Food relief for vulnerable groups is important in times of deficit. For the remainder of the population, well functioning grain markets can save lives during times of food shortfalls. This note illustrates how predictable Government behavior in the market can improve markets’ ability to meet the needs of consumers.food security, food policy, Zambia, maize, Agricultural and Food Policy, Marketing, Q18,

Jayne, Thomas S.

Mwiinga, Billy

Nijhoff, Jan J.

Shaffer, James D.

English

Research Papers in Economics

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MARKETS NEED PREDICTABLE GOVERNMENT ACTIONS TO 
FUNCTION EFFECTIVELY:   THE CASE OF IMPORTING 
MAIZE IN TIMES OF DEFICIT
J.J. Nijhoff, T.S. Jayne, Billy Mwiinga, Jim Shaffer
Background:  Food relief for vulnerable groups is
important in times of deficit. For the remainder of the
population, well functioning grain markets can save
lives during times of food shortfalls.  This note
illustrates how predictable Government behavior in the
market can improve markets’ ability to meet the needs
of consumers.
If grain markets in Zambia functioned efficiently, the
wholesale price of maize would not exceed the cost of
importing maize from South Africa for any sustained
period of time.  If local prices rose above the cost of
imports, then traders could make profits by importing
grain from South Africa (or other neighboring countries
with surplus maize).  However, when maize grain
wholesale prices in Lusaka are compared with estimated
South Africa maize import prices, in both the 1998/99
and 2001/02 marketing seasons, domestic prices rose
well above the cost of imported maize for several
months.  Consumers paid higher prices for their staple
maize meal than would have occurred if markets
performed efficiently. This would only occur if the
commodity was in short supply. Why didn’t traders
import maize during these periods?
Causes of import marketing problems, the example
of the 2001/2002 marketing season:   In July 2001, the
national crop forecast and food balance sheet suggested
a commercial import requirement of 200,000 tonnes of
maize. In August 2001, Government announced its
intention to arrange the importation of maize to be sold
at a subsidized price,  and initiated a tender process to
select importers. It made arrangements with 16 Zambian
maize millers (as buyers) and a number of commodity
trading firms (as sellers) to import 200,000 tonnes of
white maize over the period October 2001 through April
2002. However, starting in November, shortages were
evidenced by many people queuing outside shops to buy
mealie meal and local maize prices rose well above the
cost of importing from South Africa. 
Government behavior affects private trader
behavior: While import arrangements were announced
in August 2001, maize imports of substantial volume did
not commence until December 2001 and January 2002.
Between August and December 2001, marketing actors
had information that Government and millers were
working out financing arrangements and other
modalities to import maize to be sold at below-market
prices in Zambia.  During this period, most private
companies refrained from importing commercial
supplies, based on the knowledge that subsidized
supplies were coming into the country under the
Government import program to be sold at below market
prices, and that commercial imports would be unable to
find buyers in this situation.
However, because of financing problems, imports under
the Government program were delayed.  By the end of
May 2002, only 130,000 tonnes had been imported
under these arrangements, not the intended 200,000
tonnes.  Late and insufficient imports under the
Government program had two major effects:
(1) Fewer private market participants:  Because
Government arranged to supply selected milling firms
with imported maize at a landed cost of $160/tonne
1, this
ensured that these millers would have a major advantage
in selling their products compared to other millers and
traders who faced commercial import costs in the range
of $220-260/tonne. The risk to firms not awarded
preferential import subsidies were great as the firms
selected to receive the subsidy could undercut the rest of
the market by selling at roughly US$70-100/tonne less.
This situation effectively froze out of the market all
traders except those chosen under the Government
program.
(2)  A temporary import market paralysis  causing
maize grain (and mealie meal) shortages and high prices:
During the 3-4 months between the tender
announcement in August 2001 and the arrival of the first
substantial imported volumes in December 2001, local
supplies dwindled and maize prices rose sharply,
reflecting scarcity of the commodity caused by an
import gap, and the expectations that subsidized
1
 For contracts signed after January 2002, the subsidy was reduced and the
into-mill price became US$200/tonne.FSRP POLICY SYNTHESIS  No.  6
Page 2
Government imports were  imminent.  Despite the fact
that there was a widely recognized shortage of maize
and mealie meal, the anticipated Government-led
importation seemed to have effectively paralyzed the
market: it discouraged private traders who were not
selected to import, and the selected firms themselves
were waiting for supplies to arrive and did not arrange
any complementary imports.
Direct or indirect subsidies on maize imports
discourages commercial imports:  Subsidies have been
in two different forms. First, direct subsidies on
imported maize were provided to millers during the
2001/02 season. Second, indirect subsidies were
provided during the 1998/99 marketing season through
exchange rate depreciation:  the Food Reserve Agency
imported maize for sale to millers and kept its Kwacha
selling price constant during the remainder of the
season. However, as the Kwacha depreciated, the dollar
value of the maize sold to millers decreased and was
never adjusted. Hence, FRA provided an indirect
subsidy equal to the Kwacha/US Dollar exchange loss.
In both scenarios, maize was sold at less than
commercial prices.  As a result, in both scenarios
Government gave selective advantages to buyers that
were given access to its subsidized maize supplies,
effectively pushing all other millers and traders out of
the market.
Import subsidies on imported maize grain provided
to large millers may not benefit the consumer: The
2001/02 maize shortage resulted in rationing of maize
meal and the subsidy that Government conferred on
maize importation was not passed through to consumers.
Despite the subsidy on maize and subsequent price
reductions of maize grain, breakfast meal prices
remained at high levels throughout 2002. While maize
grain market prices dropped from US$350/t in January
2002 to US$160/t in May 2002 (a decrease of more than
75%), breakfast meal prices in Lusaka declined by only
15% during the same period. This would indicate that
much of the subsidy was conferred to millers or retail
traders who bid up the price in response to the local
scarcity of mealie meal that persisted, indicating that the
imported volumes were insufficient to meet the entire
shortfall. 
If maize import arrangements are to benefit low-
income urban and rural consumers, alternative
market channels should be explored: The observed
high mealie meal prices during a maize deficit season,
coupled with the non-availability of maize grain in the
public markets, would strengthen the argument for
making Government-imported maize grain directly
available to consumers and small retailers, not
exclusively to large millers. As presented in FSRP
Policy Synthesis No. 5 (October 2002), low-income
consumers stand to benefit a great deal from having
access to maize grain for grinding at the hammer mill,
rather than having no choice but to purchase expensive
industrially milled mealie meal.
Implications for the current 2002/03 maize shortage:
Maize meal prices in late 2002 are substantially higher
than normal because of the regional Southern African
crisis.  In Lusaka, real maize grain retail prices in
October 2002 were double their levels 12 months earlier.
This implies that maize grain and mealie meal are
becoming scarce and that low-income consumers are
already becoming dependent on more expensive
industrial mealie meal. How should Government
respond?
Options for Consideration:
(1)  Import arrangements, either in the form  of
subsidies for selected market participants or in the
form of direct Government/FRA imports, should only
be announced if and when the necessary resources are
in place to cover the entire announced import
requirement.  Uncertainty over Government’s actions in
the market will compound the risks that private traders
face in importing supplies.  A key goal of Government
is to add stability and clarity to the market, so that
traders can respond to opportunities.  Clear statements
about Government intentions backed up by timely action
will help in this regard.
(2) If Government is uncertain that the required
resources will be available to meet its intended import
target, it is in the country’s interest to encourage
private sector imports by clearly announcing the sale
of any maize imported by Government at full
commercial US Dollar-based price, covering all import
costs. The private sector is unlikely to arrange
commercial maize imports to supplement Government
efforts unless there is a guarantee that Government will
not sell below commercial market prices. The sale of
Government imports can be through a series of open
tenders with full import cost as the reserve price.  The
cost to consumers could actually be lower under this
approach than if Government attempts, and fails, to
import and sell sufficient quantities at subsidized rates.
(3)  If maize import arrangements (subsidized or not)
are to benefit consumers, maize grain should not be
available exclusively to large mills, but also to small
scale traders, hammer mills and consumers.
_____________________
The Food Security Research Project is a collaboration between the
Agricultural Consultative Forum, the Ministry of Agriculture and
Cooperatives, and Michigan State University’s Department of Agricultural
Economics, and is funded by the United States Agency for International
Development in Lusaka.  The Zambia FSRP field team is comprised of  J.
Govereh, B. Mwiinga, J.J. Nijhoff, G. Tembo, and B. Zulu.  MSU-based
researchers in the FSRP are C. Donovan, T.S. Jayne, D. Tschirley,  M. Weber,
E. Knepper, and A. Chapoto. 
Please direct all inquiries to the In-Country Coordinator, Food Security
Research Project, 86 Provident Street, Fairview, Lusaka; tel: 234 539; fax:
234 559; e-mail: fsrp1@msu.edu.

Markets Need Predictable Government Actions to Function Effectively: The Case of Importing Maize in Times of Deficit

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