MARKET STRUCTURE AND CONDUCT OF THE HYBRID MAIZE SEED INDUSTRY, A CASE STUDY OF THE TRANS NZOIA DISTRICT IN WESTERN KENYA

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1 Seventh Eastern and Southern Africa Regional Maize Conference 11 th 15 th February, pp MARKET STRUCTURE AND CONDUCT OF THE HYBRID MAIZE SEED INDUSTRY, A CASE STUDY OF THE TRANS NZOIA DISTRICT IN WESTERN KENYA Elizabeth Nambiro 1, Hugo de Groote 2 and Willis Oluoch Kosura 1 1 University of Nairobi, Department of Agricultural Economics, PO Box 30197, Nairobi, Kenya. 2 International Maize and Wheat Improvement Center (CIMMYT), PO Box , Nairobi, Kenya 2 corresponding author. ABSTRACT To understand the organization of the market and assess the degree of competition in maize hybrid seed production and retailing, the structure and conduct of the market was analyzed in Trans Nzoia District, a major maize producing area in Western Kenya. The structure of the market was analyzed in four aspects, namely: market concentration, product differentiation, market integration and conditions for entry in the hybrid maize seed business. The market conduct considered behaviour and activities of the participants, in particular concerning pricing and promotion. Primary data were obtained randomly from a random sample of 30 traders, out of a total of 46 who sell hybrid maize seed within the district, and 30 farmers within the district. Data were collected at the peak of the planting season in the months of February to April Results show that there is some impact of the liberalization of the seed industry on the distribution side, but it is minimal on the production side. The major impact in the district is that the previous Kenya Farmers Association s monopoly of seed distribution has been reduced and that now there are many seed traders in retail. Analysis of the market structure reveals that several factors favour imperfect competition in the hybrid maize seed marketing at the retail level, including include unequally distributed shares of transactions among traders, product differentiation, and barriers to entry. The distribution, with a Gini Coefficient of 0.6 in the district, is categorized as oligopolistic, with 61.67% of the market share going to the 4 largest firms. Interviews with traders indicate that conditions for competition were lacking mainly due to barriers to entry such as institutional restrictions and high initial capital. However, traders did not collude among themselves to decide on prices or control sales volume. On the production side, Kenya Seed Company still provides 96.7% of the hybrid maize seed sold in Trans Nzoia District, with Pioneer Company providing the remaining 3.3% of the market share, a clear monopolistic seed production. Farmers showed their preference for the variety H614. They also complained about KSC s perceived inefficiency, and lack of purity of their seed. Unfortunately, they have few alternatives since only KSC offers the late maturing varieties recommended for the moist transitional and highland zones, while the Pioneer variety available (PHB3253) is of intermediate maturity. Recommendations for the seed industry include improved inspection to improve the seed quality, increased access to credit for traders to increase entry, and increased competition in the seed production through encouraging the development of new late maturing varieties, reducing the requirement to release new varieties, and reducing the import tax on seed. Keywords: Hybrid maize seed industry, seed companies, liberalization of seed marketing, monopolistic, oligopolistic. INTRODUCTION The maize industry in Africa is undergoing rapid changes. After independence, most governments continued the policies of tight market control that were put in place by colonial governments, in order to protect the farmers and stabilize prices. Over the years, it became clear that the exclusion of market forces and reliance on bureaucracies was not an efficient way to harmonize supply and demand, and the system became increasingly inefficient. Under pressure from the donor community, many countries liberalized the food crop marketing as well as the fertilizer market (Byerlee and Heisey, 1997). Pressure for liberalization in the seed industry also led to reforms in this sector. Across countries, the maize seed industry development seems to follow a common path (Morris, Rusike and Smale. 1998). In the early stages of the seed industry, only the public sector can make the necessary heavy investment for research, development, and marketing of seed. However, when the sector expands and develops, seed production and distribution becomes increasingly interesting for the private sector. In the final stages, the private sector can take over increasing parts of the research too. Kenya shows signs of following this general trend. The seed industry is subject to the "Seeds and Plant Varieties Act" of Unfortunately, a clearly stated seed policy is still missing (Ochuodho et al., 1999). Formerly, research, production and distribution was a government monopoly, dominated by public enterprises such as the Kenya Agriculture Research Institute (KARI), Kenya Seed Company (KSC), and the Agricultural Development Corporation (ADC). In 1996, liberalization of the seed industry was implemented, to improve efficiency in the industry and increase seed purity, among other objectives. Experience from other countries has shown that deregulating the trade of inputs can lead to significant increases in the range and quality of inputs available to farmers, which in turn raises productivity and income (Gisselquist and Grether, 2000). The growing size and increased commercialization of the global maize economy have been accompanied by an expansion in the industries that provide inputs used in maize production especially improved seed, chemical fertilizers, pesticides and machinery. Over time as the global maize seed industry has matured, it has undergone a series of restructuring and 474

2 NAMBIRO ET AL.: MARKET STRUCTURE AND CONDUCT OF THE HYBRID MAIZE SEED INDUSTRY 475 organizational changes. The nature and pace of these changes have varied among countries, reflecting differences in stages of development and the structure of production from one country to the next, as well as differences in the economic, political and institutional climates. The net result has been a global maize seed industry comprising a conglomerate of different types of national seed industries that vary widely in their organization and performance (Morris, 1998 ;CIMMYT 1994). In most industrialized countries, the maize seed industry is now largely in the hands of the private sector. The roles of the public institutions like the universities, research institutes, and extension organizations, which once dominated maize research and technology transfer activities, have diminished as private companies have steadily expanded their sphere of influence to take advantage of profit opportunities offered by an increasingly commercialized and input-dependent maize economy (Morris, Rusike and Smale, 1998). Public organizations continue to play an important role in the technology development and transfer process, but they do so within an increasingly narrow and specialized realm. For instance, the focus of publicly funded research has shifted towards more basic research. Very few publicly funded maize researchers now operate towards the applied end of the research spectrum, for example developing and testing finished hybrids because private companies have assumed these functions. Many technology transfer activities have also been carried out by the private sector. For instance, today a maize farmer in Europe or the United States is likely to look first to their input dealer rather than the local government extension agent for technical advice on how to manage their crop. If the steadily growing world maize economy has provided the impetus for the private sector seed industry to expand, economies of scale in research and seed production have contributed to its increasing concentration. The 1980s and 1990s have witnessed an unprecedented wave of mergers and consolidations during which a large group of independent seed companies have been bought out by, or merged with, larger competitors. In the United States, for example, although the 7 largest companies currently control about 70% of the market for maize seed, 300 other companies also produce and sell maize seed. (Norskog, 1995). In developing countries, the maize seed industry is more variable in organization and performance (Tripp, 2000). In countries where maize is produced mainly by small-scale, subsistence oriented farmers using low levels of purchased inputs, private firms have demonstrated an understandable reluctance to enter the market. In these countries, maize research, seed production and seed distribution are generally carried out by public organizations. (Morris, Rusike and Smale, 1998). Ndambuki (1998) indicated in his case study that in seed marketing three closely associated aspects have to be considered and they were products, customers and the competitors in the seed industry. He failed to elaborate further on the market structure and conduct of the three aspects mentioned above. This gap leads to this study, which analyzes the market structure and conduct thus clarifying the elaborate relationships of the three aspects named above. The present paper aims to analyze if the deregulation of the Kenyan seed industry had the desired effect. We want to test the hypothesis that liberalization resulted in increased competitiveness in hybrid maize seed market, by studying the market structure and conduct. We will test that by studying if new companies have entered the market, if farmers' access to hybrid maize seed has improved, and if their price has decreased. The study was limited to the Trans-Nzoia district, the district with the highest maize production in the country. MATERIALS AND METHODS 2.1. Selection of the sample and data collection The sampling frame was a list of all 46 hybrid maize seed retailers from the licensing department of Trans Nzoia district (Figure 1). Of this group, a random sample of 30 retailers was chosen. Primary data were collected through use of a structured questionnaire, by single visit personal interviews. The data included sales volumes for February April 2000, by variety. A group of 30 farmers were randomly selected from a list of farmers in the district; available at the district agricultural office, Ministry of Agriculture. Data were collected through use of a structured questionnaire, by single visit personal interviews in April The data were collected between February and April because this is the peak planting season. Secondary data were obtained from various seed companies, published and unpublished reports, public libraries, KARI and any past studies carried out were used as sources of secondary information To detect product differentiation in the market, the packages offered for sale were listed. In addition, traders were interviewed to reveal different after sales services they receive from wholesalers. The services traders provided to farmers were also recorded. The types of maize seed sold in terms of kg per packet were examined for retailers. The retailers were asked if the farmers asked for specific kg/packet of maize seed or if they asked for a specific variety of maize seed. The above questions were aimed at finding out the farmers awareness of the differentiated products in the market. Market conduct explains the behavioral characteristics in the market place. Price and promotions are the two variables which were used to determine the market conduct. Traders were asked whether they set prices of hybrid maize seed individually or by colluding with each other, and also if they jointly restricted the amount of seed for sale to raise the market price. Traders were also asked the type of promotions they carried out to advertise the hybrid maize seed. The degree of integration also shows the power of participants in making price decisions. Thus vertical integration may eliminate price as a coordinator between market levels, especially when the market is informal or weak. Integration in the hybrid maize seed market is examined by determining if there are contracts on quantity of seed delivered by seed companies to wholesalers or by wholesalers to retailers. Other forms of integration such as extension of credit between traders were assessed. Barriers to entry were determined by establishing the threshold capital required for starting business. At the same time, sources of the funds and the current operational costs were analyzed to determine both the diversity and ease of access to credit to facilitate entry. The role of Government in licensing, checking quality standards and creating bureaucratic laws were analyzed as part of possible barriers to entry. Interviews with 30 farmers were conducted to determine the popular maize varieties and the problems

3 476 farmers encounter when using hybrid seed ANALYSIS The perfect competition market model is often used in economics as a standard by which structure and conduct of markets can be compared and evaluated. Large numbers of buyers and sellers, low barrier to entry, product homogeneity and complete knowledge of alternative choices on the part of producer and consumer characterize the competitive market model. Structure influences market performance and conduct. Knowledge regarding structure can give indications about competitiveness. The variables used to explain market structure are the degree of market concentration, vertical and horizontal integration, and condition of entry in the market and magnitude of product differentiation. A market concentration ratio is a measure of the percentage share of the market controlled by a specified percentage of firms ranked in order of market share from the largest to smallest (Karugia, 1990). High concentration and inequality indicate oligopolistic tendencies, while conversely, low concentration suggests tendencies towards competition provided there are no serious barriers to entry into the market (Bain, 1951, 1968). To measure market share, the monthly turnover (in kg of maize seed) of each of the 30 retailers was recorded. The retailers were divided into 5 classes. From the stratification it was found which class controls the highest percentage of transactions. From the above turnover, the Lorenz curves were constructed. Also, to assess retailer concentration the average monthly seed sales of retailers were recorded during the survey and sales shares of the first 4 and 8 largest retailers in the sample calculated. The Gini Coefficient is a comparative measure of inequality in share distribution that is the most commonly used in income distribution studies. It has the range 0 to 1 and oligopolistic behaviour increases as the coefficient approaches 1 while the market becomes most competitive as the Gini Coefficient tends to 0 (Scheid and Sutenan, 1979; Andic and Peacock, 1961). If all traders are divided into k classes by decreasing volumes of seed sales, the Gini Coefficient R can be expressed as: R= Σ i k=2 (P k 1 q k - P k q k-1 ) * 1/10,000 where: P = the cumulative percentage of traders by class k; k = the order of class of traders; and q = the cumulative percentage of volume or values of commodity sold by each group of traders. RESULTS History of the seed industry in Kenya In the seed industry, formal and informal sub-sectors can be distinguished. The informal sub-sector deals mostly in farmers' own local seed, which is either saved from own production, bought from the local market, or obtained seed from neighbours. In the formal seed sub-sector, on the other hand, there is an established and legal process for the movement of seed from research, over seed producer, to the farmer. The informal seed sector is important in the low potential areas at the coast (Wekesa et al., 2003), around Lake Victoria (Saylasya et al., 1998) and the dry zones (Muhammad, 2003). The formal seed sector dominates in the high potential areas such as the moist transitional (Ouma et al., 2002) and the highlands (Hassan et al., 1998). Improved seed from the formal sector in the low potential areas is dominated by Open Pollinated Varieties (OPV), while maize seed in the high potential areas, including Trans Nzoia, is almost uniquely hybrid seed. Much of the seed of improved crop varieties has reached farmers through the formal sub-sector, which was until recently a government monopoly. Research, production and distribution was dominated by public enterprises such as the Kenya Agriculture Research Institute (KARI), Kenya Seed Company (KSC), the Agricultural Development Corporation (ADC) and the Kenyan Farmers Association (KFA). Although the Kenya Seed Company has the structure of a private company, at the time of the study the majority of shares in the company (52%) were still owned by the government, the rest by KFA and private individuals. After liberalization, new companies entered the hybrid seed market, in particular the Oil Crop Development Company (OCD), Monsanto, Pioneer, and Western Seed Company. Seed quality control was previously in the hands of KARI, but with the liberalization a regulatory agency, the Kenya Plant Health Inspectorate Service (KEPHIS), was established. KEPHIS is responsible for the National Performance Trials (NPT), in which varieties need to show good results before they can be released. After release, KEPHIS inspects seed farms and production plants, and certifies the seed if the required standards are met. Certification of seed is a legal requirement in Kenya. MARKET STRUCTURE Trans-Nzoia produced 232,560 tons of maize in 1998, more than any other district in Kenya. It also has the highest yield, 3.6 t/ha (estimates of the Ministry of Agriculture). The 1999 census counted 575,000 people in Trans-Nzoia district, with a population growth of 2.9 %/year. Extrapolating for 1998, the maize production was 416 kg/person, also the highest in the country. In the district, 46 traders are licensed to sell seed. A sample of 30 was selected for the survey. Hybrid maize seed is only a small part of their commercial activities. Most stores are first of all hardware stores or they sell agricultural inorganic inputs. Average monthly hybrid seed sales for the study period, February to April 2000, ranged from Kshs. 11,200 (100 kg) to Kshs. 12,096,000 (108 tons). Older firms were generally firms with high turnover, had been in existence for a long time and had earned consumer loyalty Table 1. Average monthly value of hybrid maize seed transacted by sample retail traders (February-April 2000), (organised in six classes according to sales volume) Average value of seed sales (Million Kshs per month) a Number of retailers Class Relative frequency Total monthly value of seed sales (Million Kshs) Class % of total sales. < > Total a Average retail price of 1 kg of hybrid maize seed = 114 KSh, $US 1 = Ksh 74.

4 NAMBIRO ET AL.: MARKET STRUCTURE AND CONDUCT OF THE HYBRID MAIZE SEED INDUSTRY 477 Figure 2: Lorenz curve for the traders of hybrid maize seed in Trans Nzoia control only 10% of sales volume, while the largest 15% lof traders control 60%. PRODUCT DIFFERENTIATION Table 2. Prices of maize seed in Trans-Nzoia, per package and per kg loyalty over time. price/package price/kg Package size KSC seed Pioneer seed To study market concentration, the retail traders were divided into 6 groups (see Table 1 for specifications), by segments of 500,000 Ksh (1 $US = Ksh 74, at the time of the study, February-March 2000). The retail traders have also been classified into small, medium and large-scale with arbitrary cut-off levels of hybrid maize seed values. Traders with sales of less or equal to Ksh. one million per month comprise 60% of the total number of traders sampled, but only have a small market share (13% of the total sales). The medium size traders (between 1 and 3 million Ksh per month) comprised 27% of the total traders and had a market share of only 24.67% of the total sales. The group of large traders (> 3 million Ksh/month) comprised only 13.3% of the total traders but had more than 61% of the total market. Following Bain's classification (Bain 1951), based on distribution of sales over the different groups, the Trans Nzoia hybrid maize seed retailing system was judged as being moderately to highly concentrated. An alternative way of studying the degree of market concentration is by drawing the Lorenz curve, which depicts the cumulative distribution of sales against cumulative distribution of traders (Figure 2. The surface of the area between the Lorenz curve and the diagonal of the graph (A), divided by the area under the diagonal (A+B) represents the Gini coefficient, an indicator of inequality in distribution ranging from 0 to 1 (0 = absolute equality, 1 = complete inequality). The Gini coefficient for inequality in market shares was found to be A Gini Coefficient higher than 0.4 can be considered as oligopolistic (Parker and Connor, 1979) so the retail market for hybrid maize seed in Trans Nzoia exhibits clear oligopolistic tendencies. The Lorenz curve shows, for example, that the smallest 50% of traders Nine hybrid maize seed varieties are currently being sold in Trans Nzoia District. Six are varieties of KSC s late maturity 600 series (H614, H622, H625, H626, H627, H628), two represent KSC's medium maturity series (H511, H512), and one variety is from Pioneer namely PHB3253. The KSC seed is bought straight from the producer, who is based in Kitale, center of Trans-Nzoia, while Freshco Company, a marketing agent of Pioneer seed, distributes PHB3253. The survey showed that 96.7% of the retailers sold seed from the Kenya Seed Company while only 3.3% sold seed from Pioneer Company. KSC does not allow their distributors to sell seed from other companies. The packaging of Kenya Seed Company varieties was in packets of 2kg, 5kg, 10kg, and 25kg. The KSC could occasionally package 50kg on order from an individual consumer. Within a variety the different sizes of packets are rightly regarded as differentiated product lines. The traders revealed that 100% of their customers were aware of the various variety types in the market, the size and rang, and buyers often based their choices on these factors. KSC has, however, a strict constant price policy: retailers are required to sell all seed at the same price, regardless of package, type (hybrid or open pollinated), or place (centre of the city or rural market). Occasionally some traders provide different after sales services to the farmers. Transport services to the nearest bus station were provided by 36.7% of the traders while 3.3% of the traders provide extension services to the customers. The moment product differentiation sets in homogeneity decreases and so does market competition BARRIERS TO ENTRY The retailers frequently mentioned two barriers to entry in the hybrid maize seed market retailing system: institutional restrictions and initial capital requirements. The initial capital requirement was at least Kshs. 50,000, relatively high compared to the wage rates in the country. 0f the traders interviewed, 60% said that it was difficult to obtain the initial capital. Only 6.7% obtained a loan from the bank, 10% received funding from the cooperatives, and one trader obtained initial capital from Pioneer Seed Company. So 80% of the traders relied on savings only for their initial capital. Due to the fairly high initial capital requirement, entry for seed sellers is difficult and provides protection to those already established. The Kenya Seed Company requires retailers to be recommended by the divisional agricultural officer. Most seed sellers expressed disgust at the nightmares they had to go through before getting a letter of recommendation from the divisional agricultural officers in the Ministry of Agriculture. KSC then provides the retailer with a licence card to sell the seed. Unfortunately, the issue of this card can take months, sometimes years. The regulatory framework requires a traders license from the government, but this is generally issued without any problems. The license is issued annually by the municipal councilman, and amounts in practice to a tax by the local government. The cost of the license depends on the total sales volume of the trader, including maize seed. In most cases

5 478 traders start their business without a license, which the municipal council will eventually issue after assessing the sales volume realized. None of the traders limited themselves to seed, as they indicated that seed retailing was a seasonal business and not a reliable source of income during the rest of the year. INTEGRATION AND CONTRACTUAL AGREEMENTS The survey revealed that there is some horizontal integration: four of the hybrid maize seed retailers interviewed owned two shops and one had three shops. It would be difficult to accept the notion that retailers acquired more than one seed shop so as to improve their efficiency. Since KSC determines the prices, the integrated shops can only achieve to increase their turnover and hence the profits. Vertical integration was depicted by KSC, which acted as a manufacturer, wholesaler and retailer as it contained a seed shop, which sold seed to consumers at retail price. Again, this integration is not expected to increase efficiency but only to increase the sales volume of the company. MARKET CONDUCT Farmers can buy their maize seed directly from KSC, or from agents, subagents and retailers. The prices differ at the various marketing channel levels, but are all set by KSC. The KSC prices are uniform all over the country and do not consider transportation costs. Pricing in any one given year or season is fixed but is reviewed periodically and determined by seed producing companies. Traders on the outskirts of Kitale town made minimal profits as transportation costs were incurred, further reducing the profit margins. Due to lack of incentives by the traders outside town to sell seed, farmers were forced to travel to Kitale to purchase seed. The effect was that some farmers purchased enough seed for two seasons so as to lower costs of going back to Kitale to search for seed. The survey also revealed that since Pioneer 's introduction in Trans Nzoia, it has hardly been able to penetrate the market, with a share of only 3.3% of sales. Pioneer seed is more expensive (Table 2), but its major problem is that the variety offered (PHB3253), is of intermediate maturity, while KSC offers late maturing varieties in their 600 series, which are recommended for the area. Seed promotions are mainly undertaken by Kenya Seed Company at places such as the Agriculture Society of Kenya and Harambee shows, and through the mass media. Farmers' view of the hybrid maize seed industry and the seed performance. H614 variety was ranked first by almost all the farmers followed by H625 and H628. The farmers gave the advantages of H614 mainly as being: high yielding, disease and insect resistant, less rotting in fields and during storage, less lodging and finally good tasting. The farmers complained about the impurity of the seed from Kenya Seed Company, as it was a mixture of different varieties. They indicated that they buy seed under one varietal name but when the crop starts tasseling in the field they observe that, it was a mixture of different varieties of seed. The farmer is well aware of the tasseling characteristics of different varieties and can easily identify the different varieties in the mixed seed. Ninety-six point seven percent of the farmers admitted that they did not use the new PHB3253 seed because it was low yielding and easily rots in storage. The two main reasons as to why the PHB3253 seed is unable to penetrate the market is that it is a seed for mid-altitude zones and so cannot yield highly in highlands like the H600 series produced by the Kenya Seed Company and farmers are aware of that. Also due to the high import duty imposed on it, it further reflects on the high buying prices and so becomes more expensive than the locally produced seed of the Kenya Seed Company thus raising production costs. CONCLUSIONS AND RECOMMENDATIONS The analysis of market structure reveals that there are factors that favour imperfect competition in Trans Nzoia hybrid maize seed marketing at the retail level. These include unequally distributed shares of transactions among traders, the existence of product differentiation and barriers to entry. However, based on the Gini Coefficient of 0.6 the market is categorized as oligopolistic. The impact of liberalization intended for the seed industry has so far had minimal impact on the production side in the seed industry, but some impact on the distribution side. The only impact in the District is that the monopoly of distribution of the seed initially done by KFA has been reduced and now there are many traders in seed retailing. In spite of the fact that the government allowed other companies in the seed industry, KSC still has 96.7% of the market share in the District indicating that there is still a monopoly of seed produced. Some recommendations for the seed industry include improved inspection, increased access to credit, and increased competition. First, KEPHIS should introduce stern punishment for the seed companies who give adulterated seed to unsuspecting farmers and ensure that farmers get pure seed. Second, the government should facilitate easier access to credit so more traders can enter the business. One way is to encourage micro-finance organizations to offer credit to traders so that they can expand their businesses. Third, competition in the seed production sector should be encouraged. Finally, The Kenya Agricultural Research Institute should develop more late maturing varieties and offer them to different seed companies. Barriers to entry for importers could be relaxed, in particular the costly mandatory three year National Performance Trials. Finally, Government should consider lowering the import tax on seed, as it did for fertilizer, to make agricultural inputs cheaper to farmers. ACKNOWLEDGEMENTS The authors appreciate the financial support from the Syngenta Foundation for Sustainable Development through the Insect Resistant Maize for Africa (IRMA) project, and the technical and logistical support from CIMMYT- Nairobi and the University of Nairobi. Special thanks go to the traders and farmers who graciously offered their time for our discussions. REFERENCES Andic and Peacock The international distribution of income, Journal of the Royal Statistical Society part 2.

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