Technical note: Analysis of price incentives for maize in Uganda for the time period April, 2014

Transcription

1 Technical note: Analysis of price incentives for maize in Uganda for the time period April, 2014

2 Technical note: Analysis of price incentives for maize in Uganda for the time period April, 2014 This technical note is a product of the Monitoring and Analysing Food and Agricultural Policies (MAFAP) programme. It may be updated as new data becomes available. MAFAP is implemented by the Food and Agriculture Organization of the United Nations (FAO) in collaboration with the Organisation for Economic Co-operation and Development (OECD) and national partners in participating countries. It is financially supported by the Bill and Melinda Gates Foundation, the United States Agency for International Development (USAID) and FAO. The analysis presented in this document is the result of partnerships established in the context of the MAFAP programme with National Agricultural Research Organisation This technical note was prepared by Mohamed Ahmed of the FAO and Stephen Ojangole of NARO. For more information:

3 Recommended citation: FAO Analysis of price incentives for maize in Uganda. Technical notes series, MAFAP, by Ahmed, M. and Ojangole, S., Rome. The designations employed and the presentation of material in this information product do not imply the expression of any opinion whatsoever on the part of the Food and Agriculture Organization of the United Nations (FAO) concerning the legal or development status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries. The mention of specific companies or products of manufacturers, whether or not these have been patented, does not imply that these have been endorsed or recommended by FAO in preference to others of a similar nature that are not mentioned. The views expressed in this information product are those of the author(s) and do not necessarily reflect the views or policies of FAO. FAO, 2014 FAO encourages the use, reproduction and dissemination of material in this information product. Except where otherwise indicated, material may be copied, downloaded and printed for private study, research and teaching purposes, or for use in non-commercial products or services, provided that appropriate acknowledgement of FAO as the source and copyright holder is given and that FAO s endorsement of users views, products or services is not implied in any way. All requests for translation and adaptation rights, and for resale and other commercial use rights should be made via or addressed to copyright@fao.org. FAO information products are available on the FAO website ( and can be purchased through publications-sales@fao.org.

4 Contents SUMMARY OF THE NOTE... v DRIVING FACTORS... vi RECOMMENDATIONS... vi 1. PURPOSE OF THE NOTE COMMODITY CONTEXT... 2 PRODUCTION... 2 CONSUMPTION/UTILIZATION... 3 MARKETING AND TRADE... 4 DESCRIPTION OF THE VALUE CHAIN... 5 POLICY DECISIONS AND MEASURES METHODOLOGY DATA REQUIREMENTS AND CALCULATION OF INDICATORS TRADE STATUS OF THE PRODUCT MARKET PATHWAY ANALYSED BENCHMARK PRICES DOMESTIC PRICES EXCHANGE RATES ACCESS COSTS BUDGET AND OTHER TRANSFERS QUALITY AND QUANTITY ADJUSTMENTS DATA OVERVIEW SUMMARY OF INDICATORS RESULTS AND INTERPRETATION RECOMMENDATIONS CONCLUSION MAIN MESSAGE LIMITATIONS FURTHER INVESTIGATION AND RESEARCH BIBLIOGRAPHY ANNEX I: Data and calculations used in the analysis... 32

5 SUMMARY OF THE NOTE Product: Maize Period analyzed: Trade status: Export in all years One of Uganda s non-traditional exports and food security commodities. Much of the production of maize aims to supply export markets in the region, mostly especially Kenya and recently Southern Sudan, which are in chronic maize deficits. Over the last two decades ( ), both maize area and production in Uganda increased dramatically from about from 0.57 million tons in 1993 to 1.37 million tons in 2013 mostly as a result of area expansion rather than yield improvement. While maize has been grown for a long time in Uganda, nonetheless, unlike in neighboring countries (Kenya, Tanzania), it does not form a major part of the population s traditional diet. The transactions involved in the marketing of maize are complex but the main channels for the commodity flow include (i) from farmer (farm gate) to agents/traders/village markets in rural areas; (ii) from rural markets to secondary markets in regional towns (iii) from urban markets to major buying centers outside the district and (iv) the export market. Maize markets in Uganda are highly liberalized with minimum government interventions Percentage Observed nominal rate of protection at farm gate Adjusted nominal rate of protection at farm gate The observed Nominal Rate of Protection (NRP, green bar) in the graph above measures the effect of policy distortions and overall market performance on price incentives for producers. The adjusted NRP (blue bar) captures the same elements as the observed NRP in addition to any market distortions resulting from inefficiencies in the commodity s value. The two indicators suggest that maize farmers have received incentives throughout the period ( ). The extent of market development gap, measured by the vertical distance between the two indicators, shows the cost that these inefficiencies represent to producers. Although quite variable, v

6 the incentives appear to be related to the high export prices during the world food crisis and subsequent years. As the maize market in Uganda is highly liberalized, these indicators cannot be attributed to policy measures and are related to the functioning of the domestic maize market. DRIVING FACTORS The relatively high levels of incentives to maize producers were driven by the liberalized policy environment in Uganda. In addition, maize traders are benefiting from the free trade environment among East Africa Community member state. RECOMMENDATIONS To maintain the current level of price incentives to maize producers and to further develop the vibrant domestic and export market, it may be necessary to develop marketing mechanisms to facilitate price transmission to producers to enable smallholder farmers to benefit from possible high prices in regional and international markets for their produce. It is important to establish mechanisms to collect high quality price data on food crops. Currently, this data is unavailable. vi

7 1. PURPOSE OF THE NOTE This technical note is an attempt to measure, analyse and interpret price incentives for maize in Uganda over the period For this purpose, yearly averages of domestic farm gate and wholesale prices are compared with reference prices calculated on the basis of the price of the commodity in the international market. The price gaps between reference prices and domestic prices along the commodity s value chain indicate the extent to which incentives (positive gaps) or disincentives (negative gaps) were present at the farm gate and wholesale level. The price gaps are expressed in relative terms as a percentage of the reference price, referred to as the Nominal Rate of Protection (NRP). These key indicators are used by MAFAP to assess the effects of policy and market performance on prices. This technical note begins with a review of the commodity s production, consumption/utilization, marketing and trade, value chain and policy context (Chapter 2). It also provides a detailed description of how key data elements were obtained and indicators were calculated (Chapter 3). The indicators were then interpreted in light of existing policies and market characteristics (Chapter 4), and key policy recommendations were formulated on the basis of this interpretation (Chapter 5).Finally, the note concludes with a few main messages, limitations of the analysis and areas identified for further research to improve the analysis (Chapter 6). The results and recommendations presented in this analysis of price incentives can be used by stakeholders involved in policy-making for the food and agriculture sector. They can also serve as input for evidence-based policy dialogue at the national, regional or international level. This technical note should not be interpreted as an in-depth value chain analysis or detailed description of the commodity s production, consumption/utilization, marketing and trade or policy context. All information related to these areas is presented merely to provide background on the commodity under review, help understand major trends and facilitate the interpretation of the indicators. All information in this technical note is subject to review and validation. 1

8 2. COMMODITY CONTEXT Maize was introduced in Uganda in 1861 and has since become a major part of the farming system, ranking third in importance among the main cereal crops (finger millet, sorghum and maize) grown in the country (USAID, 2010). Much of the production of maize aims to supply export markets in the region, mostly especially Kenya and recently Southern Sudan, which are in chronic maize deficits. The maize sub-sector is estimated to provide a livelihood for about 3 million Ugandan farm households, close to 1,000 traders and over 20 exporters (UBoS, 2011). Therefore, maize is a growing source of household income and foreign exchange through exports. Providing more support to the maize industry is therefore a key part of Uganda s strategy to strengthen its positioning in regional and world markets. PRODUCTION Uganda s small-scale farmers have traditionally cultivated maize for food and for income generation. It forms an important part of the farming system, particularly in Eastern Uganda. Maize is widely grown in Uganda. The main production agro-ecological zones are in the west, east, north and southeast Uganda (NRI/IITA, 2002) with the Eastern region accounting for over 50 percent of annual production (USAID, 2010). The crop is cultivated on about 1.5 million hectares of land. In terms of area planted, maize is the third most cultivated crop after banana and beans. In some regions of the country, the crop has now become a staple food, replacing crops like sorghum, millet, cassava and banana. Maize is presently considered a major source of income in the districts of Kapchorwa, Mbale, Iganga, Masindi and Kasese (Figure 1), with about percent of the household harvest being sold to earn money (NRI/IITA, 2002). Figure 1. Map of Uganda illustrating flow of maize Source: FEWSNET, Whilst production is influenced by climate patterns, farmers planting intentions, in excess of subsistence requirements, are largely influenced by price levels and overall output tends to fluctuate accordingly. The country has a potential of producing up to 7.5 million metric tons utilizing the 2

9 current area under maize by utilizing improved varieties and crop management technology (AATF/NARO, 2010). However, this is never achieved largely due to various production constraints including low soil fertility, lack of improved maize varieties, erratic rainfall patterns and drought stress during some seasons. Maize production is generally characterized by low yields, which result in high unit costs and thus low returns. Regardless of the farm sizes, Uganda s maize yield levels are low and are generally between 1.0 and 2.5 metric tons/ hectare (Figure 1). Crop failure due to drought can cause losses of up to 80 percent. The magnitude of the problem is high in districts such as Kasese where losses can reach catastrophic levels. Other drought-prone regions include eastern, northeastern and northern Uganda. Figure 2. Maize area and production trends in Uganda ( ) 3,000 Production Area Harvested Yield , Tonnes, 1000 Hectare 2,000 1,500 1, Tonnes/Hectare Source: FAOSTAT (2012); Over the last two decades ( ), both maize area and production in Uganda increased dramatically (Figure 2). Harvested area increased from about 0.5 million hectares in 1993 to 0.71 million hectare in 2003 reaching 1.1 million hectares in 2012 (FAOSTAT, 2012). Similarly, production more than doubled during the same period, i.e., from 0.8 million tons in to 2.3 million tons in Until 2007, most of the production increase is the result of area expansion rather than yield improvement as crop yield stagnated at around 1.5 t/ha. However, significant yield improvement has taken place in recent years (Figure 2). CONSUMPTION/UTILIZATION While maize has been grown for a long time in Uganda, nonetheless, unlike in neighboring countries (Kenya, Tanzania, etc), it does not form a major part of the population s traditional diet, but is grown primarily for income generation, rather than for food security. However, the growing cost of traditional staple foods (such as cooking bananas locally called Matooke) has had the impact of increasing maize consumption, especially in urban areas. Kampala alone accounts for about 50percent of formal trade in maize (USAID, 2010). 3

10 The domestic market for maize in Uganda is estimated at 350, ,000 metric tons per annum1 (NRI/IITA, 2002). In 2007, domestic consumption remained at 400,000 MT out of a national availability of approximately 638,000 MT (USAID, 2008). Maize is consumed in various forms grilled or whole, as a cake [Posho, or Ugali], or as porridge especially in urban centers. Over 70percent of the maize is consumed as food, and about 10percent is used as animal feeds (maize bran). There is also increasing demand for value-added products (maize flour, poultry feeds, etc) especially in urban centers where maize is gaining importance both as a major food item and for income generation. MARKETING AND TRADE Uganda s maize export market is mainly regional, comprising of markets within Eastern and Southern Africa, the Democratic Republic of Congo and Southern Sudan. Exports of maize to Kenya alone more than doubled from 2004 to 2008 (MAAIF, 2010). Uganda s export potential for maize is estimated between 200,000 and 250,000 MT per year (USAID, 2010). Nonetheless, the country has only managed to formally export half of this amount, reflecting a low level of penetration into the regional markets due to the poor rural road network, and limited business exposure (USAID, 2010). Maize is sold across borders through Mutukula for Tanzania, Busia for Kenya, and Gatuna for Rwanda (Figure 1). The challenge for the cross-border trade, however, has been the increasing informal (unofficial) cross-border trade with neighboring countries for difficulty of controlling both quantity and quality of commodity flow. Of all the five neighboring countries, Kenya dominates the informal export destinations followed by DRC, Southern Sudan, Rwanda and Tanzania. There has been a vibrant cross-border trade in maize with these regional markets. According to USAID (2010), internal procurement and trade in maize along Uganda s eastern and southern borders with Kenya and Rwanda, respectively, remains brisk, as high demand for maize in the neighboring countries increased the follow of maize from production centers in Uganda. Trade in maize to these markets is entirely informal. Consequently there are no accurate data on volume and values of exports to these countries. Official figures indicate that in 2008 alone, maize is estimated to have generated over USD 18.5 million in export earnings from an estimated 66,671 tons (MAAIF, 2011). Table 2 presents maize production, import and export of Uganda ( ). The data on exports of maize reported mainly reflects the formal export. According to this data, Uganda exported 8-12 percent of its maize production between 2004 and However, informal (unofficial) maize exports appear to far exceeding the formal (official) exports through. According to Bank of Uganda (2011), the value of informal maize grain and flour exports to neighboring countries in 2009 and 2010 were estimated at USD and million, respectively. In contrast, the value of formal maize grain exports in the same years were USD and million, respectively (MAAIF, 2010). 1 Annual series data for domestic consumption is unavailable. 4

11 Table 1. Maize production, import and export of Uganda ( ) Production Imports (mt) (mt) Formal exports ( mt) Formal export as a % of production ,080,000 48,200 90, % ,237,000 21,667 92, % ,258,029 15, , % ,261, , % ,314,909 8,131 66, % ,354,664 2,550 94, % ,373,501 1, , % ,551,000 3,572 89, % ,734,000 1, , % ,300, , % Source: UBoS, 2013 and MAAIF (2011). Table 1 indicates that formal imports of maize have been declining since The same conclusion is also reported by USAID (2010). Most of maize imports are in the form of improved seed. Imports of maize have been high in seasons of low harvest (e.g., 2004) especially on account of variations in rainfall patterns. By and large, however, Uganda has always been self-sufficient in maize production and has not been dependent on imports. DESCRIPTION OF THE VALUE CHAIN Due to the importance of maize in Uganda, several studies of marketing, transaction costs and value chain analysis are available including NRI/IITA (2002), World Bank (2009), PMA (2009) and USAID (2010),. The description provided here is mainly based on USAID (2010) which focused on market assessment of staple foods in Uganda, World Bank (2009) and PMA (2009). According to these studies, the transactions involved in the marketing of maize are complex but the main channels for the commodity flow include (i) from farmer (farm gate) to agents/traders/village markets in rural areas; (ii) from rural markets to secondary markets in regional towns such as Iganga, Bugiri and Sironko; (iii) from urban markets to major buying centers outside the district and (iv) the export market. Each one of these channels involves a number of key players. Figure 3 depicts the typical maize supply chain in Uganda. Rural agents are the main buyers of all maize traded in the sub-counties (smaller administrative units in the districts). Their main function is to buy and/or assemble maize from the numerous scattered farmers, often located in inaccessible rural areas. They find market for the maize (often the urban traders and processors) when they have accumulated sufficient quantities. The urban traders and processors arrange transport to collect the maize either directly from the farmers whom they pay on a cash basis, or from the collection points of the agents. Since the agents live in the rural areas, they are a reliable linkage between the farmers and urban traders and processors/millers. Urban traders are found in major urban centers in producing districts. Their main activities include networking with rural agents, serving as a market outlet for farmers, and collecting maize grain before selling it to the various clients, including institutions and processors, located in the districts. Urban traders are also sources of bagging materials (sacks) used by farmers as well as market information in their areas of operation. Urban traders sell their maize mostly to millers. 5

12 Maize grown and traded undergoes some level of value addition conversion of maize grain into flour and a variety of other by-products, such as bran and germ. The principle players in this value chain are the processors/millers, grouped into three categories, namely: small-scale millers, mediumscale millers and large-scale millers. Majority of the processors/millers fall under the small-scale category and they are scattered in various rural trading centers in the districts, carrying out primarily customized milling. Processing costs range from USh 50 to 100 per kg, depending on the location. The medium-scale processors are based in the main town centers the district capitals and offer both contract and trade-based milling services to institutions and urban traders. The medium-scale millers first hull the maize to remove bran and then produce No.1 flour, which is not very nutritious. The medium-scale millers charge a price of U Sh per kg for milling. For every 100 kg of maize grain, about kg of No.1 maize flour is produced. The millers sell the No. 1 flour at U Sh to wholesalers and retailers. The normal price of maize bran is U Sh 100 per kg to poultry and animal farmers and manufacturers of feed meals. The medium-scale millers make a profit of U Sh per kg or about percent of the price of the flour. Figure 3. Typical supply chain for maize in Uganda Smallholder, commercial farmers Farm and farmgate buyers Primary market village trade centers Export (Busia) markets Medium/large scale millers Primary/secondary traders Secondary market towns (Iganga, Bugiri) National grain traders/exporters /millers (Kampala) Wholesale/ retailers (flour) Small-scale Millers (flour) World Program Food Consumers Source: Adapted from USAID (2010) and PMA (2009), World Bank (2009). 6

13 Large-scale processors are only found in Kampala. They buy their maize from urban traders and large-scale traders from the western, central and eastern regions. They sell more than three quarters (75 percent) of their maize products to the World Food Programme (WFP) for export and distribution to war displaced people in Northern Uganda. The processors carry out activities such as cleaning, destoning, drying, fumigating and milling into flour. Transport costs are the major marketing cost and, therefore, are key in determining the prices offered to farmers by rural traders. The relative share of transportation cost in total marketing costs averages 84 percent in Uganda (World Bank, 2009). These costs are quite high because a maize bag often goes through a number of markets before reaching the final consumer in large cities and thus requires loading and unloading at each intermediate stop. For sales, maize is brought from farm to primary markets mainly by traders but sometimes by farmers themselves. The common mode of transportation on this route is either bicycle or carts. In Uganda, a 10MT truck is the mostly common mode of transportation beginning already from the rural market, while some traders use trucks with a capacity of between 24 and 32 metric tons (World Bank, 2009). Average distances between market pairs are short and the average distance between secondary and wholesale markets is about 80 km in Uganda (from Jinja to Kampala). A number of large scale traders and exporters of maize have emerged over the years. The main ones include: (i) the World Food Programme, (ii) the Uganda Grain Traders (UGT), (iii) the Masindi Seed and Grain Growers Association (MSGGA), and (iv) the Uganda National Farmers Federation (UNFF). The informal export market to Kenya is uncontrolled and involves the sale of low and variable quality maize. This constrains the penetration of the formal Kenya market represented by large millers. Furthermore, Uganda lacks an authoritative price determination point, e.g., a central commodity exchange or futures market, national maize quality standards, and a legal and regulatory framework covering grain warehousing and handling operations (NRI/IITA, 2002). These deficiencies, together with inadequate finance to enable the development of an efficient warehouse receipt financing system, constrain the holding of stocks, essential for the exploitation of export marketing opportunities in particular (NRI/IITA, 2002). According to World Bank (2009), the most important reason for informal trade is likely to be low incentives to comply with formal procedures (World Bank, 2009). On the Ugandan-Kenyan border, many formal procedures can be processed at the border post itself, including certification from the Kenyan sanitary and phytosanitary authorities. So, if a trader is officially registered and has the certificate of origin for maize, he/she should have no problems with exporting maize to Kenya. But since the costs of informal trade are not much different from the costs of formal trade, some traders keep using informal routes. This is especially the case when a trader has only a few tons of maize, maize is not properly dried and cleaned, business license and certificate of origin are not available, and working hours at the border posts differ. Therefore, as long as there is effective demand for small volumes of maize on the Kenyan side and loose enforcement of the border crossing rules, informal trade by small traders will continue. Most farmers sell most of their maize at low prices to traders who in turn sell to exporters (PMA, 2009). Further, PMA analysis of the trend of maize farm prices indicates that, on average, there has not been any significant increase in the deflated national average farm price received by farmers 7

14 during the period (PMA, 2009). At the end of the chain are large scale traders/processors, large scale distributors and exporters, and big millers. They rent or have big warehouses and modern cleaning and drying equipment, own transport facilities such as pick-up, trucks, Lorries and trailers. They engage in maize cleaning, consolidation and bulking and sell maize to relief agencies, or export to regional markets. Ugandan maize exporters appear to receive profitable prices for their exports in most of the years (Figure 4). With the exception of 2008 and 2012, the export price of maize exceeds wholesale price in Kampala considerably in most of the years. In 2008/09, export prices were slightly below the whole sale market prices. This does not necessarily mean the exporters are selling at loss as maize exported was probably purchased earlier at lower wholesale prices. It is to be noted that export prices reported here are the average unit value of exports to all countries. In contrast, trade data from Kenya Ministry of Agriculture indicate much lower average value of maize imports from Uganda. Wholesale maize prices in Uganda, especially in Kampala, are sometimes above the reported export prices (Figure 4). Figure 4. Wholesale prices in Kampala and export unit value (USD per ton) of maize in Uganda Kampala wholesale export price Source: Wholesale price data from Export prices calculated from data from UN comtrade (2014) and UBoS (2014). POLICY DECISIONS AND MEASURES As common in most African countries, post-independence grain production and marketing in Uganda were subject to state control. However, the government intervention in the maize market through the Produce Marketing and Food and Beverage Boards ceased in the 1990s when this parastatal was dissolved. The market is now completely liberalized for all agricultural products including maize. However, it should be noted that Uganda does not have, as yet, a formal trade structure for the marketing of maize. The policy environment for the agriculture sector and the maize subsector in Uganda in the last decade has been shaped by the Plan for Modernization of Agriculture (PMA). The PMA is a strategic and operational framework for the transformation and structural change of the subsistence farming 2 However, no empirical evidence is presented to support this statement and maize producer prices mentioned were not presented in the study. 8

15 sector through policy, institutional and organizational reforms and changes in the type and methods of service delivery leading to increased profitability and competitiveness in the agriculture sector. The PMA has been part of the wider planning framework for the country the Poverty Eradication Action Plan (PEAP). The need to fill the gaps in PMA implementation led to emergence of alternative thinking about agriculture and rural development. Thus, in 2005 the Rural Development Strategy (RDS) was formulated, with the overall objective of raising household incomes, like the PMA, but proposing a more focused approach to supporting farmers through input provision and formation of cooperative societies. The focus of RDS was the sub-county, and this led to the development of the Sub-County Development Model. In 2006, the Ministry of Agriculture, Animal Industry and Fisheries (MAAIF) developed the so-called Development Strategy and Investment Plan (DSIP) as medium-term plan. The DSIP was intended to translate the national goals and priorities contained in the PMA into a plan for public sector activities in the agriculture sector. It was also designed to clarify the objectives and outputs for the sector and to bring out priority areas for spending in the period 2005/ /08. The DSIP drew from the PMA priority areas in which public sector action was required in the medium term to support the modernization of agriculture, especially those that fell within the mandate of MAAIF and its agencies. It is these priority areas that informed the DSIP investment areas and have been the basis for the Ministry s planning and budgeting in recent years. In 2006, Government formulated a much broader vision - the Prosperity for All (PFA). The PFA not a policy as such, but a programme, which attempts to put in place varied but integrated socioeconomic programmes targeting mainly the rural poor in order to transform them into productive and prosperous communities. The programme seeks to achieve prosperity for all through production, value addition, agro-processing, improved marketing, savings and accessibility to affordable credit. In 2007, Cabinet directed the MAAIF to coordinate all agriculture-related programs of the PFA through the PMA Secretariat. Some of the policies affecting maize trade include: Customs Tariff and Non-Tariff Barriers: After ratification of the Customs Union, some tariffs were reduced while others were totally abolished as a step towards harmonizing trade policies and taxes within the EAC region. Uganda, Kenya and Tanzania have all adopted zero rate VAT on maize imports from within the EAC. Export policies: Consistent with its commitment to all liberal trade policy, Uganda has emphasized that her maize export sector remains as open as possible. Uganda has no maize export taxes, charges or levies. Given this observation, it is imperative to argue that exporters of Uganda s maize grain are largely regulated by the importing countries. Despite the fact that no policy per se discourages maize exportation, exporters must have a fumigation certificate, a phytosanitary certificate, and a quality standards certificate. Exchange rate policy: Of relevance to maize production is the exchange rate policy addressed by Bank of Uganda (BOU). Uganda s BOU continued to pursue a flexible exchange rate policy regime, whereby it intervenes in the foreign exchange market primarily to dampen short term volatility in the exchange rate (BOU, 2011). Dampening short term volatility is important to avoid its possible adverse impact on trade. Net sales of foreign exchange amounted to USD 37.7 million over the review period. 9

16 Overall the shilling depreciated against the US dollar by 5.1 percent in 2009/10, from an average rate of U Sh per USD in 2008/09 to U Sh per USD. Though generally the Government of Uganda has been implementing private sector friendly policies, its specific policy on agriculture remains unclear (USAID, 2010). There are no known incentives for farmers to increase production and no attempts to ensure farmers receive an economic return for their efforts. This results in wildly fluctuating prices for farmers (USAID, 2010). With the progressive liberalization of Uganda s economy a process which included trade among others, price regulation was abandoned as a trade policy tool. Both domestic and international trade in all agricultural products has since remained in private hands. There are no more state trading companies operating in competition with the private sector or acting as major buyers and guarantors of a minimum farm-gate price. Similarly, price control as a development and trade policy measure is no longer practiced by the government. There is no export duty on maize (as well as other agricultural products), nor the government instituted any bans or other restrictions on trade in food commodities (World Bank, 2009). As such, all prices are determined by the market but this does not imply well functioning markets. 10

17 3. METHODOLOGY MAFAP methodology seeks to measure price incentives for producers and other marketing agents in key agricultural value chains. The analysis is based on the comparison between observed domestic prices and constructed reference prices. Reference prices are calculated from the international price of the product at the country s border, where the product enters the country (if imported) or exits the country (if exported). This price is considered the benchmark price free of influence from domestic policies and markets. MAFAP estimates two types of reference prices observed and adjusted. Observed reference prices are those that producers and other marketing agents could receive if the effects of distortions from domestic market and trade policies, as well as overall market performance, were removed. Adjusted reference prices are the same as observed reference prices, but also exclude the effects of any additional distortions from domestic exchange rate policies, structural inefficiencies in the commodity s value chain, and imperfect functioning and noncompetitive pricing in international markets. MAFAP s price incentives analysis is based on the law of one price, which is the economic theory that there is only one prevailing price for each product in a perfectly competitive market. This law only applies in the case of homogeneous goods, if information is correct and free, and if transaction costs are zero. Thus, this analysis was conducted for goods that are either perfectly homogeneous or perfect substitutes in the local market in terms of quality, or, failing that, are simply comparable goods. Indicators calculated from reference and domestic prices will, therefore, reveal whether domestic prices represent support (incentives) or a tax (disincentives) to various agents in the value chain. Domestic prices are compared to reference prices at two specific locations along commodity value chains the farm gate (usually the main production area for the product) and the point of competition (usually the main wholesale market where the domestic product competes with the internationally traded product). The approach for comparing prices at each location is summarized below, using an imported commodity as an example. In this situation, the country is importing a commodity that arrives in the port at the benchmark price (usually the unit value CIF price at the port of entry). In the domestic market, we observe the price of the same commodity at the point of competition, which is in this case the wholesale market, and at the farm gate. We also have information on observed access costs, which are all the costs associated with bringing the commodity to market, such as costs for processing, storage, handling, transport and the different margins applied by marketing agents in the value chain. These include access costs between the border and wholesale, as well as between the farm gate and wholesale. The benchmark price is made comparable to the domestic price at wholesale by adding the access costs between the border and wholesale, resulting in the observed reference price at wholesale. This takes into account all the costs incurred by importers and other agents to bring the commodity to market, which in effect, raises the price of the commodity. The reference price at wholesale is further made comparable to the domestic price at the farm gate by deducting the access costs between the farm gate and wholesale, resulting in the observed reference price at farm gate. This takes into account all the costs incurred by farmers and other agents to bring the commodity from the farm to the wholesale market. Mathematically, the equations for calculating the observed reference prices at wholesale(rrrr ooooh ) and farm gate RRRR oooooo for an imported commodity are as follows: 11

18 RRRR ooooh = PP bb + AAAA ooooh RRRR oooooo = RRRR ooooh AAAA oooooo where AAAA ooooh are the observed access costs from the border to wholesale, including handling costs at the border, transport costs from the border to the wholesale market, profit margins and all observed taxes and levies, except tariffs, and PP bb is the benchmark price. AAAA oooooo are the observed access costs from the farm gate to wholesale, including handling costs at the farm, transport costs from farm to wholesale market, processing, profit margins and all observed taxes and levies. The same steps described above can be taken a second time using benchmark prices and access costs that have been adjusted to eliminate market distortions due to exchange rate misalignments, structural inefficiencies in the commodity s value chain 3 and imperfect functioning and noncompetitive pricing in international markets, where possible and relevant. The adjusted benchmark prices and access costs are then used to generate a second set of adjusted reference prices, in addition to the first set of observed reference prices calculated. For exported commodities, a slightly different approach is used. In this case, the border is generally considered the point of competition (wholesale), and the unit value FOB price for the commodity is normally taken as the benchmark price. Furthermore, observed and adjusted reference prices at wholesale are obtained by subtracting, rather than adding, the access costs between the border and wholesale. Mathematically, the equations for calculating the observed reference prices at wholesale(rrrr ooooh ) and farm gate RRRR oooooo for an exported commodity are as follows: RRRR ooooh = PP bb AAAA ooooh RRRR oooooo = RRRR ooooh AAAA oooooo After observed and adjusted reference prices are calculated for the commodity, they are subtracted from the domestic prices at each point in the value chain to obtain the observed and adjusted price gaps at wholesale and farm gate. Observed price gaps capture the effect of distortions from trade and market policies directly influencing the price of the commodity in domestic markets (e.g. price ceilings and tariffs), as well as overall market performance. Adjusted price gaps capture the same as the observed, in addition to the effect of any distortions from domestic exchange rate policies, structural inefficiencies in the commodity s value chain, and imperfect functioning and noncompetitive pricing in international markets. Mathematically, the equations for calculating the observed price gaps at wholesale(pppp ooooh ) and farm gate PPPP oooooo are as follows: PPPP ooooh = PP wwh RRRR ooooh PPPP oooooo = PP ffff RRRR oooooo where PP ffff is the domestic price at farm gate, RRRR oooooo is the observed reference price at farm gate, PP wwh is the domestic price at wholesale, and RRRR ooooh is the observed reference price at wholesale. A positive price gap, resulting when the domestic price exceeds the reference price, means that the policy environment and market functioning as a whole generate incentives (support) to producers or wholesalers. For an imported commodity this could be due to distortions such as the existence of an 3 Structural inefficiencies in commodity value chains may include government taxes and fees (excluding fees for services), high transportation and processing costs, high profit margins captured by various marketing agents, bribes and other non-tariff barriers. 12

19 import tariff. On the other hand, if the reference price exceeds the domestic price, resulting in a negative price gap, this means that the policy environment and market functioning as a whole generate disincentives (taxes) to producers or wholesalers. For an imported commodity this could be due to distortions such as a price ceiling established by the government to keep domestic prices low. In general, price gaps provide an absolute measure of the market price incentives (or disincentives) that producers and wholesalers face. Therefore, price gaps at wholesale and farm gate are divided by their corresponding reference price and expressed as a ratio, referred to as the Nominal Rate of Protection (NRP), which can be compared between years, commodities, and countries. The Observed Nominal Rates of Protection at the farm gate (NNNNNN oooooo ) and wholesale (NNNNNN ooooh ) are defined by the following equations: NNNNNN oooooo = PPPP oooooo RRRR oooooo ; NNNNNN ooooh = PPPP ooooh RRRR ooooh where PPPP oooooo is the observed price gap at farm gate, RRRR oooooo is the observed reference price at the farm gate, PPPP ooooh is the observed price gap at wholesale and RRRR ooooh is the observed reference price at wholesale. Similarly, the Adjusted Nominal Rates of Protection at the farm gate (NNNNNN aaaaaa ) and wholesale (NNNNNN aaaah ) are defined by the following equations: NNNNNN aaaaaa = PPPP aaaaaa RRRR aaaaaa ; NNNNNN aaaah = PPPP aaaah RRRR aaaah where PPPP aaaaaa is the adjusted price gap at farm gate, RRRR aaaaaa is the adjusted reference price at the farm gate, PPPP aaaah is the adjusted price gap at wholesale and RRRR aaaah is the adjusted reference price at wholesale. If public expenditure allocated to the commodity is added to the price gap at farm gate when calculating the ratios, the Nominal Rate of Assistance (NRA) is generated. This indicator summarizes the incentives (or disincentives) due to policies, market performance and public expenditure. 4 Mathematically, the Nominal Rate of Assistance is defined by the following equation: NNNNNN = PPPP aaaaaa + PPPP cccccc RRRR aaaaaa where PE csp is commodity-specific public expenditure that has been identified and measured as monetary units per tonne. Finally, MAFAP methodology estimates the Market Development Gap (MDG), which is the portion of the price gap that can be attributed to excessive or inefficient access costs within a given value chain, exchange rate misalignments, and imperfect functioning of international markets. Excessive access costs may result from factors such as poor infrastructure, high processing costs due to obsolete technology, government taxes and fees (excluding fees for services), high profit margins captured by various marketing agents, bribes and other non-tariff barriers. Therefore, the total MDG at farm gate is comprised of three components gaps due to excessive access costs, the exchange 4 The NRA indicator was not calculated for any of the commodities analyzed because of insufficient data on public expenditure. However, it will be developed in the forthcoming reports, as the public expenditure analysis is improved and better data are made available. 13

20 rate policy gap and the international market gap. When added together, these components are equivalent to the difference between the observed and adjusted price gaps at farm gate. Similar to the price gaps calculated, the MDG is an absolute measure, which is also expressed as a ratio to allow for comparison between years, commodities, and countries. This relative indicator of the total MDG affecting farmers is derived by calculating the ratio between the total MDG at farm gate and the adjusted reference price at farm gate as follows: MMMMMM ffff = (AAAAAA wwh+aaaaaa ffff +EEEEEEEE+IIIIII) RRRR aaaaaa where ACG wh is the access cost gap at wholesale defined as the difference between observed and adjusted access costs at wholesale, ACG fg is the access cost gap at farm gate defined as the difference between observed and adjusted access costs at the farm gate, ERPG is the exchange rate policy gap, and IMG is the international market gap. A more detailed description of the methodology applied in this analysis is available on MAFAP s website atwww.fao.org/in-action/mafap. 14

21 4. DATA REQUIREMENTS AND CALCULATION OF INDICATORS To calculate the indicators needed to estimate incentives or disincentives to production (NRP, NRA) as well as the Market Development Gaps (MDGs), several types of data are needed. They were collected and are presented and explained hereafter. The analysis of price incentives/disincentives is carried out for the period of and aims at estimating price gaps and rates of protection at wholesale and farm-gate levels. This analysis requires the following variables. TRADE STATUS OF THE PRODUCT During the period of analysis ( ), Uganda exported 8-12percent of its maize production (see Table 1) in addition to substantial informal (unofficial) exports to neighboring countries estimated at USD and million in 2009 and 2010, respectively. Imports were small and declining. As such, Uganda is considered as net exporter of maize with a positive trade balance even when informal trade is not considered (Figure 5). Trade balance (000' tons) Figure 5. Uganda maize trade balance ( ) Source: UBoS (2014), MAAIF (2011) and Indexmundy (2014) MARKET PATHWAY ANALYSED The maize is grown in most part of Uganday but mainly in central and eastern parts of the country and traded across the various regions mainly by agents who buy from farmers on behalf of wholesalers in the districts. The district wholesalers stock and transport to the main markets in Kampala for domestic market and Busia mainly for export (Figure 3). The analysis considered Busia as the major point of competition through which most of Uganda exports of maize cross the border to Kenya (the main trade partner) either through the formal or informal market. Therefore, the maize market pathways considered in this analysis consists of farmgate to wholesale markets in district towns and from wholesale markets in district towns to Busia and finally through the border to Kenya. This pathway is conceived as a representative pathway for the commodity flow. 15

22 BENCHMARK PRICES Observed As maize is an important export commodity for Uganda, the analysis starts with FOB price as benchmark price. The average unit value of maize export with all trade partners is considered as the most relevant benchmark price for Ugandan maize for two reasons. First, although Uganda produces maize surplus to sell to its neighbors, the volumes of Uganda maize exports are too small to trade elsewhere given that the country is land-locked and transportation cost to Mombasa is prohibitively high. Second, the qualities of the produce do not match international specifications (World Bank, 2009). This price data, computed by dividing value of maize exports by its quantity, is obtained from United Nations Commodity Trade Statistics database (UN Comtrade). The benchmark price ranges from USD 198 to 345 per ton during The average unit value of maize exports to all destination reported by MAAIF (2011) and Uganda Bureau of Statistics (UBoS) (2012) is generally comparable to the values reported here. Table 2. Benchmark price of maize ( ) UNITS Benchmark price a US$/ton a. The benchmark price represent the unit value of exports (FOB) derived from the trade data on official exports obtained from UN Comtrade (2014). Source: FAOSTAT 2013, UN Comtrade (2014). Adjusted In this analysis, no adjustment of the benchmark price is considered. DOMESTIC PRICES Observed prices at point of competition Busia, near the border with Kenya and a surplus producing area in Eastern Uganda, is assumed to be the point of competition 5. The wholesale price in Busia is reported by Regional Agricultural Trade Integration Network (RATIN) for is available and is used here (Table 3; Figure 4). Observed prices at farm gate Producer or farm-gate price data is unavailable from any official source. This type of data is rarely collected and published particularly for food crops in Uganda. In this analysis, producers prices ( ) are compiled from Uganda Cooperative Alliance annual reports for various years. This data represents the average farmgate prices for non-cooperative members in 5-7 major maize producing districts in Uganda. Table 3 presents the farmgate prices for EXCHANGE RATES Observed exchange rate: The exchange rate between the Ugandan shilling and US dollars are reported by Bank of Uganda (2014). These represent the observed exchange rate (Table 3). Adjusted exchange rate: Real (equilibrium) exchange rate is assumed to be equal to the observed exchange rate. For the years considered, this assumption is close to reality as exchange rate 5 The analysis could be repeated for Masindi, the major export market to Southern Sudan but wholesale price for this market is unavailable. 16

23 misalignment is likely to be minimal since the foreign exchange market in Uganda has been fairly liberal. Table 3. Wholesale and farmgate prices of maize and observed exchange rate in Uganda (2005/2013) Wholesale prices (USh/tonne) a farmgate prices (USh/tonne) Exchange rate (U Sh/US $) , ,583 1, , ,667 1, , ,000 1, , ,445 2, , ,661 2, , ,000 2, , ,200 2, , ,800 2, , ,000 2,548 a. Average wholesale in Busia. Source: RATIN (2012), UCA ( ), Bank of Uganda (2014). ACCESS COSTS Access costs between farm-gate and district wholesale markets and between the district wholesale market and the country s border are needed to compute the reference prices at the farmgate and point of competition. Based on value chain and commodity flow, there are three major segments of the supply chains: (i) from farm-gate to primary market (usually located in village trading centers); (ii) from primary to secondary markets (usually located in regional capital towns such as Iganga, Bugiri and Sironko); and (iii) from secondary to wholesale markets (mainly located in large regional cities and countries capitals); and (iv) from the wholesale markets to neighboring countries (Kenya, South Sudan, Congo and Rwanda).This analysis focuses on grain movement from producing areas to Busia wholesale market through various rural and urban markets (the first three segments) and from Busia to the Kenyan borders. Busia controls the export to Kenya, the major importer of maize from Uganda. Observed Access costs Point of competition to border Access costs from the point of competition to the border represent the costs from Busia to the border crossing points along the Uganda Kenyan border. World Bank (2009) summarizes the costs of crossing the Busia border through both formal and informal routes. These include transportation cost to cross the border, Ugandan Council fee, re-bagging and loading (Table 4). The estimated costs of crossing the border are relatively low compared to the domestic marketing costs. The difference in costs between formal and informal cross-border trade is insignificant. The costs of formal crossing of the Busia border are estimated to be US$11 per ton for formal routes using 10MT truck, while the cost of informal crossing with bicycle is about US$10 per ton (Table 4). All the savings that informal traders generate from bypassing the formal certification and customs procedures are offset by additional costs of transporting grains in small quantities (by bicycle) through the border. The cost of 17