The Effects of Government Maize Marketing Policies on Maize Market Prices in Kenya

Abstract

The Government of Kenya pursues maize marketing policy objectives through the National Cereals and Produce Board (NCPB) which procures and sells maize at administratively determined prices, and stores maize as a contingency against future shortages. A private sector marketing channel competes with the NCPB and prices in this channel are set by supply and demand forces. This paper estimates the effects of NCPB activities on the historical path of private sector maize market prices in Kenya between 1989 and 2004. Results provide important insights into the historical effects of the NCPB, and will provide useful input into deliberations on the appropriate role for the NCPB in the future. It was not possible to use a fully structural econometric model to estimate the historical policy effects because of data limitations in Kenya, which are typical of many developing countries. Instead we use a reduced form vector autoregression model (VAR) and show how policy simulation results can be obtained from a fairly parsimonious VAR that can be estimated with sparse data and imposes only minimal identification restrictions. Results show that NCPB activities have stabilized maize market prices in Kenya, reduced price levels in the early 1990s, and raised price levels by roughly 20 percent between 1995 and 2004. Because roughly 60 percent of Kenya's rural households purchase maize while less than 30 percent sell maize, the government's maize marketing board operations have transferred income from urban consumers and most small rural households to maize selling farmers.Kenya, income transfers, maize policy, price stabilization, VAR, International Development, C22, O2, Q13, Q18,