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African Agriculture: The Problem Of Volatility

African Agriculture: The Problem Of Volatility

Volatility in African agriculture prices is practically a given. “Ninety-six percent of the crops in Africa are rain-dependent — so you get no rains at all, you get no crop,” says Edward George head of group research at Ecobank.

In good years, then, prices drop, and in bad years they surge. Add to this Africa’s distribution problems — George reports that roughly 40 percent of crops produced in Africa rot before they even get to market — and you have the makings of a system that is highly sensitive to price shocks.

Unfortunately, smallholder farmers in Africa are overwhelmingly poor and occupy the unenviable position of being subject to volatility on all sides: not only in exports, but in local food prices.

“For a lot of the farmers in Africa, they’ve actually had a period of quite steady prices. The thing is, in Africa, the local prices… are totally disconnected from the international market.” That is, even if export prices are steady, the prices of local food staples can swing wildly — putting additional pressure on farmers and consumers alike.

Local price volatility can be aggravated by “poor infrastructure, high transport costs, absence of credit or insurance markets, and various policy and governance failures,” according to a Food and Agriculture Organization of the United Nations report from 2011.

For example, policy failures could take the form of a tax on exports. How to adapt? In a follow up to questions regarding their World Bank working paper on the subject, economists Walter Cont and Guido Porto suggest that these can be dealt with through cost reduction measures.

“Reduction in transport costs through investments in infrastructure has medium to long term effects, while reduction in transaction costs (banking and financial, mostly) may have more short term impact,” the researchers said in an email.

Overall, the number of potential policy measures available to individual governments is enormous. How to determine which ones work best, and at the lowest cost?

A Lund University working paper finds that, in terms of market efficiency, direct transfers to farmers are the least disruptive to market prices, followed by input subsidies for supplies like fertilizer or seed. The researchers found that other policy measures, like price support, tend to cause distortions in the market.

Agricultural Economies

But it’s hard to draw general conclusions, given the vast differences between agricultural economies, their particular set of commodities, and the issues facing a specific group of farmers.

For example, one aspect of volatility is the simple notion of uncertainty — not only about prices in general, but about the prices a farmer can expect to get from a particular buyer for a particular sale. In Côte d’Ivoire, this uncertainty had a detrimental effect on farmer welfare despite high global demand for cocoa.

However, George says, “If you can introduce a system where you fix the prices and enforce that, and you guarantee the farmer can sell the beans he produces, according to quality restrictions, you’ve taken away all the risk from the farmer.”

Two seasons ago, Côte d’Ivoire thus instituted a fixed price regime for cocoa exports. Prior to the reforms, farmers were often taken advantage of by traders, who would make purchase offers for cocoa in times of great need — usually just before school fees were due.

“Now, they introduce a system of a fixed price, which is a decent price, between let’s say 50 to 60 percent of the international price… Farmers are incredibly happy, they’re getting the best prices for cocoa they’ve had in two years, and in response quality has just gone through the roof.”

Production is also up, according to George.

Of course, such regimes are tricky to implement, not to mention costly. Credible forecasting of seasonal prices is important, as is a stabilization fund, which accumulates assets during such high price periods and subsidizes payments to farmers in low price periods. It also helps that cocoa prices have been high — had Côte d’Ivoire implemented the policy into a downturn, it might not have turned out so well.

However, such a system could function well precisely because it addresses what economist Alexandros Sarris argues is the heart of the matter.

“That unpredictability rather than instability is the main problem in agricultural production is one of the oldest, but apparently forgotten or not appreciated, issues in agricultural economics,” he writes in a recent paper.

Sarris argues that without a level of predictability in agriculture, people tend to overreact to swings in price stability, which causes markets to fail and prices to rise. Having such a system like Côte d’Ivoire’s, then, effectively eliminates that unpredictability.

Other systems that Sarris investigates include everything from futures markets to globally-implemented risk-management schemes, such as an international food reserve fund or import financing facilities.

However, there could also be potential in broader value extraction through measures that encourage backwards integration. “Nigeria,” says George, “Has been very successful with this one.”

Take Sugar

Nigeria is Africa’s largest sugar importer, but that might soon change. For years, George explains, Nigeria imported packaged sugar, a finished good. The government imposed a gradual ban on packaged sugar and, according to George, offered tax incentives to those who invested in packaging operations. 

“Nowadays, not a single packaged sugar is imported.”

“Then they said, ‘We’ll give you tax incentives if you start processing raw sugar into sugar and fortifying it. So they started doing that… guess what, imports of refined sugar have dropped to almost zero.”

Today, the government will only grant import licenses of raw sugar to those who plant sugarcane. “So it’s already started huge investment in sugarcane. It could reach a point where Nigeria becomes basically self-sufficient in sugarcane production — having been the largest importer of sugar in the world.”

How was Nigeria able to be so successful? “Political will is one of the most important things, there’s no doubt about it,” says George.

While the strategy hasn’t worked as well for rice, it could be an interesting model for other countries in the region looking to raise self-sufficiency and improve their own value-added sectors.

However, one might still advise a measured approach — and a healthy dose of realism. As mentioned above, policy measures can have unanticipated negative consequences.

For example, Guinea Bissau implemented a tax on cashew exports to help develop its cashew processing sector. Unfortunately, Cont and Porto found that the tax overwhelmingly affects (mostly poor) farmers, increasing their exposure to price volatility and reducing overall welfare.

Could the overarching benefits make up for the costs? Cont and Porto say, “If funds are used in this direction there could be a countervailing result… but there has been no progress along these lines.” As George points out, Guinea Bissau lacks even the most basic infrastructure for manufacturing, making the broader aims of the project, quite simply, “not conceivable.”

Thus a sense of what is realistic for a given place remains a key feature in developing policies for the agricultural sector. It may also, as the Nigerian case demonstrates, require a degree of experimentation. What works for one crop may not work for another, just as success may vary between countries.

Either way, volatility looks to be a long-term issue for Africa, making appropriate policy measures all the more critical.