2 The price paid for farmers' produce

Main points in Chapter 2
The price paid for farmers' produce

What influences prices under the new system?

• Supply, which is influenced by …

  • How much maize farmers produce
  • How quickly they need cash
  • How much storage they have

  • The price they are offered for their maize

• Consumer demand, which is influenced by …

  • The price. A high price will make consumers reduce purchases and be more careful with what they do buy. A low price will encourage increased consumption, although consumers can only eat so much maize meal

• Trader demand, which is infuenced by …

  • Production levels in other parts of the country. Traders will prefer to buy in easily accessible areas. Demand for maize in other areas will thus be low until there is no more left in easy-to-reach areas
  • Production levels in neighbouring countries

Traders prefer to go where roads are good…
… and will pay higher prices

A trader will be happier to make a visit if he can collect sizeable quantities and doesn't have to visit farmers individually.

• Location

  • Distance from the market
  • Condition of the roads
  • Quantity of maize available

  • Extent of competition between traders

• Time of the Year

  • Seasonal price pattern is influenced by …

    • farmers' cash needs after harvest
    • production in urban gardens
    • suitability of on-farm storage
    • size of total harvest
    • storage by traders

    • forecasts of following year's production

• Information

  • The extent of information available is an important influence on prices

• Quality

  • Better quality maize at the right moisture content will get better prices

THE OLD SYSTEM

Under the old system, the price paid by the marketing board for maize was set by the government. In most countries this price had two important characteristics: it was the same throughout the country and it was the same throughout the year.

Paying the same price throughout the country was seen as being fair to all. However, the problem with this policy was that it often encouraged farmers in remote areas to grow maize when they should have grown other crops which cost less to transport. Transporting large quantities of maize over distance was one reason why marketing boards ran into financial difficulties.

Paying the same price throughout the year meant that farmers were keen to deliver their maize to the marketing board as soon as possible. They had no incentive to store grain until the price went up. Farmers only invested in stores large enough to hold their families' own consumption needs over a year or so. They did not store maize meant to be sold. Now that the system has changed farmers are in a difficult situation because most do not have enough adequate storage, particularly for hybrid maize. As is discussed later in this Guide, hybrid maize requires a different kind of store because it is best stored shelled, not on the cob.

THE NEW SYSTEM

Under a liberalized marketing system, the prices which traders are prepared to pay vary throughout the country. This reflects the different costs that traders have to meet in getting the maize from the farmer to the market. Under the new system, the price will almost certainly rise over the season. Prices can be expected to be lowest immediately after harvest and then go up as supplies become scarcer. Thus, under the new system there is no such thing as a maize “price.” There are many prices and these may even vary within the same area, with some traders offering more than others at any particular time.

Under the old system governments usually tried to fix the maize price so that it was greater than the cost of production. This was in order to give the farmer a reasonable return for his labour. Under the new system, however, when there is a large surplus farmers may sometimes have to sell their maize for less than the cost of production. This is a problem faced by farmers throughout the world when prices are decided by market conditions.

INFLUENCES ON PRICES

There are a number of factors which influence the prices of products. These include:

• supply and demand;
• location;
• time of the year;
• information.
• quality;

Supply and demand

Prices of most products generally respond to both the quantity supplied and the quantity demanded of that product. In theory, when prices go up there will be a fall in demand and an increase in supply. In time, the amount supplied at a particular price will come to equal the amount demanded.

In the case of staple foods such as maize the situation is not so straightforward. Farmers do not, in the short term, have much control over how much of a product is produced. They can, for the following season, reduce the amount of maize they produce by using less fertilizer, not planting such a large area, growing other crops, or do just the opposite by increasing maize output. For any particular harvest, however, the prices they receive are very much influenced by the total amount produced in the country and region which, in turn, is mainly influenced by the weather.

Quantities of maize supplied by farmers to the market at a particular time will depend on several factors, including:

• how much maize they have produced. When the harvest is good they will clearly have more bags for sale;
• how much cash they need. Farmers often have to sell some of their maize immediately after harvest to pay back loans and raise much-needed cash. How many bags each farmer sells will depend on the price and on how much cash he needs;
• how much storage they have. Farmers may be unhappy with the price offered and want to store their maize until later in the year, in the hope that the price may go up. However, they may not have suitable storage available to them, or storage may be more expensive than the benefits of storing (see Chapter 5);
• the price. If the price is high farmers may try to sell all of their produce as quickly as possible, so increasing the amount supplied to the market in the short run. If the price is really high, some may even make the mistake of selling maize which they should be keeping for their family's consumption later in the year;

Demand for maize which farmers have available to sell will, likewise, depend on a range of factors:

• if the market price is high, consumers will reduce their purchases of maize meal. This may simply mean eating less. But it can also mean that consumers will be more careful about how much they cook, and eat more or less the same quantity but waste less. It can also mean eating less maize meal and eating more of other products, such as bananas, roots or tubers. Consumers may also respond to higher prices by eating lower qualities of meal. As it takes more unmilled maize to produce a bag of super-sifted meal than it does to produce a bag of unsifted meal, this will also reduce the quantity of maize demanded;
• if the market price is low, consumers will increase their consumption of maize meal (see Figure 2). But a person can only eat so much meal, so consumers who can already afford adequate quantities will not increase their consumption by much. The demand for staple foods, such as maize, is said by economists to be relatively price inelastic. That is, demand does not change very much in response to price changes;
• demand by traders for maize produced by farmers in one area will depend on how much farmers in other areas have to sell. For example, if the harvest in the south of Malawi is excellent, traders will be able to buy most of the maize they need to supply Lilongwe and Blantyre in the south, and will be less likely to visit the north of the country to buy maize;
• similarly, demand will depend on production levels, and hence prices, in other countries of the region. If production in one country is poor then farmers might reasonably expect prices to rise as traders compete for the limited crop available. However, if a neighbouring country has had a bumper crop larger traders may be able to get much of their requirements from that country. The price they will be prepared to pay locally will then be related to the cost of the maize in the other country and the differences in transport costs.

It is important to stress that demand is a commercial concept and is not the same as need or requirements. For example, consumers in a country may each need to consume the equivalent of 150 kg of maize a year in order to obtain the required level of nutrition. But many may not be able to afford 150 kg. Effective demand for maize represents what people can afford to buy, together with anything the government may buy in order to feed poorer people. Demand may therefore be significantly less than 150 kg per capita.

Location

While the supply and demand of maize will influence the general level of prices and the price trends, the actual price at which the farmer can sell his maize will depend on other factors as well — location is one of them.

Some reasons for this are discussed below:

• distance from the market. It will cost a lot less to transport a bag of maize from a farm which is 20 km from a mill than from one which is 200 km from a mill. Therefore, farmers who live close to major markets, that is towns and cities, will almost always receive higher farm-gate prices.
• condition of roads. Those maize farmers who live close to a main road which is in a good state of repair will earn more for their maize than farmers living the same distance from a city but at the end of a minor road in very bad condition. Transport costs will be much lower and therefore traders will prefer to visit villages close to a main road, and will be able to pay more.
• quantity of maize available. Transport costs per bag of maize usually go down as the size of the truck used increases. Locations where farmers have available sizeable quantities can attract larger trucks. With lower transport costs, traders can pay more. Moreover, an important cost for traders can be the time it takes them to buy maize. The quicker the trader can buy a truckload, the quicker he can sell the maize and the quicker he can return to the rural areas to buy more maize. The more often traders can buy and sell, the greater their profit, so they will pay higher prices in areas where it is easier to buy maize in suitable quantities, for example at local collection points or local markets.
• the amount of competition between traders. Where there is a lot of maize available there are likely to be several traders trying to buy it. For the reasons indicated above, they will want to maximize their purchases as quickly as possible and may increase their prices in order to persuade farmers to sell to them. However, in a situation where there is not much grain available, there will be little incentive for traders to go to a village. If only one or two traders visit a village then there will be little competition and the prices paid will be much lower.

Time of the year

While the level of prices will vary every year according to the general level of price inflation and the size of the harvest, they will almost always follow the same seasonal pattern. For a country which begins its harvest in April or May, it can be expected that consumer prices will be rising in the December to March period. In April they may stay more or less the same until the end of the month and then prices will begin to fall as a lot of new maize becomes available. Prices will continue to fall until June and will start to rise slightly in July, rising more steeply towards the end of the year.

The consumer price mirrors the price paid to the farmer. Normally, the farmer prices rise and fall a couple of weeks before the consumer price does as it takes some time for changes in the price of the raw material (maize) to filter through into changes to the maize meal price. However, this may not always be the case. A sudden shortage in the city could lead to a meal price rise which would only later result in higher maize prices to farmers. Factors affecting the seasonal price pattern are:

• immediately after harvest farmers need to sell some produce to raise cash. They will try to sell at least as much maize as they need to sell in order to raise enough cash to meet their needs;
• although prices go down, demand is, as we have seen, relatively inelastic. Thus there will not be a major increase in consumption and prices are unlikely to be forced upwards unless there is strong demand in neighbouring countries;
• many urban consumers have small gardens of their own and will be able to grow enough to meet their maize needs for at least a few months. Others will receive maize from relatives living in nearby villages;
• a few months after harvest farmers realize that the storage they have is not good enough for storing maize during the rainy season and they sell much of the remainder of their crop. They also worry that no traders will visit their village during the rainy season;
• some months after harvest, traders, who will be continuing to try to buy as much as possible, will find it increasingly difficult to obtain maize and will raise their prices as a result. Clearly, the extent to which prices go up will depend on the size of the harvest. Price rises may be very small when there is a large surplus crop;
• if traders feel that the price of maize is likely to go up a lot they may try to buy maize cheaply at the beginning of the season and store it until the price goes up enough for them to sell at a profit. This is not a wide-spread practice on domestic markets at present because most smaller traders lack the money to store large quantities. However, large trading companies also operate in Africa and these may buy produce early in the season for subsequent export;
• if farmers feel that the price of maize will go up they may decide to store it and wait for higher prices. In countries which have only recently changed their marketing system this is also not a widespread practice, partly because farmers do not have suitable stores but also because they still have an insufficient understanding of the way the market operates;
• the extent to which prices increase towards the end of the season will depend on the price of maize in neighbouring countries. If imports are possible, the price will only go as high as the price in the next country, plus transport costs;
• finally, expectations of a good harvest will permit farmers to sell the stocks they have kept for family use, if they can produce enough to replace these. This may lead to a stabilization of or reduction in prices even before new harvest becomes available.

Information

The extent to which various kinds of market information are available has an important influence on prices.

Collecting price information

Examples of information and how it can be used are:

• if farmers know what prices traders are paying in their area they are better able to negotiate with the traders to obtain good prices;
• if farmers and traders know that the harvest has been bad in many parts of the country they can then make a decision to store maize for some months, in expectation of price rises later in the season;
• if farmers and traders know what the prices are in neighbouring countries they can then make informed guesses about how high the prices in their country are likely to go.

Quality

In the days of marketing boards there usually existed standards relating to moisture content, damaged kernels and foreign-matter content. One of the factors contributing to the problems of the boards was that these standards were sometimes inadequately applied, if at all. Under the private marketing system there are rarely formal standards for domestic trade, although standards remain very necessary for international trade.

Although there may be no formal standards, traders and millers are still very aware of quality and, in effect, apply their own, unofficial standards. This may explain why they may offer one price to one farmer and a different price to another farmer in the same village.