Effects of improving storage efficiency on the maize market in six major southern African countries: A spatial -temporal price equilibrium approach

Antonio F. T. S Cruz, Purdue University

Abstract

Maize plays a vital role in the agricultural economy and as a staple food in Malawi, Mozambique, South Africa, Tanzania, Zambia and Zimbabwe (SA6). Most of smallholder producers cultivate it for home consumption and for the market. In South Africa, large commercial farmers produce most of maize traded on the market. In poor crop years, maize market prices can raise up to five fold between harvest and the “hungry” period later in the marketing season, in Malawi, Mozambique, Tanzania and Zambia. This increase in prices represents a burden for both smallholder producers and consumers. Small scale producers tend to sell their maize immediately after harvest, at low prices. They look for scarce monetized income, in order to finance urgent consumption or investment needs. Smallholder producers lose the opportunity to sell grain later in the marketing year at higher prices. Instead, many are confronted with much higher prices when looking for buying it back from the market. Differences in storage costs are hypothesized to be a source of comparative advantage in intra-SA6 trade. It could explain the current pattern of trade, where the surplus maize producer South Africa is a significant maize provider to other SA6, due to some combination of lower opportunity cost of capital, superior storage technology and enhanced opportunities for diversification of risk. The mentioned hypothesis is examined through a spatial-temporal price equilibrium model. Given differences in the opportunity cost of capital, as measured by the real interest rates, a mixed complementarity problem version of the model is applied. The analysis confirms that differences in storage costs is a significant determinant of comparative advantage and hence the pattern of production and trade within SA6. When these countries liberalize trade, increase in exports from South Africa to other SA6 is relatively small. A key finding is that a general SA6 reduction in the cost of storage, which is largely the cost of capital, would lead countries like Tanzania and the central region of Mozambique—potential surplus maize producers—to increase maize exports to other inland and deficit maize producer countries, improving welfare of smallholder producers and consumers.

Degree

Ph.D.

Advisors

Arndt, Purdue University.

Subject Area

Agricultural economics

COinS