambia should have enough maize to meet local demand this year, thanks to large carry-over stocks of almost 500 000 tonnes from the 2018/19 marketing year which has provided a buffer for the 2019/20 marketing year.

Zambia’s annual maize consumption is estimated at 2.1 million tonnes. This means that there will be sufficient supplies for domestic consumption, and also maize for the export market. The U.S. Department of Agriculture estimates that Zambia could have 100 000 tonnes of maize for the export market. The balance is the pipeline requirement or carryover stock for the next season.

Why am I giving this background? It is so you can appreciate that there is no maize shortage crisis in Zambia and if the market could have reliable information about events happening in the country’s maize sector, there wouldn’t be fears that end up driving up prices and leading to government interventions.

I am not even a fan of government interventions to markets, and on the Zambian side, I have made a similar point in LSE blog in 2016 when the government banned exports of maize because of worries of possible shortages.

In brief, I noted that policy uncertainty in Zambia remains a key concern, particularly around agricultural market regulation. The then Zambian Agricultural Secretary, Julius Shawa, had cancelled previously issued maize export permits and further insisted that market participants forget the export market and focus only on meeting domestic demand. This move was in response to concerns that maize exports were driving up domestic staple food prices. I noted then, and I still hold this view, that such government intervention does not encourage maize production and broader agricultural development.

Had the Zambian government invested a lot on market information systems which would enhance the price discovery methods and eliminate the fear of shortages of maize, even when that’s not the case, maize prices wouldn’t increase dramatically when there is a lower harvest.

Moreover, infrastructure is also another area that needs improvement so that when there are maize and other agricultural shortages, commodities could be transported to deficit areas timely and cost-effectively. This would lessen the fear of maize shortages.

Zambia needs to look no further for an example to emulate, South Africa is one such country that has a successful maize production.

For the immediate concern, it always helps to remember that the cure for higher agricultural commodity prices is “higher prices”. This is in the hope that higher prices would encourage production in the following season, which ultimately leads to lower and affordable prices. Whereas, placing a cap of commodities prices would drive away investment from the sector. In this case, why should farmers who are blocked from enjoying a fair value for their products continue to invest and expand their operations?

I’ve written this note for Fin24

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