Crop competitiveness and producer prices

65. In addition to technological competitiveness, policy makers need to examine the elements of cost-competitiveness through a thorough analysis of agricultural price policies and their effect on farm income. This analysis is crucial for deciding whether and where new investments (both public and private) should be made in production, processing and research fields. In general, however, country data on average production costs are unobtainable. Therefore, a rigorous analysis of the cost-competitiveness differential between African producers and their competitors, using a more sophisticated methodology based on econometric modelling, is limited.

66. To overcome the deficiency in production-cost data, producer prices have been used as a proxy indicator for assessing crop cost-competitiveness at the present technological level. This was done because producer prices are the observed revenues per tonne received by farmers, which incorporate the underlying production costs. Owing to a lack of historical and more recent data on producer prices for crops in FAOSTAT, the analysis of producer and world prices was limited to the period 1991-1995. For crops that are exportable, world prices (expressed by FOB export prices) represent the benchmark that governments consider stimulating domestic production and exports. The difference between producer prices and world prices incorporates the effects of a host of domestic factors that simultaneously impact crops and cause producer prices to diverge from world export prices.

Empirical examination of the producer - world prices differential

67. The results of the empirical examination of the producer - world prices differential between African countries and their major competitors (in both absolute and relative terms) are shown in Table 17. This examination was made only for crops and countries for which FAOSTAT had times-series, producer-price data.

68. The price differential analysis indicates African producers of cocoa, coffee (except Liberia), groundnuts (except Gabon), maize (except Namibia, South Africa, Kenya, Somalia and Ethiopia), olives, rice (except Gambia and Liberia) and sunflower have received only a small fraction of the world prices. Cassava producers in all Coastal West African countries, except Liberia and Nigeria, have also been 'taxed' to various extents. Although their competitors have obtained a price that is inferior to the world price, most of these competitors have been much more profitable mainly owing to their higher productivity and economies of scale in production, marketing and trade.

69. The 'taxation' level, however, varies widely among crops and countries, as illustrated below.

• Although the cocoa producers in Cameroon and Côte d'Ivoire have received almost the same fraction of the world price (39 percent) as Indonesian competitors, they are more heavily 'taxed' than Malaysian producers (10 percent). The producer price for Sierra Leone was lower than the world price by 85 percent.

• Coffee producer prices in Guinea, Cameroon, Central African Republic and Côte d'Ivoire were lower than the world price by 69 percent, 58 percent, 81 percent and 41 percent, respectively. Their competitors in Brazil and Colombia also received less than the world price, but with prices lower only by 34 percent and 18 percent, respectively.

• The Indian and American producers of groundnuts are taxed to a lesser extent than their African competitors from Burkina Faso, Gambia and Mali (which received about 80 percent less than world price).

• The olive producers of North Africa also received a much lower price than the world prices (by 70 percent), while the olive producers in Italy and Greece have received only slightly less than the world price (only 16 percent and one percent less, respectively).

• The millet producers in Sahel West Africa and Chad have been taxed less than their Indian competitors. In some countries millet farmers have received more than the world price. Producer prices of millet outpaced the world price in Niger (by 61 percent), in Gambia (by 17 percent) and in Senegal (by 6 percent).

• The major producers of maize from Southern Africa (Malawi, Zimbabwe and Zambia) were taxed to varying extents, while those from Namibia, Lesotho, Kenya, Somalia, South Africa and Ethiopia received more than the world price.

• Cassava producers received, in some countries, a price below the world level (68 percent less in Ghana and 56 percent in Gambia) and were taxed almost to the same degree as their competitors. However, producers in Central Africa have been subsidized, receiving 2 to 4 times more than the world price in some cases.

• The rice-producer prices in Egypt, Chad, Madagascar and Mauritania have been comparable (44 percent lower than world prices) to those in Thailand, the United States and Vietnam. Only Italy, a major producer and exporter of rice in the EU, subsidizes its producers by keeping their prices 116 percent higher than world prices. Producers have also received prices above the world level in Liberia (65 percent) and Gambia (19 percent).

• Wheat producers in main competitor countries (Australia, Canada and the United States) have been taxed to various extents. In contrast, the wheat producers in North Africa have exceeded the world price in Algeria (by 164 percent), Morocco (by 114 percent), Lesotho (by 79 percent) and Ethiopia (by 56 percent).

Table 17. Producer - world prices differential, in US$ per metric tonne (MT), average 1991-1995, for selected African countries, major competitors and selected crops

Estimated based on data on producer prices and world prices (1991-1995) expressed in US$ per Metric Tonne (MT), extracted from FAOSTAT (2002) and IMF Statistics on annual nominal exchange rates (1991-1995). Notes: *Dried cassava.

Concluding remark: low cost-competitiveness due to prohibitive transaction costs

70. The producer - world price divergence analysis confirmed that in most cases African producers receive very little compared with both the prevailing world price and their competitors. Given that world prices are higher, it can be asked why African farmers do not expand production and exports. The reason may be that African farmers are taxed by their inadequate business environment in which they operate and trade. As producer prices are the result of concurrent domestic conditions, including government policies and transaction costs, a variety of reasons contribute to inefficient production and factor allocation in Africa. These include: (a) lack of a functional basic transport infrastructure including roads, ports and airports; (b) the precarious state of input/output distribution channels; (c) inadequate institutions providing competitive services and market and technological information to farmers; and (d) distorting policies (Box 3). All these factors have caused producer prices to diverge from world prices and have had a long-lasting adverse impact on the farming sector's overall economic and trade performance.

Box 3. Factor-allocation distorting policies

71. Because there may be little hope in gaining a sizeable global market share rapidly (especially for staple food products: cassava, millet, sorghum, maize, pulses, rice and animal products), the stimulation and development of trade among African countries may be a better way to exploit the continent's comparative advantage.