Marketing Boards, Fertilizer Subsidies, Prices, & Smallholder Behavior: Modeling & Policy Implications for Zambia

MARKETING BOARDS, FERTILIZER SUBSIDIES, PRICES, & SMALLHOLDER BEHAVIOR: MODELING & POLICY IMPLICATIONS FOR ZAMBIA By Nicole Marie Mason Grain marketing boards (GMBs), strategic grain reserves (SGRs), and fertilizer subsidies have experienced a renaissance in eastern and southern Africa over the last decade. Relatively little is known about how the re-emergence of GMBs/SGRs as major players in maize markets in the region is affecting smallholder behavior and maize market prices, and although the revival of fertilizer subsidies has received considerably more attention from researchers and policymakers, knowledge gaps remain. The dissertation consists of four essays and the empirical work focuses on the case of Zambia. The Government of the Republic of Zambia (GRZ) has become increasingly involved in maize marketing in recent years through the Food Reserve Agency (FRA), an SGR/GMB. The FRA buys maize from smallholders at a pan-territorial price that typically exceeds wholesale market prices in major maize-producing areas. The scale of GRZ targeted fertilizer subsidy programs has also increased since the late 1990s. The first essay develops a conceptual model of crop production decisions in the context of dual maize marketing channels (government and private sector) when there is uncertainty about the prices to be paid by both channels and about whether one of the channels will be available come harvest time. The empirical analysis is based on a three-wave, nationally representative household-level panel data set. Estimation results suggest that increases in past FRA maize purchases in a household’s district and in the effective (i.e., farmgate) FRA maize price faced by the household at the previous harvest do not have statistically significant marginal effects on the household’s maize quantity harvested or total crop output. The second essay estimates the effects of FRA maize buying and selling price policies and net maize purchases on equilibrium maize market prices in Zambia using a vector autoregression model (VAR) and monthly data from July 1996 through December 2008. Threshold tests generally favor a linear VAR over a threshold VAR. Simulation reults suggest that FRA activities raised mean wholesale maize prices in Lusaka and Choma by 17% and 19%, respectively, between July 2003 and December 2008. The Agency’s activities also reduced the variability of maize market prices throughout the period of analysis. The third essay uses the household-level panel data and constituency-level election data to estimate the effects of past election outcomes on the allocation of GRZ-subsidized fertilizer. Households in constituencies won by the ruling party (the Movement for Multi-Party Democracy, MMD) in the last presidential election receive an estimated 25.6 kg more subsidized fertilizer than households in constituencies lost by the MMD. Furthermore, households in constituencies won by the MMD receive 0.7 kg more subsidized fertilizer for each percentage point increase in the MMD’s margin of victory. The MMD appears to use subsidized fertilizer to reward its supporters, and the reward is greater the stronger the support. The fourth essay also draws on the household-level panel and estimates the marginal effects of GRZ fertilizer subsidies on smallholder fertilizer purchases from commercial retailers and total fertilizer acquisition. Each additional kg of GRZ-subsidized fertilizer received by a household decreases its fertilizer purchases from commercial retailers by 0.14 kg. As a result of diversion and leakage, only approximately 67% of the fertilizer intended for GRZ subsidy programs reaches smallholders through the government channel. Assuming the remaining 33% is resold through commercial retailers, total fertilizer acquisition is estimated to increase by 0.53 kg for each additional kg of GRZ-subsidized fertilizer injected into the system.