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REFORMS OF THE MAIZE MARKET SYSTEM IN ZAMBIA:
ISSUES OF PRICE AND MARKET POLICIES, COOPERATIVES
AND INTERPROVINCIAL TRANSPORTATION

by

F. Kapola Sipula

A DISSERTATION

Submitted to the
Michigan State Universsity
in partial fulfilment of the requirements
for the degree of

DOCTOR OF PHILOSOPHY

Department of Agricultural Economics

1993

ABSTRACT
REFORMS OF THE MAIZE MARKET SYSTEM IN ZAMBIA:
ISSUES OF PRICE AND MARKET POLICIES, COOPERATIVES
AND INTERPROVINCIAL TRANSPORTATION
by

F. Kapola Sipula

Zambia embraced market liberalization as a strategy for economic
development in 1980 due to failings of the price policies and public marketing
enterprises which depended on subsidies and became a major drain on government
revenues. This dissertation presents three issues related to maize market
liberalization namely: 1) Evolution of the Pricing and Marketing Policies; 2) The
Role of Primary Cooperative Societies in Maize Marketing; and 3) Interprovincial
Maize Transportation.

The past agricultural policies were characterized by uniform pricing that did
not reflect transport costs and public monopoly marketing organizations. The system
resulted in nus-allocation of resources. Maize production pattern changed from
major consumption areas and nearby regions of Central, Copperbelt, Lusaka and
Southern towards remote Eastern and Northern provinces. On-farm storage and
rural milling were discouraged and consequently, marketing costs increased causing

subsidy requirements to increase.

ii

To reduce subsidy costs, the government attempted several market
coordination mechanisms including COOperatives whose performance was dismal too.
In the four-tier cooperative system, the Primary Cooperative Societies were surveyed
to study their potential to carry out basic market functions under the reforms. The
societies were found to be solvent but barely so and had serous liquidity problems.
Credit gaurantees for investments in their education and infrastructure was
recommeded for the short run.

Transportation, a major market coordination cost component was studied
using a linear programming model. The results re-affirmed that major maize
consumption provinces and those in close proximity had a comparative advantage
over remote provinces based on transportation costs. The remote deficit provinces
would also benefit from producing maize from within and/ or other grains. In the
long run, the change in production patterns will minimize the transportation costs
and help keep food prices low.

The dissertation supported the need for market liberalization for an efficient
maize market coordination mechanism and as a strategy for economic growth of

Zambia.

iii

DEDICATION

This dissertation is dedicated to my wife Pumulo Muyatwa

and my two lovely sons Kachinga and Chisulo Kapola

iv

ACKNOWLEDGEMENTS

It is not possible to itemize the quantity and quality of contributions made to
this dissertation by many people involved. I would, however, wish to express my
deep gratitude to Professor James Shaffer for his generous guidance and suggestions
as my advisor. I also extend my appreciation and respect to him for the support
outside of the academic environment afforded to me and my family. Great
appreciation is extended to Professor John Staatz for being there for me during the
most trying time of my study program. Special thanks go to professors Carl Eicher
and Richard Bernsten for their support received during my studies. I would also like
to thank my other members of the committee, Professors Mike Weber and Carl
Liedholm. Thanks go to Michigan State University, Department of Agricultural
Economics, Food Security in Africa Cooperative program for their financial support
for research.

I would like to thank the USAID/ZATPID II for financial support of my
whole study program and special appreciation goes to Dr. Florence Chenoweth for
the great encouragement in the course of my studies. Thanks also go to the
University of Zambia, Rural Development Studies Bureau, the Ministry of

Cooperatives and the research team for their hard work on the research project.

In Winnipeg, my gratitude goes to the University of Manitoba, Department
of Agricultural Economics and Farm Management for the support and facilities
accorded to me. I extend thanks to the Zambian and New Apostolic Church
communities, Drs. Rubinger and Dow G. and their staff at the Health Sciences
Centre for their caring.

I am deeply indebted to my father, G. K. Sipula, my mother, E. M.
Namusamba, my late sister, Namulinda, my late uncle, K. C. Sipula and the entire
family for their continuous support and encouragement throughout my years of
education.

And finally, I dedicate this thesis to my academic partner and wife Pumulo
and to my sons Chisulo Kapola and Kachinga for their sacrifice, traquility, and

patience.

TABLE OF CONTENTS

Page

LIST OF TABLES ............................................. xi

LIST OF FIGURES ............................................ xiv
CHAPTER ONE - THE EVOLUTION OF MAIZE PRICING AND

MARKETING POLICIES ..................................... 1

1.1. Geographic and Demographic Characteristics .................. 3

1.2. Economic Characteristics ................................. 9

1.3. The Agricultural Sector ................................. 12

1.4. The Maize Subsector ................................... 17

CHAPTER TWO - PRICING AND MARKETING POLICIES ........... 22

2.1. Government Agricultural Sector Objectives .................. 22

2.2. Maize Pricing Policies .................................. 24

2.2.1. Producer Pricing ................................. 25

2.2.2. Input Pricing .................................... 28

2.2.3. Credit Provision ................................. 31

2.2.4. Transport Pricing ................................ 31

2.2.5. Into-mill Pricing ................................. 35

2.2.6. Retail Pricing ................................... 36

2.2.7. Subsidy and Coupon System ........................ 39

2.3. Maize Marketing Organizations ........................... 42

2.4. Need for Market Liberalization ........................... 45

2.4.1. Marketing System ................................ 49

vii

Page

CHAPTER THREE - LESSONS LEARNED AND LIKELY

IMPACTS OF LIBERALIZA'IION ............................ 55
CHAPTER FOUR - THE ROLE OF PRIMARY COOPERATIVE

SOCIETIES IN MAIZE MARKETING ......................... 62

4.1. Problem Statement .................................... 64

4.2. Objectives ........................................... 66

4.3. Literature Review ..................................... 66

4.3.1. Development of Primary Cooperative Societies in Zambia . . 67

4.3.2 Cooperatives’ Role in Agricultural Marketing ........... 75

4.3.3 Cooperative Definition ............................ 77

CHAPTER FIVE - METHODOLOGY AND DATA .................. 79

5.1. Methodology .............................. I ........... 79

5.2. Sampling ............................................ 80

5.3. Data ............................................... 82

5.4. Data Quality ......................................... 84

5.5. Data Management ..................................... 86

CHAPTER SIX - ANALYSIS OF PCS RESULTS ..................... 87

6.1. Structural Characteristics of Sampled PCS ................... 88

6.2. Economic Activities .................................... 93

6.2.1. Maize Assembling Activity ......................... 94

6.2.2. Input Handling ................................. 101

6.2.3. Credit Distribution .............................. 102

6.2.4. Rural Milling .................................. 103

6.2.5. Consumer Shop Retailing ......................... 105

6.2.6. Surplus Versus Deficit Region Societies ............... 108

6.3. Whole Enterprise Financial Analysis ...................... 111

6.3.1. Selected Case Studies ............................ 115

6.4. Private Trade Participation, August 1990 ................... 119

6.5. Summary and Conclusions .............................. 123

CHAPTER SEVEN - INTERPROVINCIAL MAIZE TRANSPORTATION 130

7.1.

Problem Statement ................................... 131

viii

Page

7.2. Objectives .......................................... 134
7.3. Literature Review .................................... 135
7.3.1. Spatial Equilibrium Framework ..................... 135

7.3.2 Spatial Equilibrium Model ........................ 137

7.3.3. Transportation Costs and Rates ..................... 142

7.3.4. Maize Storage and Processing ...................... 145

7.4. Methodology and Data ................................. 148
7.4.1. Market Boundaries and Distances ................... 149

7.4.2. Transportation Routes and Costs .................... 151
CHAPTER EIGHT - ANALYSIS OF TRANSPORTATION MODEL ..... 157
8.1. Optimal Solution ..................................... 157
8.1.1. Minimum Marketing Costs ........................ 158

8.1.2 Provincial Level Analysis .......................... 163
8.1.2.1. Central Province ......................... 164

8.1.2.2. Copperbelt Province ...................... 165

8.1.2.3. Eastern Province ........................ 165

8.1.2.4. Luapula Province ........................ 166

8.1.2.5. Lusaka Province ......................... 166

8.1.2.6. Northern Province ....................... 167

8.1.2.7. North Western Province ................... 167

8.1.2.8. Southern Province ....................... 168

8.1.2.9. Western Province ........................ 168

8.1.3. Dual Price Analysis .............................. 170
8.1.3.1. Supply constraint Dual Prices ............... 171

8.1.3.2. Milling Constraint Dual Prices .............. 173

8.1.3.3. Final Product Demand Constraint Dual Prices . . 174

8.1.3.4. Conclusion ............................. 176

8.2. Sensitivity Analysis ..................................... 177
8.2.1. Objective Function Coefficient Ranges ............... 180

8.2.2. Right Hand Side Ranges .......................... 182

Page

8.3. Summary and Conclusion ................................ 183
CHAPTER NINE - SUMMARY, CONCLUSION AND POLICY
IMPLICATIONS .......................................... 186
9.1 Summary ........................................... 187
9.2 Policy Implications .................................... 196
9.3 Further Research Recommendation ....................... 199
BIBLIOGRAPHY ............................................ 201

Table 1.1

Table 1.2

Table 1.3

Table 1.4

Table 1.5

Table 2.1

Table 2.2
Table 2.3

Table 2.4

Table 2.5

Table 2.6

Table 2.7

Table 4.1

LIST OF TABLES

Page
Provincial Size, Total Population, Distribution, Growth
Rate and Density ..................................... 7
Real GDP and Real per Capita GDP: 1964-1991 ............. 11
Estimated Number of Farmers by Size, Category and
Province: 1990 ...................................... 14
Sectoral Percentage Shares in GDP: 1983-1991. ............. 15
Maize Cultivated Area, Production and Marketed:
1980-1990. .......................................... 19
Maize Related Subsidies in Relation to Government Budget
(Recurrent and Capital) and Budget Deficit: 1980-1990. ....... 24
Nominal and Real Maize Producer Prices, 1980-1992 .......... 26

Compound ’D’ and Urea Nominal and Real Prices: 1985-1991 . . . 29

Costing of a Bag of Maize from Selected Supply Sources

1989/90 Market Season ................................ 33
Maize and Maize Meal Road Transportation Rates,

1983-1991 (ZK/ton/kilometre) .......................... 34
Interprovincial Maize Movements 1989/ 90 Market

Season (’000 bagsx90kg) ............................... 35
CPI Nominal and Real Prices: Into-Mill and Retail,

1980-1991 .......................................... 37
Growth of PC83: 1948-1990 ............................ 70

Table 5.1
Table 6.1
Table 6.2

Table 6.3

Table 6.4

Table 6.5

Table 6.6
Table 6.7
Table 6.8

Table 6.9

Table 6.10

Table 7.1

Table 7.2

Table 7.3

Table 7.4

Table 7.5

Table 8.1

Page

Sampled Primary Cooperative Societies .................... 82
Average Society Management and Board Characteristics ....... 90
Mean Economic Characteristics - 1991 ..................... 95
Maize Costing PCS under Assumed Autonomy (Sample

Means and 1990/ 91 Market Season Parameters) ............. 96
Revenue and Expense Percentages: 1990 ................. 108
Selected Mean Variables from Surplus and

Deficit Maize Regions PCS Sample ...................... 109
Sample Averaged PCS Net Worth Statement - 1990 .......... 110
Sample Averaged PCS Income Statement - 1990 ............ 112
Sample Averaged PCS Financial Ratios - 1990 .............. 113
Averaged Category Income Statement - 1990 ............... 116

Private Participation Characteristics: August 1991/92

Market Season ..................................... 120
Marketed Maize Production Pattern Changes (percentage):

OLR vs Non-OLR Provinces, 1974-1985 .................. 133
Provincial Capacities (’000x90kg), 1990: Annual Production,
Storage, Milling and Final Product Demand ................ 147
Transportation Costs to Storage Facilities

(ZK per 90kg bag). 1990/91 ........................... 150
Transportation Costs to Processing Plants

(ZK per 90kg bag), 1990/91 ........................... 152
Transportation Costs to Demand Destinations

(ZK per 90kg processed maize), 1990/91 .................. 153
Optimal Provincial Maize Flows to Storage (’000x90kg bags) . . . 160

xii

Table 8.2

Table 8.3

Table 8.4

Table 8.5

Table 8.6
Table 8.7
Table 8.8
Table 8.9
Table 8.10

Table 8.11

Page

Optimal Provincial Maize Flows to Mills (’000x90kg bags) ..... 161
Optimal Provincial Maize Flow to Retail Demand

Destination (’000x90kg bags) ........................... 162
Optimal Provincial Storage and Milling Capacity

Utilization (’000x90kg bags) ............................ 163
Opportunity Costs for Using Non-optimal Routes,

1990/ 91 Marketing Season (ZK per 90kg bag) .............. 164
Dual Prices for Maize Supply Sources (ZK per 90kg bag) ..... 170
Dual Prices for Milling Capacity (ZK per 90kg bag) .......... 172
Dual Prices for Final Product Demand (ZK per 90kg bag) ..... 173
Derived Minimum Final Product Prices by Region ........... 175
Objective Function Coefficient Ranges ................... 178
Right Hand Side Ranges (’000 bags) ..................... 180

Figure 1

Figure 2
Figure 3
Figure 4
Figure 5

Figure 6

LIST OF FIGURES

Page
Map of Zambia: Provinces, Districts, Major Road
and Rail Links ....................................... 4
"Controlled" Maize Market - 1989/ 90 ..................... 44
"Free” Maize Market: August 1991 ....................... 47
Cooperative Structure in Zambia - 1991 ................... 68
Two-Region Spatial Equilibrium Model ................... 138
Interprovincial Maize Transportation in Zambia ............ 154

xiv

BF

FAO
GDP
GNP

GRZ

LINTCO
MAWD
MOC
NAMBoard
N CZ

NMC

OLR

PIC

ACRONYMS

Breakfast maize meal

Commercial Farmers Bureau

Central Statistics Office

District Cooperative Union

Food and Agricultural Organization of the United Nations
Gross Domestic Product

Gross National Product

Government of the Republic of Zambia
Zambian Kwacha (currency)

Lint Company of Zambia

Ministry of Agricultural and Water Development
Ministry of Cooperatives

National Agricultural Marketing Board

Nitrogen Chemicals of Zambia

National Milling Company

Old Line of Rail

Primary Cooperative Union

Prices and Incomes commission

HZNI‘II'IWO

(I)

Roller maize meal
Zambia Seed Marketing Company
Zambia Cooperative Federation Limited

Zambia Cooperative Federation/ Finance Services

Central Province
Copperbelt Province
Eastern Province
Luapula Province
Lusaka Province
Northern Province
North Western Province
Southern Province
Western Province

Imports from the rest of the world

Commonly Used Units

ZK = USS 0.0017 ZK, July, 1993
Bag of Maize = 90 kilogram weight
Weights (Kg) = Kilogram

Distance (Km) = Kilometres

Rainfall (mm) = Millimetres

CHAPTER ONE

THE EVOLUTION OF MAIZE PRICING AND MARKETING POLICIES

Inimdnsflan

The structural adjustment efforts under way in many African countries since
the 19805 have sought to liberalize existing government restrictions on markets. As
a result, the relative roles for the private and public sectors in the economies are
being debated. This has involved redefining the role of the state in the economy and
achieving stability with respect to macroeconomic variables such as balance of
payments, government budget, the rate of inflation, the growth of the national
income and income distribution. Zambia is one country that has seriously attempted
such market reforms beginning in 1980.

Zambia manifests a dualistic economy, with relatively developed, densely
populated urban areas and sparsely populated undeveloped rural areas. The country
depends heavily on the mining sector, whose contribution to the economy has been
declining. The economy has consequently been declining, forcing the country to rely
more on domestic borrowing and external financing for development projects.

The country suffered from a combination of significant external shocks and
domestic policy errors which have culminated in a severe economic and political

crisis in recent years. There has been a rapid deterioration in balance of payments,

2

budget balance, per capita income and the social and physical infrastructure such as
health, education, housing and transportation services.

Recognizing that earlier economic policies were not conducive to realizing
national goals of economic diversification and self-sufficiency in staple food
production, the government undertook changes. The main thrust of these was to
decontrol and liberalize the economy from the high degree of direct state
participation and regulation that had existed since independence in 1964. The
agricultural sector was identified as the priority sector for development.
Improvement in the agricultural sector is important in order to make full use of the
land and labour resources and in increasing incomes and foreign exchange earnings.

In the past, agriculture has contributed about sixteen percent to the country’s
GDP. The government has begun formulating and implementing a policy and
institutional reform program that will put agriculture as the leading sector. In
addition wholesale and retail prices of all agricultural commodities including maize
and maize meal prices have been decontrolled and Government monopoly marketing
institutions have been abolished, with markets opened to private participation at all
levels.

Maize is by far the most important agricultural commodity in Zambia. It is
the Staple food and accounts for seventy percent of the marketed value of
agricultural commodities. Any changes in the maize policy is bound to affect not
only the agricultural sector but the economy as a whole. The centerpiece of the
reforms has been the liberalization of the maize market. The aim is to revitalize the

sub-sector under the revised set of production and marketing policies. One of the

3

major changes will be the withdrawal of maize related government subsidies which
had been increasing uncontrollably. A large percentage of the subsidies went toward
market coordination functions.

The dissertation discusses the maize sub-sector in relation to price and market
policies, cooperatives and interprovincial transportation. Chapter one presents an
overview of the country, looking at the geographic and demographic, characteristics,
economics, the agricultural sector and the maize sub-sector. Chapter two reviews the
past pricing and marketing policies of the country. Chapter three draws lessons for
the past agricultural policies and presents likely impacts of the market reforms in
Zambia. Chapter four provides a review of the cooperative in maize marketing in
Zambia. The chapter presents a problem statement, the objectives of the study on
cooperatives and reviews the past role of cooperatives. Chapter five presents
methodology of the cooperative study and Chapter six, the results. Chapter seven
introduces the interprovincial maize transportation problem, objectives, model
framework and methodology. Chapter 8 presents results of the interprovincial

transportation and the last chapter, Chapter nine includes a summary conclusion.

1.1. Geographic and Demographic Characteristics

Zambia is a landlocked country occupying an area of 752,614 square
kilometers. The country shares borders with Zaire, and Tanzania in the north,
Malawi and Mozambique in the east, Zimbabwe and Botswana in the south, Namibia

in the South West and Angola in the West (See map, Figure 1.).

 

 

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Figure 1 Map of Zambia: Provinces, Districts, Major Road and Rail Links.

5

Zambia has a tropical climate and vegetation with three distinct seasons,
namely: the warm-wet season stretching from November through to April, the cool
dry winter season stretching from May to August and the hot dry season from
September to October. The country is normally divided into four ecological zones.
These include the northern rainfall zone, with an area of 350,000 square kilometers.
This zone comprises the Northern, Luapula, Copperbelt, and parts of North Western
provinces. It has highly leached soils with rainfall ranging from 1,100 to 1,400
millimeters. The soils are relatively infertile. The zone is suitable for the production
of perennial tree crops and has limited potential for cassava, cotton, tobacco, maize,
sorghum, millet, beans, rice and beans (Malambo, 1987, p. 32).

The second zone is the western semi-arid plains, with an area of 208,000
square kilometers. The zone comprises the Western and parts of the North Western
provinces. The rainfall is low, averaging about 600 to 800 millimeters, and the area
is suitable for cattle rearing.

The third zone is the Central, Southern and Eastern plateaus with an area of
94,000 square kilometers. The rainfall ranges between 600 and 1,000 millimeters.
The zone is the most fertile in the country. The area is suitable for many crops,
including maize, tobacco, cotton, sunflower. It is also suitable for livestock
production.

The fourth zone is the Luangwa-Zambezi rift valley, with an area of 101,000
square kilometers. Rainfall is below 800 millimeters in this zone. It is characterized

by valleys with hot and humid temperatures. Sorghum, millet and cotton are suitable

6
(Malambo, 1987, p. 32). The zone lies in parts of the Southern, Central, Lusaka and

Eastern provinces. The zone has limited agricultural potential.

Administratively the country is divided into nine provinces, namely: Central,
Copperbelt, Eastern, Luapula, Lusaka, Northern, North Western, Southern and
Western (See Figure' 1). There is, however, no direct relationship between the
ecological zones and the administrative regions. The high agricultural potential
zones cover parts of Central, Copperbelt, Eastern, Lusaka and Southern provinces.

The population of the country is currently estimated at 7.8 million people
(Table 1.1). The Copperbelt province has the largest population followed by Lusaka
province. The two urban areas account for over 35 percent of the total population.

Population density is high in the Copperbelt and Lusaka provinces.
Copperbelt has 50.4 and Lusaka province has 55.2 persons per square kilometer.
The rural areas, on the other hand, have only between 14.1 in the Eastern province
to 3.0 persons per square kilometer in the North Western province. The population
densities in the rural areas indicate the vastness of the country whereas the urban
densities show the concentration of people within alimited area.

According to the census of 1990, 52 percent of the population was in the
urban areas.1 The Copperbelt province accounts for 43.5 percent of the total urban
population. Lusaka accounts for 31.7 percent. The two provinces thus account for

over 75.0 percent of the urban population. The urban population relies on marketed

 

1Urban areas are defined as "all areas with a population of more than five thousand
inhabitants most of whom are involved in non-agricultural activities and sharing such
facilities as piped water, electricity, post office and police station" (CSO, country profile:
Zambia 1989/1990, December, 1990, p. 5).

7

Table 1.1 Provincial Size, Total Population, Distribution, Growth Rate and Density.

 

Province Area Total % Distribution Growth Rate
(’000 sq Km) Population of Population (1980-1990) Density

Central 94 725,611 9.3 3.5 7.7
Copperbelt 31 1,579,542 20.2 2.3 50.4
Eastern 69 973,818 12.5 4.0 14.1
Luapula 51 526,705 6.7 2.2 10.4
Lusaka 22 1,207,980 15.5 5.6 55.2
Northern 148 867,795 11.1 2.5 5.9
N. Western 126 383,146 4.9 2.3 3.0
Southern 85 946,353 12.1 3.4 11.1
Western 126 607,497 7.8 2.2 4.8
Zambia 753 7,818,447 100 3.2 10.4

 

Source: CSO, 1990c, 1990d.

food commodities from the rural sector. The importance of marketing can not be
over-emphasized, as the distribution and density of the population indicates.

The national population growth rate was recorded at 3.2 percent between 1980
and 1990. The population density at the nationallevel increased from 5.3 in 1969
to 7.5 in 1980 and to 10.4 persons per square kilometer in 1990. Population grth
rates per province are shown in Table 1.1. The highest population growth rate
between 1980 and 1990 was recorded by Lusaka province at 5.6 percent. This was
due to the natural population growth through high birth rates (accompanied by lower
death rates) and to rural-urban migration.

The Eastern province was next in the population growth rate for the given

time period, with 4.0 percent. The Copperbelt had a low population growth rate of

8

2.3 percent, similar to the less-populated rural areas. This indicated a slow down in

rural-urban migration rates. This is true for the urban areas in general.

The background so far presents the general physical challenges, obstacles and

opportunities that the Zambian economy faces, particularly the agricultural sector.

Briefly these include:

i)

iii)

the landlocked position of the country raises the costs to participate in world
markets. Neighbors are largely agricultural countries capable of producing a
similar range of commodities and suffering similar climatic catastrophes. This
has happened in the past three years with severe droughts in the whole of the
southern Africa region. The scope for agricultural exports to neighboring
countries is, therefore, limited.

Zambia’s low population density and dispersed rural settlement patterns has
disadvantages. It raises the cost of providing services to agriculture and the
cost of extracting agricultural commodities.

the high proportion of the population that resides in the urban areas requires
producing a relatively large food surplus from widely distributed and sparse
rural populations to feed the urban population.

large sections of Zambia’s labour force are urban and do not have the
agricultural or marketing skills or experience of rural living. People may be
slow to accept that they have few alternatives to becoming involved in
agricultural production either as independent smallholder, agricultural
laborers or traders. The transfer of labour to agriculture employment is,

therefore, unlikely. The regional dispersions, population densities,

9

urbanization, vastness of the areas are key challenges for production and

marketing of agricultural products.

1.2. Economic Characteristics

The economy is largely based on its majority state-owned copper industry,
which is the only significant foreign exchange earner. The industry accounts for one-
third to one-half of government revenues.

The country’s main export is copper. In 1988, for example, copper exports
accounted for 85.2 percent of the total value of exports (CSO, 1990c, p. 14). There
has been a relative decline in the mining sector’s GDP share from 37 to 14 percent
from 1970 to 1985 (Jansen, 1990, p. 6). The heavy dependence on copper for
Zambia’s foreign exchange earnings has resulted in a very volatile and poor economic
performance due to fluctuations in the world copper prices. In addition, copper
production in the country has been going down. In 1975, copper prices dropped by
40 percent and the Situation was made worse by increased oil prices which raised
import costs. The effect was particularly severe for imported inputs, on which
Zambia depends heavily.

Zambia’s major imports include mineral fuels, chemicals, machinery and
transport equipment and food and beverages. In 1988, the highest annual growth
rate of imports was that of mineral fuels, with petroleum and petroleum products
rising by 17 percent. This was followed by chemicals with 16 percent.

Overall the economic performance has been weak particularly since 1974.

The real GDP grew at an annual rate of 5.6 percent from 1965 through 1974. Since

10
then the growth rate has been about nil. In 1965 real per capita GDP was 518

kwacha and was 252 in 1985. In 1989 the per capita GDP had dropped to 148
kwacha (Table 1.2). In the last ten years (from about 1982) the real GDP per capita
has declined by about 2.5 percent annually. With a rapid population growth rate and
slow economic growth, the real per capita GDP has declined to seriously low levels.

To lessen the heavy dependency on mineral export earnings, the government
embarked on a policy to restructure and diversify the economy. The development
of agriculture was identified as the key sector for the strategy. Wood (1990, p. 40)
observed several reasons why the agricultural sector was and should be the engine
of grth for Zambia. First, Zambia could not afford to use its scarce foreign
exchange resources to import foodstuffs that could be grown locally. Financial
problems, for example, threatened to disrupt food imports on several occasions, with
the consequent threat of the urban unrest. The government could not remove this
threat.

Second, the increasing government deficit required it to seek foreign funding,
which in turn led to recourse to the World Bank (WB) and the International
Monetary Fund (IMF) with their stringent conditions for loans. It became desirable
to remove maize subsidies to meet the loan conditions and for the long-run economic
development. Third, agriculture has become increasingly important to the economy
in view of the poor prospects for copper. Agriculture and agricultural industries
could generate employment, foreign exchange and government revenue.

The terms of trade between the rural poor and the urban dwellers had been

worsening against the rural. Income for the rural population was only a quarter of

11
Table 1.2 Real GDP and Real Per Capita GDP: 1964-1991

GDP (ZK Per Capita GDP Real Per Capita

 

Year million) (ZK million) GDP
1983 3,872 628 207
1984 4,556 714 234
1985 6,001 908 252
1986 10,017 1,463 242
1987 16,297 2,297 252
1988 21,063 2,864 173
1989 33,701 4,419 148

 

Source: GRZ 1990a (Real per capita GDP base year 1975 = 100).

 

the urban incomes in 1978 (Wood, 1988, p. 17). Urban produced products were also
becoming more dear. It was imperative to arrest the rural urban drift brought about
by these factors and the cheap food policy. The agricultural sector is important for
several other reasons, among which is the fact that the sector could be less
dependent on the imported inputs compared to many other sectors.

Although the maize sub-sector has been making an important contribution to
the economy, substantial opportunity for improvement in rural food security and
economic efficiency of production and marketing would also make a major

contribution to reducing the govemment’s financial difficulties.

12
1.3. The Agricultural Sector

The agricultural sector as it exists today is dualistic. There are a relatively few
but well-developed large-scale commercial farms, mainly in areas along the Old Line
of Rail (OLR) and in the Eastern province. The low-cost maize production areas are
comprised of 95 percent of Central province, and 85, 80, 70 and 40 percent of
Eastern, Southern, Lusaka and Western provinces, respectively (FAO, 1991, p. 136).
Commercial farming has concentrated in these areas. The commercial farmers are
highly mechanized and usually highly specialized. They number about three thousand
in the whole country (GRZ, 1990a, p. 86). The commercial farmers cultivate over
forty hectares annually.

Between 1964 and 1982 the government tried to achieve its food production
targets by encouraging a variety of production forms which included cooperatives,
state and parastatal farms (Wood, 1990, p. 3). These institutional farms owned and
operated by the government directly or as parastatal entities were classified as
commercial farms as well.

The small-scale farms scattered all over the country are a much larger number
of producers. This group sometimes includes the emergent farmers, who are
basically upcoming medium Size commercial farmers. Emergent farmers number
67,000 (about 10% of all farmers) and cultivate between five and twenty hectares
on average. They grow crops for subsistence and for the market. Emergent farmers
use mostly family labour, oxen and /or hired tractors. This category of farmers is
considered separate from the small-scale farmers (also known as traditional or

subsistence farmers).

13
Small-scale farmers number about 580,000 (80% of farms) according to

1988/ 89 estimates. The small-scale farmers cultivate on average two hectares (or less
than 5) per household using family labour and simple hand tools. Maize, sorghum,
millet and cassava are their principle food crops (Malambo, 1987, p. 36). The
estimated number of farms by Size, category and region is presented in Table 1.3.
Southern, Eastern and Central have the largest number of commercial and emergent
farms.

About 50 percent of the maize is produced by the small-scale farmers. The
emergent farmers contribute 27 percent of the total maize output. The remainder
comes from the commercial farmers, who put in 16 percent, and the institutional
farms, which provide 7 percent. In the Eastern province, 55 percent of the maize
comes from the small-scale farmers. Central gets 40 percent of its maize from small-
scale farmers and 33 percent from emergent farmers. Southern province, with the
largest number of emergent farmers, gets most of its maize from this category.
Forty-two per cent is contributed by emergent farmers and only 27 percent comes
from small-scale farmers. Luapula, North Western, and Western provinces get over
80 percent of their maize from small-scale farmers.

Small-scale farmers, therefore, provide an important share of maize output in
almost all the provinces. Together with the emergent farmers, this category of
farmers provide the country with over 70 percent of the total maize produced. The
numerous and various locations of small-scale farmers causes a major marketing
challenge for crop extraction and food and input distribution. The market has to

deal with small quantities of the commodities scattered all over the country.

14

Table 1.3 Estimated Number of Farmers by Size, Category and Province: 1990

 

Province Small-Scale Emergent Commercial Institutional Total
Central 47,981 9,658 874 383 58,896
Copperbelt 15,315 749 123 157 16,344
Eastern 182,262 23,645 315 311 206,533
Luapula 89,871 338 15 290 90,514
Lusaka 22,488 1,157 163 94 23,902
Northern 75,478 5,380 91 411 81,360
NWestern 36,817 217 18 472 37,524
Southern 64,145 22,977 1,417 534 89,073
Western 47,914 2,656 39 197 50,806
Zambia 582,271 66,777 3,055 2,849 654,952

 

Source: GRZ, 1990a.

 

All the categories of farmers in Zambia utilize in total only one sixth of the
arable land. There is, therefore, a Significant opportunity for the agricultural industry
to contribute to the development of the economy. In the past, farming, forestry and
fishing industries have been contributing between 12 to 16 percent to GDP. Between
1970 and 1974 the farming industry contributed 12 percent to GDP. For 1975 to
1979, 1980 to 1982, and 1983 the contributions were 15, 14, and 14 percent
respectively (See Table 1.4). Farming hardly contributed more than 16 percent to
GDP until 1990, belying the sector’s potential and importance to the country.

Despite the steps taken and the seemingly high priority accorded to the sector
in the past, the performance has been far below potential in both food and raw
material production. The major reason could be the limited public investment

directed to agriculture and rudimentary infrastructure such as roads, extension, and

15
Table 1.4 Sectoral Percentage Shares in GDP: 1983 - 1991

 

 

 

SECTOR
Year Agriculture Mining Service Other
1983 14.0 15.0 48.0 23.0
1984 14.5 13.7 46.8 25.0
1985 13.1 15.6 44.8 26.5
1986 12.2 18.2 43.3 26.3
1987 11.0 13.6 44.1 31.3
1988 16.1 10.4 39.3 34.2
1989 17.6 12.9 41.8 38.7
1990 17.8 n.a n.a n.a
1991 18.7 n.a n.a n.a

 

Source: Malambo, 1988; C80, 1990b; Weekly Post, 1992.

_
irrigation. Government expenditures have been directed more at consumption than
capital investments (Mumeka, 1991, p. 73).

The major aims of the Zambian agricultural policy from independence to 1992
were driven more by political rather than economic factors.2 Securing the urban
food supply at a ”reasonable" price had been the major goal. As a result an index
of per capita food production which had reached a peak of 112.4 in 1976 dropped
to 72.2 in 19883 (Jansen, 1988, p. 221). There has been need to increase food

production in order to meet the rapidly growing urban and rural demand. Maize is

 

2This was so until the new government took over at the end of 1991.

’Per capita food production (measured in calories) involves total food production divided
by the total population. Given food requirements per person, the index shows whether the
country is self-sufficient if the number is hundred or higher.

16

the major grain, but Sorghum and millet contribute about 10 percent of total
marketed grain production. Wheat, a crop grown mainly by commercial farmers, has
gained importance but little progress has been made to meet demand from local
production. Cassava is an important drought-resistant crop in the Luapula, Northern,
North Western, and Western provinces.

Cotton, groundnut, soybean and sunflower have been produced as cash crops
and the marketing performance has been dependent on the performance of the
parastatal marketing organizations handling each crop (except for groundnut).
Cotton particularly did well by small-scale farmers who also produced most of the
sunflower and groundnut.

Export crops, such as tobacco, coffee and tea, have performed very poorly.
Tea and coffee are mostly produced by parastatal farms. Tobacco is produced mostly
by the commercial farmers and earns the country about one percent of total export
earnings (agriculture as a whole earns about three percent only). livestock
production is limited, but includes mostly cattle, goats, poultry and pigs.

The potential for increasing production of crops and livestock is considered
to be very high. AS stated earlier, only one sixth of arable land was under cultivation
and in 1990, the unemployed labour force was estimated at 1.2 million peOple (FAO,
1991, p. 1). Not only is increased production necessary but an efficient marketing

system is required, particularly for the staple food-maize.

17
1.4. The Maize Subsector

Maize accounts for 70 percent of the cultivated crop area and Small-scale
farmers Obtain 90 percent of their cash receipts from the crop sales (GRZ, 1990b,
p. 1). Over 90 percent of the grain produced in Zambia is maize, making it the most
important economic commodity after copper.

The production performance of maize is considered successful only under
favorable weather conditions, when the country has been able to produce sufficient
maize to meet its needs, such as in the 19705, 1988 and 1989. Production, therefore,
has fluctuated considerably depending on weather conditions.

Maize has contributed to improved food security of some rural households by
increasing their land productivity, increasing their income and providing them with
an opportunity to enter the cash economy. Despite such success in maize production
at the national level and in some provinces, some rural maize growing households
have been exposed to food insecurity.

Agricultural product prices in the 19805 continued to be controlled directly or
indirectly, but manufactured goods and services were not. This worsened the terms
of trade between the rural and the urban areas (GRZ, 1990a). The gap in real
incomes widened against the rural dwellers (Sipula, 1987). In addition, food products
moved from the rural areas to the urban areas through the official marketing
channels, but there was no similar mechanism to move the food into the rural areas.
The rural areas were thus exposed to food insecurity either through lack of food on

the market and/ or higher prices or costs to obtain food from urban centers.

18

The measure of success for maize production, therefore, has been judged on
the basis of national levels of quantities produced and marketed. The production of
maize has shown an increasing trend since 1964. Table 1.5 Shows the estimated
quantity of maize produced and marketed each year from 1964 to 1990. Maize
production in the 19805 expanded Significantly and peaked in 1988, with a record
marketed production of 14,990,000 bags of 90kg weight. The increased output was
attributed to good weather, increased area devoted to the crop, and increased
productivity due to increased use of the subsidized fertilizer input (Jansen, 1988, p.
34, GRZ, 1990a, p. 40). A large percentage of the increased production was
attributed to increase in area put under maize. For example, in 1980 the area was
335,000 hectares and in 1990, it had increased by 96.8% to 659,000 hectares.

Average yields per hectare per year remained stable changing by only 9.6%
from 1980 to 1990. The erratic yields has been mainly due to the weather and
government policies. In addition, erratic changes in producer prices have lead to
some loss of confidence amongst farmers and to doubts concerning the prospects for
a sound marketing and pricing policy which would encourage agricultural production.
This was particularly important between 1985 and 1991 when there was no clear and
reliable agricultural policy.

Maize is consumed by a large majority of the people both in the urban and
rural areas. The processed product, maize meal or mealie meal, is an inexpensive
source of calories. In 1980, the average cereal consumption per capita was estimated

at 170 kilograms, of which 62 percent was derived from maize (GRZ, 1990a, p. 23).

19
Table 1.5 Maize Cultivated Area, Production Yield and Marketed: 1980-1990.

 

Year Land Area Production Yield Marketed
(’000 Ha) (’000 bag-3) (bag/Ha) (’000 bass)
1980 335.0 6,657 19.9 4,247
1981 540.0 10,658 19.7 7,703
1982 454.5 8,336 18.3 5,671
1983 541.2 10,392 19.2 5,901
1984 501.0 9,686 19.3 6,347
1985 575.8 12,471 21.7 7,069
1986 571.7 12,006 21.0 10,607
1987 583.3 12,365 21.2 7,296
1988 600.5 12,851 21.4 14,990
1989 629.4 13,595 21.6 13,559
1990 659.1 14,369 21.8 7,100

 

Source: Jansen, 1988; C80, 1990b; FAO, 1991; Malambo, 1988; GRZ, 1990a

 

Per capita maize consumption in the rural areas varies widely by region.
Nutritional surveys have found that the lower the per capita maize production, the
higher the incidence of food deficiency cases. This could be due to the fact that
traditional food crops are less nutritious compared to maize. The government policy
of promoting maize on this basis was, therefore, good for improving the nutritional
status of consumers.

The incidence and severeness of protein-energy malnutrition in rural areas is
almost twice as high as in urban areas. This provides a great challenge to the
reformed market in the future, especially with the increased consumption of maize

in rural areas.

20
In 1980, eighty percent of the rural households and a quarter of the urban

families were found to be living below the poverty level in Zambia (Greiner, et a1,
1988, p. 10). Not only was physical availability of maize and maize meal, a problem
in urban and rural areas but the income levels were low. The low income group
Spends 90 percent of their income on food either retained or purchased (GRZ,
1990a, p. 27). For policy purposes in Zambia, the vast majority of rural households
are assumed to produce most of their food requirements and have small quantities
of surplus for sale. Weber et a1. (1988, p. 1045), however, cautioned that in some
rural areas as many as 50 percent of the households have been net food buyers and
not net food sellers, in major grain producing Countries of Africa.

In the Zambian case there is not enough documented evidence to support or
refute the assumption that most rural households are net food sellers, which was a
basis for not providing food coupons to the rural households in 1989. However,
Malambo (1987) in his study of Mumbwa district in Central province found that a
significant portion of the population were net food buyers. This specific region was
generally known to be a food surplus area. The net food buyers had difficulties in
purchasing food from the market in times of need. The marketing system, he
concluded, was geared towards moving maize from the rural areas to the urban areas
and had no backward linkages. This is particularly important in the event of poor
harvests due to droughts, which have been frequent in the 19805.

These issues complicate the food price policy problem. Increased producer

prices may increase incomes for the net food sellers and thus improve their food

21

security situation, and yet higher prices may reduce food security for a substantial
rural population who are net food buyers (Timmer et al., 1983).

Even though it is recognized that the absence of maize does not necessarily
imply food insecurity, it can be discerned from the foregoing that the crop plays an
extremely important role in the country. There is need to increase the production
of maize, improve the location of production and improve the marketing system in

order to meet the demand for the commodity.

CHAPTER TWO

PRICING AND MARKETING POLICIES

In order to understand the agricultural status of the country, one needs to look

at the historical background of the pricing and marketing policies which have thus

shaped the sub-sector’s structure, conduct and performance.

2.1. Government Agricultural Sector Objectives

Major agricultural objectives of the Zambian government Since 1964 when the

country attained independence have included:

a)

b)

d)

to increase the sector’s contribution to GDP and thus aid in diversifying the
economy away from total dependence on copper;

to provide cheaper food to the Zambian people;

to promote import substitution;

to attain self-sufficiency (and food security) in food and industrial raw
materials;

to create new employment and income opportunities particularly for the rural
areas and hence arrest the high rural-urban migration; and

to increase the purchasing power of people in the rural areas and thus provide

an expanded market for the urban industrial sector.

22

23

To fulfill these objectives over the years a number of policies were instituted.
The major ones were price controls of major agricultural products and inputs, direct
control or ownership of marketing organizations, subsidies on maize and agricultural
inputs and the 1989 coupon system to ease the effects of maize meal direct subsidy
withdrawals.

These measures were implemented and defended by the government as the
only way to achieve regional and social equity, and maintain food security in the
country. However, poor balance of payments and increasing levels of subsidies
contributed to extremely high levels of budget deficits, as Table 2.1 shows. For
example, the maize related subsidy as a percentage of the budget deficit averaged 58
percent between 1980 and 1991. In 1980, the subsidy level was nearly the same as
the budget deficit, and by 1990 the subsidy level as a percentage of the budget deficit
was 120 percent. The budget deficit could have been eliminated by the elimination
of the subsidies. The government was, therefore, forced to institute measures aimed
at reducing the cost of marketing maize by liberalizing the economy. Firstly, the
government decontrolled prices, reduced subsidies, and encouraged privatization in
marketing of most of the agricultural products.

The impacts of these new measures have not yet been evaluated since they
have been genuinely established but for a few years and the measures have not been
complete as planned. Further reforms towards a "free" market are still in the
process of being instituted. The subject matter can, however, be dealt with in terms
of what is likely to happen concerning the performance of the reformed maize

market system. The remainder of the paper will, therefore, concentrate on reviewing

24

Table 2.1 Maize Related Subsidies in Relation to Government Budget (Recurrent
and Capital) and Budget Deficit: 1980-1990

 

 

Year Govt Budget Budget Deficit Maize Subsidy % Maize % Retail

(ZK m) (ZK m) (ZK m) Subsidy. Subsidy"
1980 1,657.6 160.3 154.0 96.1 61.7
1981 1,388.6 155.7 87.1 55.9 59.1
1982 1,643.2 658.1 138.0 21.0 30.1
1983 1,475.9 288.6 124.7 432 10.7
1984 1,484.6 2848 81.6 28.7 129
1985 2,1843 280.4 134.0 47.8 1.4
1986 5,383.6 1,025.7 565.0 55.1 32.0
1987 5,837.5 2,1468 638.4 29.7 67.0
1988 8,3593 1,531.2 1,413.0 923 118.0
1989 9,838.0 3,699.0 1,585.6 429 18.0
1990 2450303 2,801.4 3,363.9 120.1 n.a

 

 

Source: GRZ, 1990a; Jansen, 1988.
‘ as a % of budget deficit and as a % of retail price. Govt=Government

 

and documenting the major past and current maize pricing and marketing policies1
and attempt to predict the implications of the new policies and practices on

marketing of maize.

2.2. Maize Pricing Policies
Maize pricing policies in Zambia included the setting of producer prices

(prices received by the farmers for their products at what ever point of sale), input

 

‘ The historical role of the price policies and practices has been well documented by
such scholars as: Jansen, D. (1987, 1988, 1990), Wood, A. (1988), Kydd, (1988), GRZ,
(1990, 1991), and Ndalamei, L. (1990). It is, however, necessary to present this background
briefly in order to set the stage for the discussion of the reforms. This then assists in
understanding what is being reformed and helps predict the likely impacts of the changes.

25

prices, into-mill prices (prices the millers pay to acquire their maize), retail prices
(refers to final maize meal prices paid by the consumer) and costs or rates related

to transportation, storage, processing and packaging.

2.2.1. Producer Pricing

In 1936 a maize control board was established. The board was given the
power to purchase and sell all the maize at fixed prices in the OLR areasz. This is
where most of the marketed maize was produced. The maize control board was
restricted to eight districts in the line-of-rail provinces, but African producers in all
other areas had no guaranteed market. Restricting the board’s operation system to
the OLR region helped to increase the disparity in the profitability of OLR
agriculture with rural areas where most of the African producers lived. From the
time of independence in 1964 to 1971 the government maintained some form of
regional price fixing policy (Producer prices for 1980 to 1992 are shown in Table 2.2).
There were regional differences in producer prices that reflected transport cost. But
during the 1973/ 1974 maize marketing season, prices were set at a uniform level for
the whole country (pan-territorial) and for the entire cropping season (pan-seasonal).

Other crop prices and fertilizer prices were also later set at a uniform level. Under

 

2 OLR = the stretch of rail line from Livingstone to Chililabombwe and a distance of
about 40 kilometers on each Side of the line. The new rail line is the Tanzania-Zambia
Railways (T AZARA). It stretches from Kapiri Mposhi to Nakonde on the Tanzanian
border (See map, Figure 1.).

26
Table 2.2 Nominal and Real Maize Producer Prices, 1980-1992

 

 

 

Year Nominal Price (ZK/bag) Real Price (in 1985 ZK/bag)
1980 11.70 29.58
1981 13.50 30.21
1982 16.00 31.52
1983 18.30 30.14
1984 24.50 33.63
1985 28.32 28.32
1986 55.00 36.22
1987 78.00 35.92
1988 80.00 23.68
1989 125.00 18.84
1990 284.20 16.97
1991 800.00 24.81
1992 1200.00 18.61
1985 = 100

Source: Ndalamei, 1989, GRZ, 1990a and 1991a, and News reports, 1992.

this uniform pricing system" transport costs were eliminated at all depots so that the
price received by a producer at any local depot was the same as that at a district
center depot.

The government introduced the uniform pricing system in order to ensure a
"fair“ compensation to all the farmers, especially those in the remote areas. It was

especially feared that should prices be left to market forces alone, a significant sector

 

’Uniform pricing is a particular type of price control such that the price for a given
quality of commodity at a given stage in the marketing-processing chain and at a point in
time shows no regional variation (Muntanga,1984,p.10).

27

of the small scale farmers (subsistence) would be left untouched in the sense that this
category of farmers would not be absorbed into the market economy and thus lag
behind in development. The government also introduced this system of pricing in an
attempt to appease the urban consumers by controlling producer prices and final
product prices.

Producer prices were fixed on the basis of a number of often-conflicting
criteria, namely: cost of production, fair return to the producers, fairness to
consumers, import/ export parity, relative crop profitability, food security and political
acceptability. Fairness to consumers and political acceptability no doubt were the
overriding considerations, and, consequently, the fixed producer prices tended to lag
behind the cost of production.

The policy of uniform pricing remained basically the same with minor
modifications from 1974 until the early 19905. In the 19805, the government in
consultations with the Commercial Farmers Bureau (CFB), a farmers’ lobby group,
set the fixed price. The "bargained" price was, like before, based on criteria like the
cost of production for maize“, export and import parity, crop profitability, and
fairness to producers and consumers. Currently, however, a farm-gate uniform floor
price is in existence as a policy. The producer can bargain with the buyer for the
producer price and account for transportation costs. Since 1964, nominal prices have

been increasing, but real prices showed an increase trend from 1980 to 1987 and then

 

‘The costs of production took into consideration all the three categories of farmers. A
weighted average was calculated with the commercial farmers’ weight at 30%, the emergent
farmers’ at 40% and the subsistence farmers’ at 30%. The cost of production has assumed
to be uniform throughout the country.

28

dropped about 50 percent in 1990 and the following year increased again as a result
of the new policy (Table 2.2).

The uniform producer pricing system did not achieve the equity goal it was
set up for (Jansen, 1988, Muntanga, 1984). The beneficiaries of the uniform price
system could be said to have been producers off-OLR, who were subsidized. In
general the fixed producer prices tended to lag behind the cost of production and the
assumption of similar costs for the whole country basically taxed those farmers with
a comparative advantage in maize production and promoted production in areas
which would not have produced maize for the urban markets in the absence of input

and transportation subsidies.

2.2.2. Input Pricing

The major input in maize production in the country has been chemical
fertilizers. Imports of fertilizer (including donations) account for over 90 per cent
of total fertilizer supply in the country, and 90 percent of this is consumed by the
maize sub-sector. The fertilizer price was determined by the government and was
arrived at by taking into account the average cost of a ton produced domestically by
the Nitrogen Cherrricals of Zambia (NCZ). The total estimated quantity and the
availability of the subsidy are then taken into account before setting the input price.

Nominal fertilizer prices increased substantially in 1990, 1991 and 1992 when
subsidies were reduced drastically. Real fertilizer prices, however, remained
relatively unchanged between 1985 and 1989 as Shown by Table 2.3. From then

onwards the real prices increased sharply, as less subsidy was made available and the

29
Table 2.3 Compound ’D’ and Urea Nominal and Real Prices: 1985-1991.

 

Year CPD’D’ price Real price ’D’(ZK/50kg) Urea price Urea real price
(ZK/50kg? (ZK/50kg) (ZK/50kg)
1985 26.75 26.75 26.75 26.75
1986 26.75 17.62 26.75 17.62
1987 80.00 3684 65.00 29.93
1988 80.00 23.68 65.00 19.24
1989 9827 14.81 71.00 10.70
1990 396.00 23.66 384.00 22.94
1991 1,572.36 48.77 1,601.87 49.69

 

Source: GRZ, 19908
Real prices, 1985 - 100
‘CPD - compound

policy was changing towards border pricing from fixed rates. Subsidies, provided for
purposes of supplying small scale farmers with affordable inputs in order to improve
their incomes, had played a major role in maintaining low and below-border fertilizer
prices. The government introduced fertilizer subsidies in early 1972 and by 1982 the
subsidy covered as much as 61 percent of the landed cost (Jansen, 1988, p. 93).
The fertilizer price policy encouraged consumption of the input among small
scale and emergent producers and thus promoted output of maize. Commercial
farmers did, however, benefit more than the emergent and small-scale farmers
(Jansen, 1988, Ndalamei, 1989, Wood, 1988). Commercial farmers had access to
credit and better transportation and storage facilities which helped them in acquiring
adequate inputs in time. On the regional basis, however, the effect was similar to
that of the producer price in that it favored the off-OLR. In 1975, 84.9 percent of

the fertilizer was consumed in the OLR and was down to 60.5 percent by 1987.

30

Since the government declaration that there was going to be economic pricing
of the fertilizer input in 1991, the price has been pegged at c.i.f. Lusaka plus
transportation to the consumption location. The nominal price increased, for
example, from a cost of about 396.00 kwacha per 50 kilogram bag in 1991 to over
1,572 kwacha for compound ’D,’ and in real terms the price doubled (Table 2.3).
The price increase over a crop season was over 200 percent, one of the indications
for the large levels of subsidies the input carried prior to the policy change.

Fertilizer has been a major cost component in the production of maize, unlike
seed costs. Seed costs have remained a low cost input at approximately five percent
total cost of producing maize. Seed prices were previously set by the Zambia Seed
Company (ZAMSEED), a monopoly company in the seed industry but subjected to
government approval. This in effect limited the monopoly’s pricing flexibility. The
prices of seeds did not reflect transportation costs to different areas. Since the
1991/92 season, however, the Zambia Seed Company has been able to set its price
with little government interference. Seed prices currently reflect import parity prices
and transportation costs.

Other inputs such as machinery have experienced little direct price control
from the government, particularly in the 19805. However, the macro policies that
were in existence, such as overvalued exchange rate, negative real interest rates and
import tax exemptions for agricultural inputs, tended to benefit the commercial
farmers. The commercial sector resulted in being capital-intensive, and this did not

assist in slowing down the rural-urban rrrigration.

31
2.2.3. Credit Provision

A 1991 government study of the credit system reported that the agricultural
credit system for small scale farmers in Zambia was in a state of financial disarray
(GRZ, 1991b, p. 1). The system was likely going to severely curtail the production
of maize due to limited government funds since nearly the entire credit system was
dependent upon them.

Repayment of loans by farmers especially in the last two seasons (1989/ 90 and
1990/ 91) was very poor, usually below fifty percent on average from over 90 percent
in good yielding years. Reasons for such poor results ranged from drought, lack of
adequate fertilizer, liberalization of the marketing system (resulting in poor market
coordination) and lack of payment to farmers for their output. These factors made
lending organizations depend on government funds and / or guarantees. Real interest
rates have been negative due to government direct controls that have kept nominal
rates below inflation rates. In 1991, the nominal annual interest rate was 46 percent
and the annual inflation rate was estimated at over 100 percent. The credit delivery
system to small scale farmers has chronically been inefficient and ineffective in

reaching many farmers.

2.2.4. Transport Pricing

The final product price which is paid must in the long run reflect all the costs
involved in its production. One of these costs is that of transporting the commodity
several times before it reaches the consumer. Transport services increase the value

of the commodity by creating place utility.

32

In Zambia, transportation rates have had little relationship to producer or
retail prices. This was due to price controls that prevailed where transport costs
were not reflected in the final price of the commodity. Uniform pricing completely
ignored all consideration of inter and intra provincial comparative advantage, and
allowed for the transport subsidy that equalled one hundred percent of cost to the
farmer. Farmers received the same net maize producer price regardless of their
location. The uniform price tended to penalize those who produced most
economically--namely, those in locations nearest to the market. Since maize is a
bulky, low-value commodity, transportation costs are a large component of the total
cost. It has been stated that at times 70 percent of marketing cost of maize in
Zambia are those related to transportation and handling. For example, Table 2.4
Shows a breakdown of the costs for 1989/ 90 market season. The cost of
transportation and handling from Kasama to Ndola was 1,080 kwacha, a value larger
than that of the commodity itself. In the 1989/90 season intraprovincial maize
movement cost on average 74 percent of the costs that included, salaries, bank
interest, bank charges, weight loss, profit margin, and fumigation costs (GRZ, 1990a,
p. 121). Transportation rates (Table 2.5) were generally determined through a
compromise between the Transport Association of Zambia (TAZA), Contract
Haulage (CH)5 and the Ministry of Power, Transport and Communications. The
rates took into account average operational costs (TAZA and CH estimates), and a
profit margin of 33 percent. Real transportation rates as shown in Table 2.5, were

stable over time implying that the market margins were reducing as other costs like

 

s'TAZA’S membership comprises of private traders. CH is a parastatal company.

33
Table 2.4 Costing of a Bag of Maize from Selected Supply Sources 1989/ 90

 

Market Season.
_
Cost (ZK) Chipata to Lusaka Kasama to Ndola Mkushi to Ndola
Farm price of maize 800 800 800
Transport cost 600 780 300
Six months interest cost (ZK) 184 184 184
Handling cost up to depot 200 300 200
Storage cost @ 3% loss 24 24 24
Patiage cost 17 17 17
Administration charges 7% 72 91 51
Profit @ 5% 55 70 39
Total 1,952 2,266 1,615

 

Source: MAWD, Planning Division, 1991

 

fuel had been increasing. There was one major weakness in the determination of
transportation costs. There was no differentiation in rates between good (tarmac)
and bad (gravel) roads. Transport rates were a function of distance only. Due to
lack of differentiation between the types of roads, private truckers avoided the bad
roads and when they got involved with rural roads, preferred shorter distances.
Remote areas were thus avoided. This was justification for government intervention.

The country consumes approximately ten million bags per year of marketed
maize with major consumption areas being Lusaka and the Copperbelt provinces.
These two provinces consume 3.2 and 4.7 million bags respectively. The Copperbelt
province produces no more than twenty percent of its requirements and the rest has
to be transported from outlying provinces. Generally, maize moved from surplus

provinces to the deficit urban areas. Table 2.6 provides an example of the provincial

34

Table 2.5 Maize and Maize Meal Road Transportation Rates, 1983-1991
(ZK/ton/kilometer)

 

 

Distance in Kilometers
1 to 50 51 to 100 101 to 200 over 200, over 200krn,
Year nominal nominal nominal nominal real
1983 0.25 025 020 0.15 0.25
1984 0.25 0.20 0.15 0.10 0.14
1985 0.70 0.65 0.41 0.30 0.30
1986 0.80 0.70 0.55 0.45 030
1987 0.91 0.80 0.63 0.51 0.23
1988 1.45 1.20 1.00 080 0.24
1989 4.00 330 2.80 2.60 039
1990 7.20 5.94 5.04 4.85 0.29
1991 11.60 9.50 8.10 780 0.24
1991‘ 18.00 15.00 13.00 11.00 0.34

 

19858100 for over 200km real rates.
Source: GRZ (1990a), and Ministry of Transportation and Communication.

‘From August 1991

 

movement of maize for 1989/ 90 season. Most of the maize moved from Eastern and
Central to Lusaka province and from Central, Southern and Northern provinces to
the Copperbelt and Lusaka (including Zambia Cooperate Federation reserves).
Because of the long distance and large quantities of maize involved, transport costs
and hence subsidies tended to be very high. For example, in 1990, with a transport
subsidy of 852 kwacha per 90 kilogram bag, for the movement of maize from
Chipata in the Eastern province to Lusaka (a distance of just under 600 kilometers)

required a total outlay of 2.8 billion kwacha (GRZ, 1990a).

35

Table 2.6 Interprovincial Maize Movements 1989/90 Market Season
(’000 bagsx90kg)

 

 

 

 

 

 

To C K L ZCF reserve Total
From
C 2100 400 257 2757
E 2200 1103 3303
N 1000 3 42 1045
S 541 474 927 1962
Total 3641 3074 3 2329 9067

 

 

 

 

 

 

 

 

 

C - Central; K = Lusaka; E - Eastern; N .. Northern; S a Southern; L a Luapula; W .. Western.

Source: GRZ, 1990a

 

2.2.5. Into-mill Pricing

Into-mill prices were set by the government through the Prices and Incomes
Commission (PIC). The prices were calculated on the basis of producer prices,
expected average marketing costs by cooperatives, the average cost of processing by
the major milling companies in the country, and the amount of government subsidy
to be made available (GRZ, 1991b, p. 93).

The movement of the into-mill prices in relation to the producer prices and
maize meal retail prices are shown in Table 2.7. The into-mill prices were the same
as the producer prices from 1982 to 1983. However, in 1986 the into-mill price was
only 64 percent of the producer price. The producer price was 55 kwacha and yet
millers purchased maize from the Official marketing board at 35 kwacha. This

obviously meant large magnitudes of subsidies to cover the price differential and in

36

addition to transportation and handling costs and losses‘. The producer price was
increased and the into-mill prices remained unchanged from 1986 to 1988. In 1989,
the trend was reversed and the into-mill prices were above producer prices reflecting
transfer costs as shown in Table 2.7 under the into-mill to producer price column.
By 1990 the into-mill price had increased substantially in nominal terms due
to higher annual inflation as can be seen through the consumer price index in Table
2.7. In real terms, the into-mill price had an increasing trend from 1980 to about
1985 and then dropped drastically from 25.82 kwacha in 1980 to 10.36 kwacha in
1988 per 90kg bag, before starting to increase again (See Table 2.7). In 1989 the
price doubled with the on-set of market liberalization. The price trends indicated the
magnitudes of the subsidy requirements over time and the low food prices beneficial

to those with access to it.

2.2.6. Retail Pricing
As early as 1941, the consumer price of maize meal was less than the import
parity price. This pricing policy and resultant government subsidies extended into the

post-independence period. The reason for keeping the price of maize to consumers

 

“This market arrangement provided additional problems, whereby millers took advantage
of the difference between the producer and the into-mill prices. NAMBoard would
purchase maize from producers at a fixed rate of 55 kwacha for the 90 kilogram bag and
would sell to millers at a lower price of 35 kwacha. Millers would then act as producers
(some millers are farmers in any case) and resell the same maize to NAMBoard without
having processed the grain. They would then gain 20 kwacha for this "illegal" conduct, which
cost the government even more subsidies. Shortly after this arrangement, food riots
occurred due to Short falls of maize meal. The government nationalized all large milling
private companies. The industry was declared a politically strategic one that needed even
more control.

37
Table 2.7 CPI Nominal and Real Prices: Into-Mill and Retail in 1980-1991

 

Into-Mill Price Into-Mill Breakfast Price Roller Meal
(ZK/90kg) 35 % 0f (ZK/25kg) (ZK/251%)

Year CPI Nominal Real ”32‘: Nominal Real Nominal Real
1980 39.5 1021 25.82 87 4.10 1037 3.75 9.48
1981 44.7 1350 3021 100 6.63 1484 5.00 11.19
1982 50.8 16.00 31.52 100 725 14.28 631 1243
1983 60.7 1830 30.14 100 1029 16.95 8.55 14.08
1984 72.9 26.00 35.68 106 12.90 17.71 10.74 14.74
1985 100.0 35.00 35.00 124 19.15 19.15 1485 1485
1986 152.0 35.00 23.05 64 19.15 1261 1485 9.78
1987 2172 35.00 16.12 45 19.15 8.82 1485 684
1988 337.8 35.00 1036 44 19.15 5.67 14.85 4.40
1989 663.4 160.00 21.12 128 114.50 1726 8230 1240
1990 1,674.4 442.00 26.40 156 269.00 16.07 198.00 11.83
1991 3,224.9 1,100.00 34.11 138 570.00 17.67 320.00 9.92
1992 9,394.1 1800.00 19.16 150 1,800.54‘ 19.7 1354.00: 14.4

 

1985 =- 100

CPI -= Consumer Price Index

Source: MAWD, PIC, IMF International Financial Statistics, 1991/92.

‘Averaged monthly prices in Lusaka
—

below cost of imported maize was to assure a cheap supply of food for African
labour (Marter, 1978, Jansen, 1988, p. 11). In the post independence era, the
rationale for cheap prices did not change. The need to keep wages low7 remained

important and maize meal prices had to be kept low in order to appease the urban

 

7The government has been a major employer and wage increases have direct and
significant effects the budget deficit and hence on inflation rates. In July, 1993, public
workers were offered a fifty percent wage increase; as a consequence, high inflation rates
are expected.

38

politically sensitive group. The consumer price continued to be set by the
government independently of either the producer price transfer costs or import parity
considerations. This practice continued for roller meal and in 1992 the maize price
was expected to be set at 3,270 kwacha per 90 kg bag, at parity with South African
imports (Mwiinga, 1992, p. 3). As of July 1993, the price was below the parity price,
as some form of price controls were still in existence especially for roller meal. In
real prices, both Breakfast and Roller meals showed an increasing trend from 1980
to about 1985. However in 1986, soon after the food riots, real prices dropped
drastically until 1989. The real price for breakfast meal, for example, dropped by 70
percent between 1985 and 1988. The real prices began to increase in 1989 as less
' subsidies were made available.

The dependence by consumers on cheap maize since the pre-independence
time no doubt made the price of the commodity a very sensitive political issue. Few
consumers in the urban areas expected or were prepared to have maize meal
expenditures to be a Significant percentage of their food budgets.

To illustrate the extent to which the subsidy has had to cover the price
differential, an example is presented for the situation as it prevailed in August 1991.
The total cost to produce a 25 kilogram bag of breakfast mealie meal by one of the
major milling companies was 506 kwacha (Sipula and Maleka, 1991). The costs
included those of maize, the raw material; processing; packaging; and losses. The
retail price through the parastatal companies was pegged at 220 kwacha, resulting in
the need for subsidies of over fifty percent of the cost of mealie meal. The above

figures in effect underestimated the costs by not including subsidy costs on

39

transportation, handling, and retail margins of processed maize. According to Jansen
(1990), consumer subsidies as a percentage of the actual retail price increased from
61.7 percent in 1980 to 118.0 percent in 1989 (See Table 2.1).

Of all the different prices discussed, retail prices have been the least flexible.
The low retail prices have indeed favored the urban consumers (to some extent the
rural-net food buyers). The food security situation in the urban areas has been
better due to such policies compared to the rural areas“. Other beneficiaries of
subsidies were those across the borders who had access to subsidized mealie meal
that was smuggled out of Zambia. Retail prices remain the most contentious issue
even though nominal prices have normally been increased; they still tended to lag
behind the cost of production and import parity. Real prices have tended to
decrease, indicating that maize meal prices was supplied at below cost. The threat
of food riots recurring has been the major pressure that keeps the retail price of

mealie meal low.

2.2.7. Subsidy and Coupon System

The control of input, output, transport, storage and retail prices created the
need for monopoly institutions and the need for subsidies in the market. Most of the
transportation, storage, processing and handling costs and risks were born by the
government. With the increasing production and no market discipline, the subsidy

bill continued to increase. Subsidies have been a big burden on the government

 

“This is despite the fact that an urban consumer has paid a higher price when one takes
account of the time spent on long lines or the payment, to another person to stand in the
line to get the subsidized meal.

40
budget. Between 1980 and 1990 the cost of maize subsidy ranged from 9.3 to 16.9

percent of the fiscal budgets (See Table 2.1). In 1990, 13.7 percent of the fiscal
budget went directly or indirectly towards maize subsidies. Between 1970 and 1982,
an average of 65 percent of the total Ministry of Agriculture expenditures were
allocated towards subsidies (Mumeka, 1991, p. 62). The percentage of the subsidy
in the Ministry of Agriculture budget increased from six percent in 1981 to seventy
percent in 1986 (Katongo, 1991, p. 39). Tables 2.2 and 2.7 contain real producer and
final product retail price trends and indicate that the price differential had remained
constant till 1989. The subsidy level was, therefore, not decreasing.

Most of the subsidy went towards market coordination expenses’. Despite
heavy subsidies, the maize marketing system was not able to perform the basic
function of matching supply and demand“). It instead contributed to the budget
deficits and consequently to very high annual inflation rates.11 The marketing
system Simply aggravated the financial problems of the government to a point were
it was almost impossible to solve.

In January 1989, the coupon system was introduced with the view of

facilitating a gradual removal of maize subsidies without jeopardizing the food

 

9In a competitive market economy, coordination takes place across markets and within
firms, within a set of institutional constraints imposed by the government and customs.
Coordination requires transactions which involve the exchange of claims to benefits and
agreements. Explicit prices are central to coordination across markets (Shaffer, 1987).

10This refers to the equalization of demand and supply at each stage of vertical
coordination.

11In order to cover the deficit, the government printed money or borrowed from
commercial banks, thus contributing to inflation.

41

security of the poor urban population. The system was supposed to be an income
level targeted subsidy. The coupOn system was expected to reduce the amount of
subsidy on maize and decrease the downward pressure on producer prices. The
targeted group was identified as urban households, with an income of less than or
equal to 20,500 kwacha per annum for a households of four (adjustments were made
for different household sizes). This did not include the rural households, who were
assumed to be net sellers of grain and hence self sufficient. Since such an
assumption was not true, the program represented a major potential bias against
rural people. The system was unable to accomplish the task of reducing maize
subsidies due to the large size of the target group, poor administration and maize
Shortages.

The vast amounts of the subsidies, pressure from the IMF and World Bank
and the poor performance of the coupon system forced the government to attempt
a "free” market system. The "free" market system would not only free the
government from the responsibility of providing low-cost food, but would introduce
an element of competition in order to reduce marketing costs. The performance of
the new market system is yet to be seen as its implementation has just been started.
The subject matter is, however, discussed below after the review of the performance

of the maize market organizations.

42
2.3. Maize Marketing Organizations

Many scholars have identified maize marketing as a complex and politically
contentious problem in Zambia. It is for this reason that a brief historical
perspective is indispensable for an appreciation of the contemporary issues.

The government control of maize marketing started as early as 1936. By 1964
most of the agricultural marketing system was either directly operated by government
or carried out by organizations which were highly dependent on it.

The purchase of maize from the mainly commercial farmers was the
responsibility of the Grain Marketing Board (GMB), which had a monopoly in
controlled products in prescribed areas. In areas where marketed production by
small scale farmers was significant, producer cooperatives were encouraged. Large
areas were not served by the GMB or Cooperatives. In many areas commercial
production did not develop because of the remoteness from markets. In 1964, the
Agricultural Rural Marketing Board (ARMB) was formed to supplement the existing
board and the GMB was set up to serve remote areas. In 1969, the government
merged ARMB and GMB to form the National Agricultural Marketing Board
(NAMBoard). The government was concerned with ARMB and GMB perpetuating
a dualistic agricultural Structure favoring the commercial sector.

NAMBoard had a difficult task (under the set of rules and regulations set by
the government) and performed poorly which resulted in the government switching
its attention to the potential of cooperatives. From the mid 19705 the role of
Cooperatives in maize marketing was rapidly expanded. It was planned that

NAMboard would withdraw from rural marketing between 1978 to 1981 and hand

43
over rural depots to Provincial Cooperative Unions (PCUS). PCUS purchased maize

and other produce from Primary Cooperative Societies (PCSS). The PCUs were
responsible for arranging and collecting bagged maize from numerous rural PCSS’
premises (for schematic representation of the controlled market linkages. See Figure
2).

By 1988, it was clear that is was not only difficult but extremely expensive to
maintain two organizations competing in the market (usually with overlapping
responsibilities), since both organizations (NAMBoard and the cooperatives)
depended on government funding for their operating expenses. In 1988, therefore,
the government restricted primary maize purchasing to the unions and fertilizer and
maize import and export to NAMBoard.

In June, 1989, the government decided to dissolve NAMBoard and transfer
the remaining functions to the cooperative movement and the parastatal NCZ. The
Zambia Cooperative Federation (ZCF), the apex body of the cooperative structure,
was charged with the functions of importing and distributing of maize and empty
grain bags, fumigation services and maintenance of strategic grain reserves.
Importation and distribution of fertilizer functions were given to the fertilizer
manufacturing company (i.e., NCZ).

From 1989 to 1991, before the market allowed private trading, marketing
coordination not only became more difficult and complex but also more dependent
on government subsidies. This defeated the purpose of encouraging cooperatives to
undertake maize from NAMBoard to take over marketing. Under the cooperative

monopoly, the same problems continued namely:

Farmers

 

Depots

mini.

 

PC8.DCU,PCU

 

 

 

 

 

 

 

 

ZCF-reserve stock pen in Deficit _Millers
Export & Import Provinces: (PO-“SW31
ofMaize Lusaka at Coop)
Copperbelt
North-West
Luapula
Western
Retailer
Stockfeeds _. Brewers
l
Consmner
illegal exerts

Figure 2 ”Controlled" Maize Market - 1989/ 90.

45

a) there was an inability by the cooperative system to collect maize from
rural areas and to move it to safe storage depots Situated mostly in the
urban areas;

b) there was untimely payment to the farmers for their crops;

c) subsidy requirements to operate the cooperative marketing system
were high and increasing; and

d) the poor coordination resulted in demand and supply of maize not
matching at different levels of vertical coordination.

In 1991 private traders and rrrillers were allowed to trade in maize and
negotiate a price with the farmers (See schematic representation of the 1991 ”free”
market linkages in Figure 3). The liberalization was in reality partial Since the
control of producer and into-mill prices was still in effect (ZCF, 1991, p. 17).

Due to the poor performance of the marketing institutions and high levels of
subsidies required to run the centrally planned marketing system, the government
decided to go for market reforms and by August 1991 lifted the ban on private trade

inmaize.

2.4. Need for Market Liberalization

The general goals of market liberalization include reducing public expenditure
through reduced or elimination of subsidies, assuring a reliable and low cost source
of domestic food supply for consumers, privatizing input and product markets and

enhancing producer decision-making.

46

In the past, the government justified direct participation in the maize market
by assuming, among other things, that the country did not have a domestically
advanced private sector. The government also believed that the private sector was
unlikely to market a commodity or service at economically appropriate prices.
Another justification for government intervention was the argument that a laissez-
faire policy could not function effectively so long as the economy remained heavily
dependent on expatriate owners”. More Zambians, therefore, had to be
deliberately brought into the market to participate as traders. The centrally planned
economic system, popularly known as the "mixed economy" in Zambia, performed
inefficiently and serious reforms were inevitable.

The effectiveness of the market reforms so introduced will depend upon the
degree to which it succeeds in privatization and achieve competitive markets.
Privatization refers to a change in ownership and control from the public to the
private sector. The efficiency impact from privatization varies with the competitive
structure of the market or industry, and the most substantial efficiency results can be
anticipated where there are no constraints on entry". Conceptually, private
ownership can be argued to be superior to public ownership or control in achieving
economic efficiency in commodity market given a competitive environment. In a
private ownership, the decision maker also bears the risks as apposed to a publicly

supported organization. This is because a competitive market elirrrinates those who

 

12The expatriate category included the Asian-Zambian business community (a minority
ethnic group). dominating the staple food market. This was a politically sensitive issue.

13Efficiency gains can be presumed from a monopoly (public or private) if related to the
profit motive.

47

Farmers

 

 

l

PCS

 

DCU, PCU

‘——— ZCF-reaervestock.

import/export

Stockfeed --—— Brewers

 

 

 

Figure 3 ”Free" Maize Market: August 1991

 

Consumers

 

 

Private traders,
commercial farmers

r-ruralmills

 

 

Industrial millr

 

 

Private and Parastatal

 

48

are inefficient. Market efficiency comprises competitive implications of exchange
efficiency (price efficiency) and efficiency with which physical market functions are
performed (operational efficiency).

Exchange efficiency focuses on the coordination of activities as a product flows
through the marketing process, which involves buying (demand) and selling (supply)
functions. Market price is discovered by the interplay of demand and supply forces.
Prices should accurately and quickly respond to consumer demand, and should reflect
accurately the necessary costs incurred in the utility-yielding production and
marketing process. Given adequate information flows, competition can bring about
a more desirable set of prices that reflect cost efficiency. Operational efficiency
focuses on cost-reducing alternatives and technologies for physical marketing
functions. The physical functions add fornr, place and time utility to the product.

When a competitive market exists for a standard commodity, a strong
argument in favor of privatization exists. A weaker preference for the private sector
is more common when imperfect competition characterizes the market. It follows
that when reforms would merely replace a public monopoly with a private monopoly,
changing ownership needs to be carefully examined. The ultimate goal of market
liberalization under imperfect market conditions is to discover or create those market
institutions which best direct private interest to serve public purposes.

The market can be and is an instrument of economic development, observes
Johnson (1978). The market can ration supplies of consumer goods among
consumers, direct the allocation of production between commodities according to the

criteria of maximum profits, allocate different factors of production among various

49

uses according to criteria of maximizing incomes, govern the relative quantities of
specific types of labour and capital equipment made available, and distribute income
between factors of production and therefore, between individuals.

A market serves to provide incentives to economic growth, "making goods
which may stimulate consumers to seek to increase their incomes. Access to markets
on the other hand provides opportunities for investors to profit from new goods and
technical improvements. In addition, the market provides incentives for the
accumulation of personal capital in form of skills and material capital which earn
income. A properly functioning market system would stimulate both economic
grth and efficiency with little government policing other than providing a legal
system for the enforcement of contracts (given no extemalities or scale economics,
perfect information, etc). The following section discusses what a market system is,
how to evaluate market performance, and why the "free" market system was selected

as the best alternative for the economic development of Zambia.

2.4.1. Marketing System

The traditional definition of agricultural marketing has generally included all
of the activities of firms handling farm products from the farm gate through to the
retail store. According to Haveman and Knopf (1966), a market is the "sum of
contracts between buyers and sellers of the product or service." It may be formally
organized and geographically centered. Markets are institutions through which the
interaction of buyers and sellers determine prices and quantities exchanged and is,

in general, synonymous with the price system.

50
Shaffer (1968) believed that the traditional definition of agricultural marketing

had dealt with problems at all levels of organization including physical processes, but
had excluded the relationship between markets for factors and products. He saw a
market as an organizing or coordinating system with relationships involved in a group
of transactions, with market characteristics such as the rules governing the
participants, the commodities or services involved in transactions, the number and
size of participants, location and so on. The market, according to Shaffer, included
institutions which modified the outcome of the exchange process.

Rhodes (1987, p. 14) defined agricultural marketing, as "the performance of
all business activities involved in the forward flow of the agricultural commodities
from the producers to the consumers.” He saw a marketing system as a price system
which knits together the decisions of numerous participants into a smoothly working
system. Within this system a vast flow of agricultural commodities is assembled,
transported, stored, processed, priced and distributed to consumers. Shaffer’s
definition of an agricultural market had a wider scope and his holistic definition is,
therefore, adopted in this text.

In order to understand markets, according to Rhodes (1987, p. 7), one could
look at the subject through the functional, institutional or behavioral approaches.
The functional approach focuses on the functions performed in the market by
specialized activities such as exchange functions (procurement, merchandising),
physical functions (storage, transportation, processing) and facilitating functions

(Standardization, financing, marketing intelligence gathering and risk bearing).

5 1
The institutional approach entails looking at middlemen such as transporters,

processors etc. Other important institutions include government agencies that
provide public services, such as market information and commodity grades, and those
that regulate various marketing activities. Institutions are thought of as organized
systems of rules influencing behavior of participating organizations like marketing
boards, marketing orders, cooperatives and firms.

The behavioral approach combines the functional and institutional approaches
to focus on the interdependence and coordination of all the participants and all the
functions of the entire system“. The approaches require performance criteria.

The performance of a market is judged against a communal purpose such as
matching supply of maize and maize products with demand at low cost at all stages
of vertical coordination. The performance refers to those attributes of the market
which directly affect the well-being of the participants. Performance looks at the
flow of economic results as they affect the welfare of farmers, marketers and
consumers (Shaffer, 1968).

Attributes that directly influence welfare involve some of the following factors
according to Sosnick (quoted in Shaffer, 1968, p. 3): production efficiency,
technological progress, product suitability, profit rates, level of output, exchange
efficiency, cost of sales promotion, unethical practices, participant rationality,
conservation, external effects and labour relations. Other performance criteria may

be price stability, supply stability, income stability, income distribution, levels of

 

1"The behavioral approach was the basic approach used in this research project. The
research was concerned with the cooperative organization and market reforms.

52

unemployment, levels of costs of production and distribution, the combination of
output, and the rate of real economic growth. These criteria are multi-dimensional
and subject to change over time. Evaluation of market performance can be made
by contrasting an existing situation with an ideal type, contrasting the same industry
over time, or by simply contrasting several alternatives possible, none of which can
be identified as ideal.

In the case of contrasting with alternatives, Shaffer (1968) suggests that the
best approach to judge performance would be to contrast the potential performance
of several alternatives with respect to a variety of normative dimensions and to
examine present systems to identify incremental changes that would be judged to be
improvements by the community.

In the case of contrasting the existing situation with the ideal, the model of
perfect (pure) competition is usually taken as the ideal market system. Performance
of a market is, therefore, judged by its deviations from this ideal model (Shaffer,
1968, p. 3). A perfectly competitive market refers to a situation where participants
have complete knowledge of market conditions and that any discrepancy in price will
be acted upon instantaneously. Under perfect competition, the market possesses a
magnitude of participants with each participant so small relative to the entire market
that he/she has no Significant influence on the market or on the other competitors.
There is also no obstruction or restriction placed on the forces of supply and demand
or the level of price and anybody is free to enter or exit the market.

The competitive model as a guide to efficient production stems from Adam

Smith’s "invisible hand” paradigm. Each producer is encouraged to produce in a

53

technically efficient manner in order to maximize profits. Competition by other
producers pursuing the same goal not only emulate the best ideas of their
competitors, but further assure that they satisfy the needs of the public at the lowest
cost of production and marketing, and thus achieving operational efficiency.

The success of the model (system) hinges critically upon individual incentives,
whereby a profit-seeking firm strives for efficient production and marketing. The
firm or organization does this because the benefits accrue to the firm’s owners.
Competition is crucial, for without it a firm (such as a monopoly) can earn profits
even from inefficient operations.

For a number of reasons, the competitive system may not prove to be the
most efficient, justifying at least in principle government intervention. Causes of
"market failure" could be due to reasons such as economies of scale, public goods,
externalities and information asymmetries. When the limited size of the market
precludes competition, when private producers will not enter a market because of the
free-rider nature of the good, when others rather than the producing firms bear the
costs or appropriate the benefits of production, or when the information needed to
make rational decisions is itself scarce, the market mechanism will not provide
efficient results.

In addition in the real world, there is always someone with the ability to
interfere in the market. The ability to exert influence implies possession of economic
power. Governments and monopolies are examples of organization with economic
power. Governments usually enter the market and/ or impose rules upon the market

with the expectation of a particular performance. Motives behind government

54

intervention are many and may include ideology, economic sovereignty, income,
finance, and employment (Prager, 1992). Most of these are related to economics but
not directly to economic efficiency, as examples from Zambia indicated.

Unanticipated consequences to rules and regulations can, therefore, occur.
These consequences can be desirable or undesirable. As the complex economic
system changes, rules which may have been desirable in a previous period could
become barriers to desirable performance in the new situation (Shaffer 1968, p. 6).
Any firm or organization must, therefore, direct its efforts to adapting to or avoiding
obsolete rules.

The task of identifying the best alternative in the market system for the
Zambian imperfect maize market is enormous. The private sector has not developed
and has no history in maize marketing. The public sector performance on the other
hand has been disastrous and created a bad reputation. The marketing board, which
had the potential to stabilize prices, farm incomes and food supply, did not do so and
as a marketing alternative face unfavorable considerations. Cooperatives face similar
perceptions, but unlike the marketing board, are still existing and have a chance to
operate in the "free" market economy.

Added to these problems is the lack of information on maize marketing which
made it difficult to relate conduct to performance. This makes it difficult to make
any comparisons of performance based upon historical data and also limits viable
alternatives for consideration. Research on the market is ,therefore, vital if informed

policy decisions will be made.

CHAPTER 'II-IREE

LESSONS LEARNED AND LIKELY IMPACTS OF LIBERALIZAIION

The pricing and marketing policies proved to be the most serious institutional
problem in Zambia. The policies were erratic and often unclear or inconsistent with
social goals the country had identified. Uniform pricing encouraged miS-allocation
of resources by stimulating production of maize in outlying provinces, some of which
would not have produced surplus maize under competitive conditions (Mwanaumo,
1987; Jansen, 1988). Eastern and Northern provinces are the cases in point. The
policies tended to depress production of maize in areas close to the main
consumption areas of Lusaka and Copperbelt regions.

As the move towards the market liberalization proceeds, there is increasing
pressure to supply maize to the urban markets from within and nearby provinces.
This marketing challenge could change maize production patterns in the country.
The far flung surplus provinces are expected to face low prices and because of the
high transport costs are expected to decrease their contributions to marketed maize.
For deficit provinces the market challenge will include production of other crops such
as millet, sorghum and cassava and/ or other cash crops. The challenge will also

include in-shipments of maize and/ or maize products into the provinces.

55

56

Relative to other crops, maize prices had in general been better for off-OLR
regions. In Eastern province, once a major producer and exporter of groundnut, for
example, switched to maize in the 19805 (GRZ, 1990a, p. 78). Commercial farmers
around the urban areas, on the other hand found maize relatively unprofitable in the
19705 and 19805 and switched to other crops such as wheat and soybeans. Early
indications after the reforms are that the maize producer price is gaining relatively
over other crop prices and producers (mostly commercial farmers) near major
consumption areas have began to expand their maize crop areas.

Maize producer prices in pre-liberalization era had no relation to international
prices and, for the most part, were below border prices, implying that local farmers
were being taxed. Below border prices encouraged smuggling to neighboring
countries. The liberalization of the market is expected to bring local prices and
border prices at parity. Together with decreased urban pressures for low real prices,
producer prices are expected to increase and hence stimulate maize production
particularly in comparatively advantaged regions.

Pan-seasonal pricing had encouraged farmers to sell their maize at the earliest
convenient time in order to avoid risks associated with storage. The buyers
(NAMBoard and/ or Cooperatives) on the other hand, had no incentive to disburse
funds to farmers early in the marketing season. In fact delaying the purchase and
payments to farmers yielded interest earnings and allowed the organizations to use
the government advance funds for other activities (Ndalamei, 1989; Chabala, 1991).
Delayed payment improved the organizations’ cash flows and earned interest which

was not passed on to the agent-societies. With the introduction of the "free” market

57

system, it is expected that farmers may store their maize until market prices are
attractive to them. Spoilage is expected to be minimized as the risk of loss will be
borne by the farmers themselves or who ever will be participating in storage.

In the short run (about ten years) the decontrol of input prices is expected to
raise the level of input prices and this may have an adverse effect on yields and
marketed output. Input prices cannot, however, be considered in isolation from
producer prices. Thus the influence of the two prices together cannot be determined
a priori. For decontrolled input and output prices to have any positive influence on
the marketed output they must be accompanied by an orderly food market so that
farmers could be able to pass on the costs to the consumer. In order for a market
to work reasonably well, infrastructure, especially roads and storage facilities which
are severely lacking at present, will be needed.

The credit system, unfortunately, is riddled with problems such as,
unavailability or insufficient credit supply for small scale farmers, negative real
interest rates which lead to excess credit demand and little incentive to save,
inefficient and ineffective delivery credit system to small scale farmers, low loan
recovery rates, especially in drought periods; and lack of suitable collateral among
many small scale farmers. In addition to these problems will be the expected
elimination of government guarantees which will raise the cost of credit supply,
forcing lending institutions to be more prudent. Demand for credit is also expected
to increase as the need for credit for marketing purposes is also recognized. These
problems may stifle the progress towards the development of a reasonable credit

system necessary in order to have an improved production and coordination system.

58

The cooperative system has always been identified as an alternative and/ or
complementary market coordination system to the "free” market system. With many
small scale and emergent farmers to deal with throughout the entire country,
cooperatives are well placed geographically to deal with such a situation. If
cooperative societies are able to supply and distribute products at low cost, they
could assume a large maize market share. In order to achieve an efficient market
coordination system, competition from the private sector, especially in carrying out
marketing functions will be needed.

In the past, rural milling had been discouraged by regulations, uniform pricing
(resulting in low and / or negative marketing margins) and the availability of
subsidized commercial maize meal. Macro policies such as overvalued exchange
rates and controlled interest rates were all in favor of large capital-intensive
commercial mills. With liberalization more rural mills are expected to be
operational since commercial meals will reflect all the market costs (especially
transportation costs) which will result in high final product prices. Storage of maize
by rural millers is expected to develop alongside the milling industry. Millers have
now an opportunity to process maize and dispose of it as grain and/ or meal in
addition to the service operation. Such market coordination (and integration) could
potentially create substantial savings in packaging, transport and handling costs.

The major cost component of maize marketing was the cost of maize transfers.
To reduce this cost will require a major change in production patterns, with more
maize being produced near the major consumption areas. Price differentials

reflecting transfer costs are expected to be instrumental in the development of the

5 9
new production pattern. Southern, Central, Lusaka and Copperbelt provinces are

expected to be major maize production centers. Eastern and Northern provinces are
expected to lose a significant market share due to the high transportation costs.

With all the marketing costs expected to be reflected, the final product price
of maize is expected to increase drastically. The net effect on consumers cannot be
determined easily since beneficiaries of the low food prices (subsidized food) were
also victims of the high inflation rates brought about by subsidies. The subsidies had
a significant adverse effect on the budget deficits which resulted in the government
borrowing from commercial banking and / or printing money. Some income
categories whose wages and hence real incomes increased may have had net benefits
from the program. Unfortunately wage increases were one major reason for high
inflation and high unemployment rates (stagflation).

The unemployed or small item traders and the rural net food buyers may also
have benefitted from low food prices but they suffered low producer prices, poor
terms of trade between the rural and urban areas and high inflation rates. The
removal of subsidies may threaten some households’ food security situation in the
short run. Net food buyers, low income groups and the unemployed in particular
may need subsidies if they are to be protected during the difficult transition period
of the reforms. Assistance in form of food-for-work programs, for example, could be
conducted for the vulnerable groups.

In the long run, price, supply and rural income stabilization programs could
replace targeted subsidy programs. Stable food supplies and prices are unlikely to

develop without increased food production and a better and efficient marketing

60

system. Consumers (including producers who are net buyers) may need protection
from higher and volatile final product prices and producers from low producer prices
which de-stabilize food and non-food production and hence rural incomes. A
stabilization program requires the government or publicly supported organization
(e.g. cooperatives) to purchase excess maize when producer prices are running too
low and release stocks when final product prices are running too high.

In the event that reforms are carried out smoothly without political
disturbances, the food security situation will improve only if there is economic
development resulting in reduced inflation and unemployment. Economic growth is
expected to result from market efficiency brought about by the liberalization
program. Advocates of market liberalization will introduce an element of
competition in the economy and maize market system, in particular, and consequently
improve the market efficiency. This should result in relatively low cost maize with
little or no need for government subsidy programs.1

The liberalization of the marketing system alone, however, will not
automatically result in an efficient market coordination arrangement, especially in
the short run. The lack of an existing trader class, lack of private investments and
uncertain future government policies will Slow down the privatization process, which

is central to a successful market liberalization program. The role of the government

 

1The performance potential of private trading in Zambia is well illustrated by the sweet
bean market. The commodity was not controlled and private traders performed the whole
array Of vertical coordination effectively. Transportation costs were reflected in the prices
and demand and supply forces determined the market prices. As a result shortages of the
commodity were absent. Such a performance is expected by liberalization advocates for the
maize market.

61
remains in facilitating competition by supplying or improving the availability of
information on crop forecasts and price movements, providing legal support and
improving infrastructure for domestic and international trade.

Hopcraft (1987, p. 39) noted that the results of market liberalization include
the integration of markets, permitting prices to reflect quality, scarcity and costs of
transportation and storage. Liberalization could, therefore, stimulate market
efficiency. In Zambia the performance of the cooperatives and the private sector will
influence the performance of the maize sub-sector. The performance of the maize
sub-sector will most likely affect the growth of the economy and hence economic

development, resulting in a higher standard of living for the country’s population.

CHAPTER FOUR

THE ROLE OF PRIMARY COOPERATIVE SOCIETIES
IN MAIZE MARKETING

The on-going restructuring of the Zambian economy involves a movement
from a centrally controlled economy to a more market-oriented economy.
Restructuring or market liberalization in a broader sense refers to the reduction in
direct government control of markets. The definition assumes that market distortions
occur as a result of government interventions, which result in significant costs in
terms of economic growth and development. The removal of these distortions,
therefore, is assumed to stimulate the growth of an economy.

In Zambia, the impetus for market liberalization stemmed out of two major
reasons: 1) The realization that public sector production and marketing performance
did not work as anticipated; and 2) having relied heavily on IMF/World Bank
structural adjustment loans, the country responded to these organization’s insistence
that the public sector should play a reduced role in the economy.

In the process of reforming markets, the government faces many problems in
identifying constraints and formulating policies to improve the performance of the

economy. Agriculture was identified as a crucial industry to the development of the

62

63

country, and the importance of the maize sub-sectorl in the industry and indeed to
the economy cannot be over-emphasized.

In recognition of the role the maize sub-sector has in the economy, a study
was conducted in 1990 by several government and donor agencies. The study,
"Evaluation of the Performance of Zambia’s Maize Sub-sector,” identified several
objectives to improve the sub-sector performance (GRZ, 1990a, p. 6). Among these
were two objectives related to marketing. The first was to improve the economic
efficiency in both the production and marketing of maize. The second objective was
to improve the viability of the cooperatives, which were expected to play a vital role
in the new competitive market.

5 In marketing, vertical coordination has been and continues to be the most
contentious problem in the country. In the absence of marketing boards and a
developed private trading sector, cooperatives may be the most viable institutions to
undertake coordination in the short run (here taken to be about ten years).

On the subject of the best marketing alternative many scholars reject both
total public sector domination of production and marketing and the laissez-faire
approach. Despite the serious issues raised with respect to public sector failure,
public enterprise may prove to be less inefficient than the private sector in some
cases. The critical issue, therefore, becomes one of being able to determine what

role each sector, public, private and cooperatives will play in the market.

 

1The sub-sector is a meaningful grouping of firms related vertically and horizontally by
market relationships. Industry has a narrower definition. It is a group of firms producing
similar products and does not take into account some important market relationships,
especially those involved in vertical coordination (Shaffer, 1968, p. 2).

64

To this effect, research was conducted on cooperatives in order to provide
useful information on some of the important issues the policy markers, cooperative
organizations and private traders face in order to address market coordination
efficiency issues. The study looked at the economic and financial viability of Primary
Cooperative Societies (PCS) and the role they could play in the changing policy
environment of the maize market. The research project also attempted to provide

insights into the role of the private traders.

4.1. Problem Statement

Many constraints impede the development of the maize sub-sector. Generally,
the constraints include: a) Political and econonric policy environments; b)
Geographic dispersion and year to year variation of production; c) Geographic
dispersion of the population; d) Poorly developed market infrastructure such as
transportation, processing, storage, and information systems; e) Limited markets
within regions; and f) Lack of credit facilities.

In an effort to supply urban consumers with inexpensive staple food items,
prices were controlled, and in order to implement such a policy, public monopoly
organizations were required. The market functions done by these organizations
(NAMBoard and the Cooperatives) were poorly and inefficiently conducted.2 One
reason for the dismal performance of the organization was because of institutional

arrangements existing at the time.

 

2Both NAMBoard and the cooperatives have acted as monopoly organizations in the
input markets and monopsony organizations in the maize market. The term monopoly will,
however, be used in this text for both characteristics.

65
Another difficulty stemmed from the accounting system and conduct of the

marketing organizations. Since input and output prices were fixed administratively
without consideration of relative scarcities, it was difficult to determine the true
economic picture of the various monopoly organizations. The costs of inefficiency
were not borne by the marketing organizations and indeed, failure by the
organizations was more likely to bring a fund infusion than success. The absence of
market discipline on the part of the public organizations consequently relegated
efficiency in marketing to a low level of priority. It was evident by 1980 that the
performance of government ownership and / or control of marketing organizations was
dismal as well as a costly drain on government revenues. Given the institutional
problems, marketing liberalization was an inevitable alternative for improving the
performance of the maize sub-sector.

Liberalization of the maize market may be a necessary but not sufficient
condition for improving market coordination activities of the sub-sector. Some form
of public agencies or publicly supported efforts may be required, at least in the short
run, to stimulate the development of an effective commodity market (Harrison, et
al., 1987, p. 3). With the abolition of NAMBoard and the absence of a fully
developed private sector, the cooperative is worth considering as an alternative or
complementary system. Since the cooperative is a major player in the maize market,
it is important to understand how it currently operates in addition to evaluating it in
order to draw conclusions and policy implications on how best to re-organize the

system.

66
4.2. Objectives

The overall objective of this study is to determine what policy pointers can
be drawn from Zambia’s past efforts in promoting cooperatives in the development
of the maize market. Prescriptions will then be made regarding the changes needed
for the future role of primary cooperative societies in the maize market. The specific
objectives are:

1) to review, in general, constraints faced by primary cooperative societies by
examining the internal constraints (structure of PC55 and Standard operating
procedures) and the barriers to improved financial and economic
performance;

2) to examine the impacts of the entry of traders on PCS since trade restrictions
were lifted;

3) to identify cooperative marketing functions that the PCSs could participate in
with emphasis on efficiency; and

4) to present implications of the study findings on the role of PC85 in maize

marketing, potential benefits or costs to farmers, and sub-sector performance.

4.3. Literature Review

In this section a brief review of the history of cooperatives and their
involvement in maize marketing in Zambia is presented first for a better perspective.
' A discussion of the underlying issues of cooperative definition is presented in order
to provide a basis for understanding the subject matter concerning the structure,

conduct and performance of the cooperatives.

67
4.3.1. Development of Primary Cooperative Societies in Zambia

The Zambia Cooperative movement is composed of the Zambia Cooperative
Federation (ZCF) at the national level and nine affiliated provincial Cooperative
Unions (PCU). Each provincial union has some District Unions (DCU) and Primary
Cooperative Societies (PCS) affiliated to it. PCSs are affiliated to the DCUS or
directly to the PCUs but DCUS are affiliated to their respective PCUS. Membership
in PCS is drawn from mainly small scale and emergent farmers (For schematic
presentation of affiliation, see Figure 4).

The first cooperative society to be registered in Zambia, then Northern
Rhodesia, was in 1914. The society3 had a membership of 1948 and was restricted
to the European settlers. Attempts to establish cooperatives among the Africans in
the 19305 were unsuccessful due to the low level of agricultural production and lack
of trained, experienced and trustworthy personnel to run them (Lombard, 1971, p.
8).

In 1947, the cooperative societies ordinance was passed by parliament and the
department of cooperatives was formed (Mwila, 1989, p. 1) to encourage cooperatives
formation among Africans. By 1948 there were 23 societies with 3567 members.
African cooperative societies had increased to 192 with 39,677 members by 1964.
The societies that developed were primarily in crop marketing although a few were
loan, consumer and supply cooperative societies. The marketing cooperative

societies were generally successful, with the value of their turnover increasing tenfold

 

3The terms PCS and society are used interchangeably in the text.

 

Zambia Cooperative Federation ltd
(Apex Organization)

Provincial Cooperative om ch

Disrtict Cooperative

Unions

Primary Cooperative
Societies

 

 

 

Individual Cooperative Members

 

 

 

Figure 4 Cooperative Structure in Zambia - 1991

69
between 1949 and 1960 (Wood, 1983, p. 4). The societies in Southern and Eastern

provinces were notably successful.

With the conring of independence in 1964 came the new government which
saw cooperatives as the best avenue for involving Africans in the country’s efforts at
economic development. The assumption was that African participation through the
cooperative movement would improve the quality of life of the underprivileged and
unemployed rural population (Mwila, 1989).

A major campaign to promote cooperative formation was launched in 1965‘.
The unemployed, especially, were called upon to form COOperative societies and were
assured of funds to assist in these ventures. Free membership was encouraged and
members were to have "full control" of their organizations with only necessary
government supervision. The support provided to the societies included agricultural
loans, farm inputs (seed and fertilizer) and at times, oxen or tractors (Mwila, 1989,
p. 4). A cash subsidy was also provided in return for surplus crop produce.

With these attractive conditions the growth of the cooperative societies was
overwhelming and by 1970 there where 1,280 societies with an estimated 53,000
members. Promotion of cooperatives was again intensified during the 19705, and by
1990 membership was estimated at half a million patrons (See Table 4.1). The
number represented just under eighty percent of the total estimate of emergent and

small scale farmers (GRZ, 1990a, p. 18).

 

‘The new cooperative directive was issued by president K.D. Kaunda and is popularly
known as the ”Chifubu declaration." It provided the policy framework for the formation of
the cooperatives. The president called for people to supply the "energy, skills and
enthusiasm while the finance, supervision and guidance" would and did come from the
government (Quick, 1978, p. 4).

70
Table 4.1 Growth of PC85: 1948-1990.

 

Year Number of PCS Membership
1948 23 3,567
1964 192 39,667
1970 1,280 53,000
1980 715 117,000
1984 1,031 150,000
1988 1,500 400,000
1990 1,468 500,000'

 

Source: FNDP, Volume I, 1989, MOC.

‘ estimated

The rapid growth of the movement was accompanied by major problems
which led to the collapse of nearly half the societies by 1980. Some of the reasons
for the failure of agricultural societies have been documented and included:

i) total unpreparedness on the part of both the societies themselves and the
government machinery and bureaucracy to deal with the unprecedented rapid
expansion of the cooperative movement;

ii) lack of cooperation on the part of bureaucrats who were not ready to
implement government policies; -

iii) lack of skilled, trained and experienced personnel to run the societies;

iv) farmers’ preference for individual private units rather than communal or

cooperative form of production;

71
v) peasant’s lack of technical, political and inter-personal skills to manage

complex organizations such as cooperatives. Consequently there was a lot of
mismanagement of the societies;

vi) inadequate infrastructure, especially in terms of transport;

vii) the belief on the part of some of the more influential members that the
money government was pumping into the cooperatives was in actual fact a
reward for their participation in the freedom struggle few years back; and

viii) most of the people who formed or joined cooperatives had been unemployed
and others were attracted by the relatively large sums of money which were
provided. They joined so that they could obtain a share in these funds by any
means (See Mwila, 1989; Quick, 1978; Lombard, 1971; and Lungu, 1976).
Other reasons documented were that societies could be registered without any

assessment of their economic viability or of their internal coherence and commitment

to the cooperative movement (Wood, 1983, p. 20). For example, Parents Teachers

Associations were converted into marketing cooperatives in the 19705. The

government also broke away from the conventional cooperative practice in stating

that it was not essential for members of the new groups seeking registration to

subscribe share capital before commencing operations (Lombard, 1971, p. 20).
Cooperative societies in particular encountered numerous problems such as

under-capitalization and lack of the infrastructure needed to produce the services

they were directed to do. The administrative capacity was poor and in the absence
of the full-time or well-trained managers the elite in the form of board of directors

managed the societies usually for their personal gains. The surge and subsequent

72

dismal performance of the cooperatives since independence has left a lasting
detrimental image of the cooperative system. This has retarded subsequent attempts
to stimulate interest and improve the quality of the movement (Sipula, 1986, and
Wood, 1983, p. 9).

In the recent past (19805), the failures of the cooperatives to function in the
economy has been in part due to the image created that they were government and
political organs and that local effort was not needed. This was because the
movement had been supported almost entirely by government funds and were
believed to be badly organized, inefficiently run and bound to fail anyway.

Prior to 1972, a two-tier cooperative system existed. In 1972 a three-tiered
system was created with the formation of the Zambia Cooperative Federation as the
apex organization. The creation of the apex organization was justified on the
grounds that societies could not develop in an environment where activities such as
credit provision, education and input supply were being provided as isolated and
uncoordinated activities by different organizations. An apex organization could
coordinate these activities and at the same time assist in the implementation of
national cooperative development plans and in the channelling of development aid
to primary societies (ZCF, 1982).

ZCF was charged with many other responsibilities of administering various
programs through its specialized departments and subsidiaries. Some functions and
responsibilities included:

i) the role of Spokesmanship for the cooperative movement;

ii) coordination of long-term planning;

73

iii) monitoring of agricultural policy and pricing and statistics and provision of
such information to its affiliates;

iv) public relations and provision of training;

v) provision of insurance;

vi) provision of commercial services such as transportation, wholesaling, and
machinery maintenance and repairs;

vii) Auditing, accounting and provision of credit to societies;

viii) importation of the consignment of farm inputs; and

ix) management of strategic stocks and maintenance of silos and grain sheds.

Even with the formation of ZCF, the movement was ineffective and in a state
of dormancy. It was not until 1976, after the coming of the Swedish International
Development Agency (S.I.D.A.) with its financial support, that a serious attempt was
made to revitalize the movement again.

In 1980, the government reiterated the importance it attached to the
cooperatives by planning to streamline NAMBoard and allocate more functions to
the cooperative system. At this time only three provincial unions (in Eastern,
Northern and Central) were in existence. Six new extra unions, one in each province,
were created under government directives and support. The government and the
ruling party continued to believe that the cooperative movement was one way of
sensitizing the rural masses for the collective self-help projects. This was particularly
important in view of the fiscal budgetary difficulties which prevented social and

economic services and infrastructure to be provided. The movement was also seen

74

as an instrument for decentralization of economic activities to complement the
administrative decentralization that was being carried out (Wood, A., 1983, p. 12).

The economic reason for revitalizing the cooperatives was that NAMBoard
had become too monolithic and increasingly inefficient. The government believed
that smaller organizations of the provincial rather than national levels would likely
be more efficient and hence reduce the drain on government revenues that went to
supporting the market system. The development of the unions affiliated cooperatives
were seen as a better market organization alternative.

By the mid 19805, it was clear that cooperatives did not do any better than
NAMBoard in terms of market effectiveness and efficiency. The government,
therefore, started to encourage cooperatives to become autonomous and
economically viable entities. In 1989 the government decentralized the cooperatives
further by introducing the District Unions. The DCUS were supposed to bring
services closer tothe people unlike provincial unions, which were accused of being
far removed from members. The performance of the DCUS so far has had little
impact on the market since they were hurriedly implemented and are not yet well
established.

The brief review of the history of the cooperative movement in Zambia shows,
in addition to the problems narrated above, that the movement has grown out of
government initiative and support. The government (and the ruling and only political
party at the time) supported the movement in order to achieve political, social and

economic goals as perceived by the bureaucracy. As a result, the cooperative

75

organizations at all levels operated more like government agencies than as
autonomous business entities.

The dismal performance of the cooperatives, however, has not diminished the
determination of the new 1991 multi-party government to use the movement as a
strategy for reaching and raising the standard of living of the rural population. The
new government does not intend to control or influence the movement directly as
happened before. Funding will be restricted to facilitating the operations of the

maize market through education and information provisions for example.

4.3.2 Cooperatives’ Role in Agricultural Marketing

As stated before, the period of the cooperative formation saw the major role
being that of marketing. Before 1961, producer marketing cooperative societies were
particularly important in the remote outlying areas (Lombard, 1971, p. 12). At about
1948 the great majority of cooperative societies were mainly responsible for financing
of member’s crops, the marketing of the bulk of produce, and provision of transport
for collection and supply of seed and fertilizer.

Historically, the outlying Eastern province provided the impetus in organizing
the marketing c00peratives. A tobacco marketing cooperative society emerged in
1938 at Petauke. The Luangwa cotton growers organized themselves into a
marketing society in 1949. The society leased a gin from the government and
marketed lint cotton.

In 1952, the first union, the Petauke Cooperative Marketing Union

(P.C.M.U.), was formed in Eastern province. This was followed up by the formation,

76
in 1956, of the Katete Cooperative Marketing Union (K.C.M.U.) and the Alimi

Cooperative Union (A.C.U.) in Chipata (Lombard, 1971, p. 14). The unions owned
assets such as feeder transport vehicles and grading machines, and provided and
made available services such as stores for implements, seed and fertilizer.

Southern province was another area where producer marketing cooperatives
have been important. In 1951 the Namwala Cooperative Marketing Union
(N.C.M.U.) was formed. The union entered the maize market competing with the
private traders who hitherto had been buying on behalf of the maize control board.

In 1954, the Northern Province Cooperative Marketing Union (N.P.C.M.U.)
based in Kasama, Northern province, was formed. The Southern Province
Cooperative Marketing Union (S.P.C.M.U.) was formed in 1960. A cooperative
marketing union was also formed in the Central province and lasted but a short time
(Lombard, 1971, p. 15).

The major function of cooperatives has always been the marketing of crops.
In the post independence era, maize marketing came to dominate the activities of the
cooperatives. Before 1980 and in 1985 the PCUS acted as agents for the
monopoly/monopsony NAMBoard in as far as input distribution and maize
marketing were concerned. The PCSs were used by unions as assembling and
collection centers and were paid a service commission. After 1985, the PCUS took
over the purchasing of maize, leaving inter-provincial transfers and stock holding to
NAMBoard, and the role of PCSs’ did not change.

In 1989 NAMBoard was dissolved and marketing functions of maize directed

to the cooperatives and fertilizer distribution to Nitrogen Chemicals of Zambia

77

(N CZ). Within the cooperative movement ZCF and provincial unions were directing
the district unions and primary societies to carry out the functions. The DCUS and
primary societies were expected to market the bulk of the maize until 1991, when the
restriction of private trading was lifted. In the short run, before a significant private
sector confidence and entry develops, primary societies may have to carry the burden
and appear to have some potential in conducting market functions as autonomous

organizations.

4.3.3 Cooperative Definition

Cooperative firms are traditionally defined as businesses that are owned by
their patrons and follow at least some of the Rochdale principles’. Since not all the
Rochdale characteristics can easily be followed in reality, scholars have suggested
three essential principles.

1) Service at cost to member-patrons;

2) Democratic control by member-patrons; and

3) Limited return on equity capital.

In summary, a cooperative business is "an association of patrons,

democratically governed, that owns one or more firrrrs from which voluntary patrons

 

’Ihe Rochdale principles include: 1) net margins distributed according to patronage;
2) democratic control--one member/ one vote; 3) limited return to stock; 4) limitation on
the number of shares owned; 5) open membership; 6) trading on cash basis; 7) membership
education in the cooperative way of doing business; 8) political and religious neutrality; 9)
no unusual risk assumption; and 10) goods sold at regular retail prices, with net margins
rebated to members rather than discounted retail prices (quoted from Staatz, 1987, p. 33).

78

receive benefits or incur costs based on patronage rather than stock ownership”
(Shaffer, 1987, p. 63).

Zambia "cooperatives" violated these principles in one way or the other due
to the direct government and ruling political party involvement as narrated earlier.
Under the definition or principles described above, Zambian cooperatives were
cooperatives in name only. The reformed market environment is expected to present
an opportunity for the cooperatives in Zambia to operate as true cooperative

organizations.

CHAPTER FIVE

METHODOLOGY AND DATA

A study of a major participant such as the cooperatives in a market system can
be very involved. A rapid appraisal aids in narrowing down the subject matter to
manageable levels, while assisting in problem-solving goals. A rapid appraisal was,
therefore, conducted in February and March of 1991. The regions visited included
the Central, Copperbelt, Eastern, Northern and Southern provinces. The appraisal
was particularly important to this study because the country was in the midst of

market liberalization and economic policy reforms.

5.1. Methodology

The preliminary survey conducted gave insights into the relationship between
different levels of the cooperative movement (ZCF-PCUs-DCUs-PCSS). It provided
the researcher with a clear range of issues important to the cooperatives in the maize
sub-sector. It was clear that provincial unions intended to avoid assembling maize
and were pushing the difficult task to the PC85 and inexperienced district unions.

The PCS level appeared to be a potential key player in the liberalized maize
market and a decision was, therefore, made to concentrate the survey at the PCS

society level. In any case it is at this level that the cooperative system is closest to

79

80

its members and indeed the agricultural population at large. The primary purpose
of research was to examine the opportunities and barriers to using PCS for improving
market coordination of maize in Zambia. The PCSS’ behavior may ultimately affect
the maize market system performance.

The specific purpose will be to evaluate the financial status of a sample of
PCS and to determine whether they become efficient economic organizations. The
working assumption will include that PCS with good financial standing could survive
competition without government direct support and could effectively participate in
maize marketing. Market competition will bring about market discipline in the PCS
organizations’ conduct and improve their financial position. Once the PCS
constraints are determined, recommendations to improve the cooperative form and
system performance can be made. In this regard, the net worth and income
statements will be prepared and financial ratios generated for a "typical" sampled
PCS. The analysis will then compare a number of loss PCS generating losses with
those generating profits. The following section provides survey information on
sample selection, data collection, quality of data, and data management. Techniques

for analysis and results are then presented in the chapter that follows.

5.2. Sampling
The PCS samples came from four maize surplus and two deficit provinces.

The surplus provinces were Central, Eastern, Northern and Southern. The deficit

81

provinces were Lusaka and North Western provinces“. Lusaka province is an urban
major maize consumption center located on the Old Line of Rail (OLR). North
Western province is a rural location off the OLR.

Central and Southern provinces are near major consumption areas and are
served by ‘a railway line. Eastern province, on the other hand, is far from the major
consumption areas and lacks a railway line as an alternative transportation system.
The province is known to have production advantages for maize in terms crop
agronomy and husbandry, but is economically disadvantaged due to high
transportation costs. Northern province, though served with a line of rail, is
dramatically unsuitable for maize production and is also far from the major
consumption areas.

A list of existing and active primary COOperative societies was collected in each
province and a number of societies was then randomly selected. Table 5.1 shows
the estimated number of PCS in the sampled provinces, the number sampled and
number retained for analysis. Sixteen societies, out of a list of 102 were visited in
Southern province and fourteen were retained. Of the fifty societies listed in North
Western province, four were visited and retained in the analysis. Six societies in
Central, five in Lusaka, four in Northern provinces, and ten in Eastern provinces
where retained for analysis. At least four private rural mill service operators were
interviewed in each province. A second questionnaire was administered after the

lifting of the ban on private trading and a quick survey was conducted with a sample

 

6Four provinces enjoyed the surplus status in 1990/91 marketing season.

82

Table 5.1 Sampled Primary Cooperative Societies.

Province Number PCS Sample PCS Retained PCS

 

 

Central 72 7 6
Eastern 100 16 10
Lusaka 35 6 5
Northern 61" 6 4
Western 50 4 4
Southern 102 16 14
Total 4%) 55 43

 

"' Estimated for the sampled Districts only

of forty-five farmers, five millers (as, private buyers) in Central, Eastern, Lusaka and

Southern provinces.

5.3. Data

The field work was conducted between April and November, 1991. Three
experienced enumerators and two research assistants were recruited and trained for
the survey. The enumerators, one supervisor, and one principal researcher were all
involved in pre-testing and the eventual administration of the questionnaires. The
administration of the structured questionnaires involved at least one visit to the
research society. A few PCSs were visited more than once for clarifications to be
made.

Initially one Structured questionnaire was prepared and the questionnaire was

the major source of data. AS stated above, a second short questionnaire was added

83

towards the end of the survey in order to gain insights into a major policy change of
August, 1991. The policy involved lifting the ban on private participation and was
announced while the research was being conducted. The questionnaire attempted
to gather information on the immediate reactions of some participants.

Additional data to the main questionnaire came from financial records kept
by PCSS. Collection of data from financial books was based on how well and clear
the records were kept. The financial statements collected had some of the same
variables as those in the questionnaire. The Statements in most cases were not well
maintained and thus only provided complementary data to the questionnaire7.
Sixteen financial records for the 1990 financial year were retained for analysis in
total.

The first questionnaire was administered to a PCS as the research unit. It had
questions relating to the structure of the unit, including management and board
characteristics. The questionnaire sought information on selected economic
enterprises of the primary society. Enterprises included milling, maize assembling,
input supply, credit provision, transportation and communication and consumer goods
retailing.

In the questionnaire an attempt ’ was made to value the total assets and
liabilities of each society at replacement value to incorporate the effects of a severe

inflation rate the country was experiencing. At the time of the survey, by law, land

 

7The "New Cooperative Cash Column Book” as popularly known by the cooperative
movement, contained in some cases only a few months of data. The financial year also
differed among societies, and the calendar year convenient to the research for analysis.

84

did not attract rent and was, therefore, not valued in monetary terms (i.e., carried a
zero value) in the survey.

Interviews and observations were part of the survey and concentrated on
attitudes and market information issues of participants towards cooperatives and the
new market system. Other sources of quantitative data used in the study included
census data, survey reports and financial reports from the Ministry of Cooperatives
(MOC), Zambia Cooperative Federation and its affiliates, Central Statistics Office
(CSO), University of Zambia (UNZA), Ministry of Agriculture (MOA), Prices and
Incomes Commission (PIC), ZCF, etc. Data were also obtained from on-going
national research programs such as ”An Evaluation of the Agricultural credit System
in Zambia” by GRZ and "Rural Trade and Processing of Traditional Crops in

Zambia” by ICRISAT, Rohrbach and others.

5.4. Data Quality

The main problem encountered in the collection of data, other than time, was
that of mobility. The vehicle used was not capable of reaching some parts of the
research areas. Consequently, some randomly picked PCSs were dropped.

After the appraisal had been conducted, it was determined that society
managers were the best source of information from the organizations. On several
occasions, however, the society manager was either absent or new on the job and
thus had no access to or was unfamiliar with the records. Depending on the severity
of the problem the affected PCS was either replaced or another respondent

interviewed.

85

A language problem anticipated in the early stages of the survey turned out
to be insignificant as the English language employed in the interviews was familiar
to all the respondents. The other major difficult the researchers and indeed the
market participants faced, was that of interpreting and understanding frequent policy
pronunciations within the course of the research period. It was consequently difficult
to obtain answers to questions on new policies when some market participants where
not even aware of the policy changes. The problem of poor information was
exacerbated by the re-introduction (after seventeen years) of the democratic multi-
party elections and the rural population was particularly uncomfortable with the
researchers and questions posed during these political election activities.

Problems in desegregating some joint expenses of the society’s business to
individual enterprises within the business was common. This was particularly so for
labor and transportation expenses, and little could be done to alter this situation.
Records for maize were particularly poor because most of the PCSs viewed
themselves as mere agents and actually obtained instructions from the upper levels
of the cOOperative system. There was, therefore, complacency or deliberate acts to
maintain bad records on the part of the society management.

The accuracy of survey data is generally difficult to ascertain, especially where
answers are based on memory. The errors in this case were minimized by the initial
rigorous training of enumerators, good field supervision, editing and supplementary
financial records. Apart from the difficulties encountered in generating data, the
data were’relatively good and useful for drawing policy implications and as a basis

for future performance comparisons.

86

5.5. Data Management

Each questionnaire was edited by the supervisors in the field and usually on
the Spot. The supervisor checked for completeness, missing and inconsistent answers.
Corrections were made immediately while the survey team was still in the locality of
PCS. Editing was particularly important in the early stages of the survey when it was
necessary to check whether the enumerators understood the questionnaire and were
complying with the instructions. Edited questionnaires were taken to the Rural
Developed Studies Bureau, University of Zambia, in Lusaka, which served as the
research center. The data was coded and entered with the help of the Norton Editor

program on micro computers.

CHAPTER SIX

ANALYSIS OF PCS RESULTS

The results of the survey of the primary cooperative societies were analyzed
and are presented in this chapter. Structural characteristics, economic and financial
results are presented as averaged values or common characteristics. A test for
sample distribution showed that the sample was normally distributed (with a
coefficient of skewness of 0.918 with a standard deviation of 0.333). The mean
values as a statistical measure of central tendency were, therefore, reasonable.

In conducting general economic analysis of any program involving private and
public participation, financial analysis may be required (Frank, 1989). Financial
analysis should Show evidence of profitability in order to induce individuals to devote
resources to an activity. Under market reforms, PCS will be expected to operate
autonomously without government direct support. Future participation of PCS in the
maize market will depend upon how well they organize and operate as independent
firms and compete against the private traders. Profitability and financial ratios will
be used in an effort to have reasonable criteria for judging performance. The ratios
will provide insights into how solvent, liquid and profitable the cooperative firms

were for January lst to December 315i, 1990 financial year.

87

88

In order to gain some insights into the factors that influenced the volume of
maize handled, a regression analysis will be attempted using selected regressors.
Social and management regressors will be included, and economic variables will not
be Since uniform prices (pan-territorial) were in place and only cross-section data will

be available in this case.

6.1. Structural Characteristics of Sampled PCS

The average PCS sampled had been in existence for nine years, although a
few were as old as 34. The average membership was found to be 427, but the
number ranged from 32 to 2,500. Membership was scattered over a mean radius of
about 11.6 kilometers, with some members coming from as far as 22 kilometers away.
The average distance a society was located to the nearest district was 37 kilometers,
but could be as far as 88 kilometers away. Society locations were thus well scattered
and in good proximity to the farmers.

Every sampled society had a board of directors, management and general
membership. The board of directors was composed of the board chairman, vice
chairman, secretary, treasurer and three board members. The composition of the
board was standard for all PCSS in the country as specified in the "by-laws" of the
registrar of societies.

In the survey, all societies had a male board chairman, with an average age
of fifty years and average formal schooling of nine years (i.e., junior secondary school
level). In most cases the chairman was a prominent member of the community,

usually an active primary school teacher, retired primary school teacher, retired

89

police officer or a retired government civil servant. With a junior secondary school
education level, the chairman was reasonably literate to follow general economic
policies but probably not comprehend complex economic and financial concepts.

The secretary to the board and treasurer were also mostly male, with average
ages of 43 and 46 years respectively (Table 6.1). The secretary on average had 10
years of schooling (i.e., junior secondary school) and the treasurer had only 8 years
of schooling (basically primary school). The treasurer was considered semi-literate
at this level of formal schooling. The reason for having a serrri-literate treasurer was
difficult to comprehend and the author speculated that it may have been for
intimidation of the office holder and to gain control of the finances by the chairman
and/ or the society manager. Indeed the treasurer tended to know little of what was
going on in the PCS business activities. Another possible reason could be that
financial mismanagement could easily be blamed on the poor qualifications of the
treasurer when auditors from ZCF or PCU examined the records.

The management of the societies surveyed comprised of the society manager
assisted by a shop keeper, and hammermill operator, security guards and hired
seasonal labor. The cooperative society manager was responsible for the day-to-day
running of the PCS, particularly with the business aspects of the firm. The society
manager in general, was found to be male (95 percent) with an average age of 31
(Table 6.1) and an average twelve years of formal education (i.e. senior secondary

level). In addition to the formal education, the society manager attended cooperative

90

Table 6.1 Average Society Management and Board Characteristics.

 

 

Board member Age (yrs) Education (yrs)
Manager 31 12
Chairperson 50 9
Secretary 43 10
Treasurer 46 8

 

Sample (11) = 43

 

school to study book-keeping, accounts and cooperative theory as a requirement by
the cooperative movement’.

The society manager was younger, more educated, more active, and thus
tended to possess more decision making power even though it was the chairman who
was perceived to have that power according to cooperative members. The society
manager, however, was noted to be more knowledgeable on the business aspects of
the organization. From discussions with members of the societies, it was suggested
that economic decisions were made by the manager in most of the societies and that
these decisions were made for personal gain. Clues to such a conclusion included
the fact that the manager, for instance, made "business trips" to other districts and
in the process earned allowances. For personal protection from misuse of funds, the
manager maintained poor records, which made it difficult for auditors to

quantitatively determine the sources of revenue and expenditures. For example,

 

1Once some of the society managers acquired some of these Skills, they moved on to
better jobs.

91

many expenses were buried under the term ”other expenses" which covered a wide
range of unexplained expenditure items. Misappropriation of funds was often
discovered after a few years and the manager was dismissed but hardly prosecuted
for the "crime” committed. Managers were changed on average every three years,
making record keeping a difficult task. The new manager could not gain access to
the old records or could not interpret them and hence had a good reason to start all
over again.

Ordinary members were hardly concerned with monitoring the PCS activities
even though they believed that they would receive net benefits from patronage. The
reason could have been a free rider problem with each member assuming that others
would spend their time monitoring the running of the organization. In the end,
apathy permitted tribalism, nepotism and mismanagement to emerge.

Through informal interviews with members of the PC85, it was learned that
in many cases, the shopkeeper employed was a relation (often a wife or daughter)
to the board chairman, secretary or to the society manager. Nepotism introduces a
problem of discipline of subordinates for undesirable and negligent conduct.
Tribalism and political party affiliation were less of a problem than nepotism, as
there was only one political party at the time of the survey and most members were
usually of the same tribe for a given society. Mismanagement as a result of the
apathy Shown by members was another serious problem. The "Annual General
Meeting" was held on average in the survey area every fifteen months. Few members
attended the meetings and had low morale, resulting in a low level of participation.

Often members attended meetings to learn about that year’s market season loan

92

application and maize marketing regulations as directed from the upper-tier
cOOperative organizations. The impression obtained from the survey was that the
management of the organization was of low priority at the meetings and that
misappropriation of funds surfaced only when there were conflicts between the
management and members of the board.

Mismanagement examples include the fact that the manager and / or the board
chairman usually made personal trips but passed them on as business trips, goods
were often kept at a manager’s or board chairman’s house with no appropriate
records kept, some societies’ tools and equipment where used by board and society
management for personal activities and consumer shops could be closed at the
discretion of one of the members of the board or the society manager. One of the
reasons this was allowed to occur was that the expectations by members on the
cooperative’s business performance was low.

Members recognized that the societies were one way of having access to credit
regardless of the financial status of the cooperative organization. The board of
directors and management were also more concerned with provincial unions and/ or
ZCF management and were not answerable to the membership for the same reason.
It was the upper-tier organization that could take action for mis-conduct by the
society manager in most cases. Monitoring of societies by the provincial unions, on
the other hand, was very infrequent, as the auditing of financial books showed.
Auditing was behind schedule by as much as four years and often books were taken
to the provincial union offices and not returned over a long period of time. This

gave the management and/ or board more latitude in conducting the organization’s

93

business activities with little fear of repercussions for illegal or negligent conduct.
Little capital formation, for example, was initiated by the management or the board
of directors for the benefit of the organization. Even consumer shops and milling
(hammermill) operations where initiated by ZCF.

The impression obtained from interviews, discussions and observations on the
issues of mismanagement, nepotism, negligence and tribalism, point to the fact that,
Primary Cooperative Societies in Zambia had serious internal organizational
problems over and above the external policies. The conduct of the management and
the board was identified as a serious hindrance to the operations of the societies.
In this area, changes in incentives will be needed if attitudes are to change and
hence, progress made by the organizations. The societies did, however, manage to
attract young and relatively educated society managers to run the organizations, but
without monitoring by the general membership little could be gained. The
management and the board of directors will basically have to re-focus their attention
from serving the upper tier interests to those of the membership. Competition
among the societies and private traders for attention of farmers will be the impetus
for change in the societies’ attitudes and business norms and inefficient organizations

will be eliminated under the new market environment.

6.2. Economic Activities
The major economic activities for the sampled PCSS included crop assembling,
input distribution, credit distribution, milling services and consumer goods retailing.

The analysis of each activity (individual enterprises) within the business enterprise

94

of an average society from the sample and financial statements averaged over the

sample are presented in this section.

6.2.1. Maize Assembling Activity

Ninety-five percent of the PCSS sampled were agents of their respective
provincial unions and not autonomous traders in the maize market. The rest did not
deal in maize at all but were instead agents of a more successful cotton board, the
Iint Company of Zambia (LINTCO). Of the societies that handled maize, 36
percent also handled sorghum, 85 percent handled sunflower, and 8 percent handled
millet. In maize marketing, a society was offered a commission of 7 kwacha on each
bag of maize handled in the 1990/ 91 market season. On average a PCS handled
5,719 bags of maize in 1989/ 90 and 5,020 in the 1990/ 91 market seasons respectively
(Table 6.2). The volumes, however, ranged from a mere 13 bags for a North
Western region society to 72,000 bags for a Southern province society in the sample.
The PCS handling a large quantity of maize was found to be a center for other
smaller PCS’s which could be considered as subdepots. In the 1990/91 market
season the maize activity earned an average annual revenue of 35,140 kwacha. The
revenue of the maize represented approximately 5.8% of total annual revenue of the
whole PCS (Table 6.6).

Since most of the firm’s temporary hired labor was used for stacking maize,
the annual temporary labor costs of the whole business enterprise could be allocated
to the maize activity. With such an assumption, the maize activity would have

recorded a loss of 6,119 kwacha in the 1990/ 91 market season for an average society.

95

Table 6.2 Mean Economic Characteristics - 1991

 

Activity Value
Maize handled in 1989/90 (90kg bags) 5,719
Maize handled in 1990/91 (90kg bags) 5,020
Commission per bag (ZK) 7
Fertilizer handled in 1990/91 (50kg bag)
Basal dressing 2,561
Top dressing 2,974
1990/91 fertilizer comnrission (ZK) 4.68
Milling charge to members (ZK/25kg) 20
Milling charge to non-members (ZK/25kg) 25
Private milling charge (ZK/25kg) 30
Mill service radius (Km) 7.20
Distance to other mill (km) 2
Distance to other Shop (km) 4.50

 

Source: Survey, 11 = 43

Assuming that an average society had not been an agent of the union but

autonomous and the official marketing margins of the 1990/ 91 are used, a possible

Situation could be analyzed (See Table 6.3). A society that handled 5,020 bags of

maize would have spent 4.016 million kwacha to purchase maize from farmers at 800

kwacha per bag. The society would have gained 5.533 million kwacha as revenue

with the into-mill price of 1100 kwacha per bag. The society would have incurred

265,608 kwacha transportation cost from its location to the miller averaging a

distance of 37 kilometers and a transportation rate of 1.43 kwacha per bag per

kilometer. A net income of 1.24 million kwacha would have been realized by the

96

Table 6.3 Maize Costing PCS under Assumed Autonomy
(Sample means and 1990/91 Market Season Parameters).

 

 

Item Value / income Item Value / Cost
Maize Sold 5,020 Maize Bought 5,020
Into-mill Price 1,100 Product Price 800
Revenue (ZK) 5,522,000 Cost (ZK) (5,020'800) 4,016,000

(5,020‘1,100)
Mean Distance (km)

 

Trans Rate (ZK/bag) 1.43
Cost (ZK)(5,020‘37‘1.43) 265,608
Total Cost (ZK) 4,281,608
Net Income (ZK) 1,240,392

 

Source: Based on survey averages (n=4 ) and 1990/91 market season, market
margin.

 

society from the maize activity, given all else the same. This would have been a
reasonable level of income for a small business in Zambia for the 1990/ 91 market
season. One would conclude that the societies would have benefitted more from
being autonomous than as agents based on this criteria. Other costs not considered
in the above scenario include full-time labor costs, packaging, fumigation and interest
payments.

In order to gain some insights into the factors that influenced the volume of
maize handled by a typical PCS in the researched areas, an 01.8 regression analysis
was attempted using cross-section data of the 43 societies sampled. A linear

mathematical relationship was assumed and the intercept was suppressed to allow for

97

zero purchases of maize.2 The regression equation was in general Specified as

follows:

0
8

Where

0
B

e: we m g>

r

U
{/1

DW

DN

DE

f(A, W, E, D, R, M, D1, D8 DW, DN, DE)

quantity of maize assembled by the PCS in 1990/ 91 market
season (90 kg bags)

Age of PCS (years)

Work experience of society manager within the same PCS
(ream)

Education level of society manager (no education; primary;
junior secondary; senior secondary; and college education)
Distance of PCS location to the nearest district (Km)
Distance of the PCS location to the nearest all weather
road (Km)

Quantity of maize purchases per member (bags/ farmer)
Dummy variable equal 1 for Lusaka province and 0
otherwise

Dummy variable equal 1 for Southern province and 0
otherwise

Dummy variable equal 1 for the North Western province
and 0 otherwise

Dummy variable equal 1 for Northern province and 0
otherwise

Dummy variable equal 1 for Eastern province and 0
otherwise

The quantity of the maize handled in 1990/ 91 season was the regressant and the

regressors (exogenous variables) included the age of the society, the number of years

the manager was employed, the education level of the society manager, the distance

Of the society to an all weather road, the distance of the society to the nearest district

and the per member sales to PCS. In order to capture regional differences, dummy

variables for Lusaka, Southern, North Western, Northern and Eastern provinces were

included, controlling for Central province. Under the uniform pricing system and

 

2The linear relationship used performed better than a non- linear relationship that was
transformed using logarithms.

98

with the use of cross-section data, uniform price variables (producer price and
transport rates, for example) could not be applied to make economic sense.

The age of the PCS and the number of years the manager was employed
were used as proxies for the stability and experience in maize marketing of the
cooperative organizations. A positive relationship to the regressant was expected in
each case. The distance to the district and to an all weather road were expected to
provide insights into the importance of the location factor. An ambiguous
relationship was expected for each regressor. Farmers further away from good
infrastructure tend to be small and to retain more maize for household consumption
selling less to the market and on the other hand, the absence of private trading in
remote areas could increase the volume of maize handled by PCSS. The education
of the society manager was included as a proxy for the quality of management and
a positive relationship between the volume of maize and quality of management was
expected. The per capita maize sales variable included in the model was expected
to have a positive relationship to the volume of maize handled by a PCS. The
variable was included in order to try and capture contributions by farm size. The
regression equation generated by the model is shown below with t-Statistics indicated
in brackets for each respective coefficient)

Qm = 52.6A - 647.8W - 3426.1E - 215D + 158.7R - 3481.4M + 3885.9DL

(.5) (-1.5) (4.0) (-6.0) (2.6) (-1.0) (1.5)

- 3496.3DS - 1831.0DW + 2214.7DN - 29.0DE
(-22) (-5) (.7) (-15)

Adjusted R-square: 0.2809

99

The selected regressors did not explain much of the variation in the volume
of maize handled by the societies. Only 28 percent (adjusted R-square of 0.2809) of
variation was explained by the variables included in the test. The variation in volume
of maize handled by PCSS appeared to be more stochastic with over 72%
unexplained variation. Because of the imperfect market situation that existed in the
market and the direct government "protection” of all societies regardless of
performance and other physical factors, this outcome not surprising. The results,
however, indicated that the most influential variables in the model were the level of
education of the society manager (i.e. primary, junior or senior secondary school),
the distance to the nearest all-weather road and the Southern province region. These
variables were significant at the 5 percent level of significance. With every stage of
education level of a society manager, 3,426 bags bought by the PCS could be
explained by this variable. At every kilometer increase in the distance of location of
PCS from an all-weather road, 159 bags of maize were purchased. This suggested
that remotely located PCS will most likely be important to farmers compared to
those near the roads in maize assembling. The dummy variable for Southern
province suggested that a variation of the volume of maize handled by a PCS in the
province to those in Central province could be explained by the regional differences.
Since the Southern prOvince was experiencing a drought in the 1990/91 market
season, the PCSS did not purchase more maize than those in Central province as
expected.

Variables significant at 10 percent level of significance, included maize

purchases per member and the regional differences of Lusaka and Eastern. The per

100

member sales suggested that the PCSS in areas were each member sold relatively
large quantities of maize, the PCS handled less quantities of maize. The result
implies that PCSS surrounded by many small farmers are likely to handle more maize
compared to PCSS in areas with relatively large farmers. The Significance of the
Lusaka region dummy variable suggested that more maize was handled by an average
PCS in Lusaka than in Central province. Eastern province, on the other hand, had
lower volumes of maize handled by each society compared to Central province. The
results showed that regional differences could explain some of the variations in maize
handling by the PCSS.

The age of the society and the distance of the PCS to the nearest district
were not significant variables at 10% level of significance. The distance to the nearest
district not being able to influence the volume of maize bought by a PCS and the
Significant influence of the distance to the nearest road, indicated that, infrastructure
was a more important influence on the volume of maize purchased by a PCS than
the proximity to the major consumption areas. This points to the importance of the
transportation development. The results also indicated that societies near major
consumption areas are likely going to face competition from private traders and
farmers who will take their maize directly to the central markets. Remote PCSS on
the other hand stand a better chance to conduct maize market functions where
farmers have fewer alternatives for disposing of their maize.

The PCSS in Northern and North Western provinces were found to be no
different from those in the Central province in terms of the volume of maize

handled.

101

The regression tests presented above suggested that the level of education
of the society manager (good management) and societies located far from central
maize markets and far from an all weather road, will be important variables to
consider for primary cooperative societies’ participation in the maize market.
Infrastructure will be important in order to attain comparative advantage of
productive areas between and within regions. The PCSS in rural Lusaka appeared to
be important compared to those of Southern and Central provinces. PCSS in Eastern,
Northern and North Western provinces were little different from those in Central
provinces and the regional differences, therefore, were not major factors in

determining the viability of the PCSS.

6.2.2. Input Handling

Input distribution was a common economic activity, with fertilizer distribution
taking up the bulk of the activity. Societies as agents of provincial unions extracted
a commission of 4.68 kwacha and 3.88 kwacha per 50 kilogram bag of fertilizer and
seed respectively. The PCS on average handled 2,561 basal dressing and 2,974 top
dressing fertilizer bags in 1990/ 91 season bringing in a total annual average income
of 25,904 kwacha per society. The fertilizer commission was a source of 4.4 percent
of the firm’s annual average income (Table 6.6). The activity, though economically
viable, was small and not too important to the firm as a revenue generating activity.
The input handling service by the societies, however, will continue to be important

to the farmers.

102
6.2.3. Credit Distribution

In the area of credit distribution to farmers, the societies played a minor role.
The PCS supplied names of applicants and their respective requests for fertilizer
financing to ZCF / F S (the major lending organization) and kept records for maize
purchases from farmers for purposes of extracting loan repayments. The ZCF/F8
processed and handled most of the transactions with the farmers. Since the loans
were provided to farmers in kind, societies were responsible for storage and
distribution of the physical inputs. Loan transactions were, however, handled mostly
by ZCF/PS personnel.

In the 1990/ 91 marketing season a farmer was charged 28 percent interest
on the loan with four percent of the recovered interest going to the society as
commission and 24 percent to the lending organization (ZCF/PS). Due to the low
recovery rates of loans, PCSS realized little revenue from this activity.

The potential role of PCS in credit distribution in the short run appears to
be high even with the introduction of private trading. In the long run, farmers may
be able to deal directly with the development and commercial banks, but meanwhile
societies are a good source of information on farmers to lending organizations and
could still play an important intermediatory role.

Societies as direct borrowers are themselves not familiar to commercial
lending organizations. Societies with potential to operate in the new market could
be identified through contact with their respective provincial unions. Government
guaranteed loans from ZCF/F8 and development banks are expected to decrease,

resulting in less credit available to farmers and societies alike. Cooperative societies

103

may, however, have an advantage over private traders in the sub-sector regarding
access to credit facilities. The societies have a history, though unfavorable, in the
maize market. The history of individual societies could lead to the isolation of
obvious undesirable organizations for targeted assistance programs where needed.
Other considerations, however, may also weigh against PCSS in favor of
private traders. Commercial farmers (as private traders), for example, may hold an
advantage over PCSs since they own storage and transportation facilities and they
already have an existing relationship with commercial banks. Large commercial
millers may also have a slight edge over societies on the basis of the size of their
business. Lending organizations prefer to deal with fewer and larger business entities
and familiar clients over numerous and small business entities which are difficult to
police in case of defaults on loans. The credit system in Zambia, therefore, is one
area that will present a great challenge to the primary cooperative societies’ survival

in the liberalized maize market.

6.2.4. Rural Milling

The provision of the mill service was a popular economic activity of the
sampled societies, which owned on average a three-year-old diesel powered
hammermill. Eighty percent of hammermills were acquired on credit at an average
cost of 185,000 kwacha. Of these loans, 86 percent came from ZCF/F8, 8 percent

from Small-scale Industry Development Organization (SIDO), and 6 percent from

104

commercial banks. At the time of the survey, an average sum of 36,778 kwacha was
owed by the society to the lending organization.

The hammermill service charged about 20 kwacha for milling 25 kilograms
of maize to members and 25 kwacha to non-members’. The PCS hammermills
catered to people within an average radius of 7.2 kilometers with a range of up to
15 kilometers, especially during peak periods from June to August. Society service
mills operated in competition with privately owned hammermills which were
stationed on average only 2.0 kilometers away. The privately operated mills charged
a higher average price of 30 kwacha for the same service‘. Unfortunately, the PCS
mills were less dependable due to extended periods of breakdowns. Privately
operated hammermills tended to break down twice a year, just as often as those
operated by the cooperative societies. It, however, took an average of three weeks
before repairs were made on private mills compared to nine weeks for the sampled
societies. In case of a mill, operated by a society, a repairperson from the provincial
union had to be informed about the problem, upon which he would inspect, assess
and identify the problem. Repairs called for a second visit, which would take a

waiting period, in some cases, of as long as 16 weeks. The privately operated

 

3A hammermill operator could only process a consumer’s grain. By law the operator
was not allowed to maintain maize stocks for the purposes of selling in grain or milled form,
other than to the official marketing monopoly of the time. This restriction together with the
uniform pricing policy discouraged operators from developing their own storage facilities.

4In addition to the value of the 90 kilogram bag of 800 kwacha, the cost of transforming
the grain to maize meal (on a 1:1 transformation rate) was 108 kwacha. The purchase of
subsidized maize meal of the same quantity if available in 1990 was 968.40 kwacha which
was comparable to the farmer processing their own maize in the rural areas. Where
industrial meal was available, it was less costly to purchase maize without additional
opportunity costs of labour and maize storage loss risks.

105

hammermills were, consequently, dependable and , therefore, popular among
clientele (including cooperative members) despite the higher service charges.

In the mill enterprise, the major variable cost was that of fuel for operating
the machine. The fuel cost was on average 31,763 kwacha per year. Average annual
repairs and wages cost 21,331 and 19,949 kwacha respectively. With annual average
revenues of 87,161 kwacha a net annual income of 14,118 kwacha was generated by
the activity in the 1990 financial year.

The mill enterprise was a reasonable contributor to gross revenue, at 14.60
percent of the gross revenue (Table 6.6). The results showed that the hammermill
operated with positive net income and had potential for profitability. Profitability
could improve even further if societies eliminated the role of the provincial unions
in the decision making process. Efficiency could improve through a shortened and
cost effective decision making process on repairs of the mills. The need for rural
milling is high not only as a source of maize meal to the rural areas but also as
source of maize meal to the urban centers. The quality of the rural meal is relatively
similar to the industrially processed roller meal in terms of appearance, texture and
nutritive values. Rural meals and roller meals are both not decorticated especially
in the last decade in the case of roller meal. Rural maize meal could, therefore,

easily penetrate the urban market at the right price.

6.2.5. Consumer Shop Retailing
Almost every society had a consumer shop regardless of the location and/ or

presence of competing publicly and / or privately owned consumer shops. A non-

106

cooperative retail shop was located on average 4.5 kilometers away from the sampled
society. Consumer shops stocked basic essential commodities such as salt, sugar,
cooking oil, soap, candles, matches and kerosine. A few larger retail shops had
clothes, mealie meal, ploughs and spare parts for implements. The enterprises in the
sampled PCSS, generated an annual total revenue of 332,276 kwacha on average.
The major variable costs included expenditures on acquiring shop inventories at an
average of 237,130 and full-time labor wages at 20,587 kwacha. Miscellaneous
expenses averaged 10,790 kwacha annually. The average annual net income came
to 63,769 kwacha. The calculations did not consider transportation and overhead
costs that could not be desegregated by enterprise.

The major problem faced by the consumer shop enterprise was the
availability of transportation facilities to move retail goods from the wholesale shop.
Inventories in general where acquired and transported only when union personnel
visited the society. It was difficult to determine when such a visit would occur so that
goods could be purchased in advance. When this was done, transport costs were
debited to the society with little pressure for immediate payment, which prompted
the society management to "ignore" these costs.

Another problem regarding the standard operating procedures for operating
a Shop enterprise was the banking relationship between the PCS and provincial
unions. Revenues of the society from all enterprises were deposited in one account

and withdrawals required a provincial union signatory’. The purchase of major

 

sln one case, the district union maintained one account for all the PCSS in its
jurisdiction. A PCS with positive bank balances may end up being told they had less in their
account since the district union may have used it on other PCSS or other activities.

107

items (the largest expense component-Table 6.4), therefore, required "permission” of
the provincial union. This requirement was instituted in order to monitor the board
and the management on behalf of the general membership. When purchasing shop
items, money required for such purposes had to be requested in advance and in
some cases a limit of 50,000 kwacha per withdrawal was imposed on the societies.
This presented a planning problem in that the decision making process was
unnecessarily prolonged. Under the conditions of high inflation rates, new requests
and limited shopping lists were often made, raising the cost of consumer shop
operations. The society, for example, incurred administrative and travelling costs of
the manager or the shop keeper charged with making the arrangements.

Despite these difficulties in operating procedures, the consumer Shop was a
major revenue earner for the society, contributing over 55.80 percent to gross
revenue on average (See Table 6.4 where other contributions to gross revenue and
expenses are presented). By changing the standard operating procedures, particularly
the elimination of the provincial union involvement in the decision making process,
the shops could be able to run more efficiently and provide a better service to the
consumers. In addition, farmers with their once a year household income could
benefit from low prices and credit provisions from the retail shops.

Under the 1990 economic and political environment, the enterprises of
maize, milling and consumer shops indicated potential for profitability, an indication
of financial viability, a pre-condition for economic viability. Input and credit
distributions activities did not show any evidence for economic viability due to

inadequate data. These functions will, however, be necessary to the farmers and

Table 6.4 Revenue and Expense Percentages

108

 

 

 

% of Gross % of Total
Revenues Income Expenses Expenses
Maize revenues 5.80 Shop expense' 55.30
Input revenues 4.40 Mill expense" 15.10
Shop revenues 55.80 Salaries 8.50
Mill revenues 14.60 Transport 5.20
Fees 0.04 Other expense 16.00
Shares 0.70
Other revenues 18.60
Total Revenue 100.00 100.00

 

Source: From the survey (n=43)

' Expenses were not adjusted for inventories.

" Milling costs included: fuel, 43.5%; maintenance, 29.2%; and wages, 27.3%

 

cooperative societies may have to carry them out. The shop and hammermills

enterprises may be less important to the community around the societies but these

were important economic enterprises to the firm business and may continue to be 50.

6.2.6. Surplus Versus Deficit Region Societies

Generally, societies sampled from maize deficit region'S were composed of

smaller organizations in terms of membership numbers, were younger in terms of

formation period were further away from major districts and good all whether roads,

and served a smaller radius of farmers (Table 6.5).

109

Table 65 Selected Mean Variables from Surplus and Deficit Maize Regions PCS
Sample.

 

 

 

Variable Surplus PCS Deficit PCS Total
PCS Age (yrs) 11.6 7.5 9.5
Membership 493 360 427
District distance (Km) 33.6 41.3 37.0
Road distance (Km) 12.0 15.5 13.8
Service radius (Km) 15.9 12.0 14.0
Manager education (yrs) 12.4 10.5 12.0
Work period (yrs) 4.0 3.6 3.8
Maize Volume (90kg bags) 8,433 1,714 5,020
n =34 n =9 n=43

 

Source: Generated from the Survey

 

The societies sampled from deficit provinces also handled about one fifth of
the maize produce as those in surplus provinces. They employed managers for a
relatively similar time period, but the managers had fewer years of formal education.
Managers in deficit regions had junior secondary school education compared to
senior secondary school for the societies in surplus regions. The chances of societies
in deficit provinces to survive under the ”free” market system appears to be poorer
than those societies in the surplus maize province regions. A special policy focus by
the government may be needed especially in the supply of food items, inputs and
consumer goods into deficit regions, in the event that private trading fails to carry out

these functions.

110

Table 6.6 Sample Averaged PCS Net Worth Statement - 1990
_

 

 

 

 

 

 

CURRENT ASSETS CURRENT LIABILITIES
Cash at hand 5,204 Loan repayment 36,949
Crop revenues 35,140 Shop costs 237,130
Input revenues 25,904 Wages/ Salary 81,795
' Shop revenues 332,276 Fuel 31,730
Mill revenues 87,161 Transport costs 25,057
Shares/ fees 4,582 Repairs/maint 21,331
Other revenues 75,503 Other expenses 51,440
Less inventory 82,143
Total Current Assets 483,627 Total Current Liabilities 485,465
INTERM. ASSETS INTERM. LIABILITIES
Equipment 20,163 Princ. loan 36,778
Hammerrnill 185,000
Less depreciation‘ 120,000
Total Assets Interm. 85,163 Total Interm. Liabilities 36,778
FIXED ASSETS LONG-TERM LIABILITIES
Storage/ Shop 117,600
Mill shed 43,357
Office 38,333
less depreciation 20,000
Total Fixed Assets 179,290 Total Long-Term 00,000
Total Iiab 522,243
Net Worth 225,837
Total Assets 748,080 Total Liab. & Net Worth 748,080

 

 

Source: Based on the survey (n=43). Units = ZK

‘ depreciated for 3 years

111
6.3. Whole Enterprise Financial Analysis

In a firm, a manager is concerned with returns on investment of various
assets and the efficiency of management. In order to bargain effectively for outside
funds, the manager has also to be attuned to the aspects of financial analysis that
outside suppliers of capital use. The net worth statement (also called balance sheet),
and the income statement are two of the basic records useful in the financial analysis
of a firm. The net worth statement shows the assets and liabilities of a business firm
at a moment in time, usually at the end of the year (See Table 6.6). It summarizes
the financial solvency and is the most commonly requested for statement by lending
organizations (Harsh, et al., 1981). The income statement depicts a firm’s financial
progress, efficiency, stability and profitability and summarizes the financial
transactions which occurred over a period of time (See Table 6.7). With the two
records, substantial information for analyzing a business and making management
decisions is available to the manager. However, in order to assess the financial
condition and performance of a firm, financial ratios are needed so that comparisons
could be made over time and/ or with other firms of similar industries. No one ratio
gives sufficient information to judge the financial condition and performance of a
firm, but a group of ratios can be used to provide reasonable judgment. liquidity
ratios such as gross ratio are used to judge a firm’s ability to meet short-term
obligations“. Solvency ratios such as net capital ratio provide insights into the ability

of the firm to meet long-term obligations, and profitability ratios (e.g., gross margins)

 

6liquidity was defined by Van Hone et a1. (1985, p. 135) as ”the ability to realize value
in money, the most liquid asset." liquidity has two dimensions: 1) the time required to
convert the asset into money and 2) the certainty of the realized price.

112
Table 6.7 Sample Averaged PCS Income Statement - 1990.

 

 

 

 

CASH RECEIPTS
Maize revenues 35,140
Input revenues 25,904
Shop revenues 332,276
Mill revenues 87,161
Shares/fees 4,582
Other income 75,503
Less inventories 82,143
Gross Income 478,423
OPERATING EXPENSES
Shop purchases 268,507
Mill expenses 51,712
Labour expenses 81,795
Transportation 25,057
Repairs/ Maintenance 21,331
Loan repayment 36,949
Other expenses 51,440
Depreciation 60,000
Total Expenses 545,465
Net Income (profit/loss) -67,042

 

Source: Based on the Survey (n=43). Units = ZK

113
Table 6.8 Sample Averaged PCS Financial Ratios - 1990.

 

 

Ratio - Formula Value
Net Capital Ratio Total Assets/Total Liabilities 1.43
Operating ratio Total Operating expenses / Gross 1.02
Income
Gross ratio Total Expenses/ Gross Income 1.14
Capital Turn Over Ratio (Gross Income + Major 0.64
Purchases) /Average Capital
Investment"

 

‘Average Capital Investment = (beginning capital + ending capital)/2. (See
Harsh S., et al., 1981).

 

provide indications of the firm’s operational efficiency7.

The sampled PCSS generated, on average, a net worth of 225,837 kwacha,
indicating a small but healthy state of the business under the financial year in
consideration (Table 6.6)“. The positive figure pointed to the fact that the average
society was solvent. From the income statement (Table 6.7), prepared from the
survey, a negative net income of 67,042 kwacha was calculated, indicating a loss to
the owners of the operation (cooperative members). The value indicated liquidity

problems for the firm business. Further analysis is, however, required to gain better

 

7Since there was no available data to compare PCSS’ calculated ratios to other firms or
with previous years of the same firms, the analysis applied rules of thumb to come to its
conclusions.

”The net worth value was about five times less than the value of a one metric ton
capacity utility vehicle at the time of the survey. This example illustrates the size of the PCS
enterprise.

114

insights of the true financial conditions of a business. Selected financial ratios were,
therefore, generated and are presented in Table 6.8.

The net capital ratio of an average surveyed society’s business was calculated
at 1.43, a value indicating that the business was solvent but barely so. For every
kwacha of liability there was only 1.43 kwacha of assets to cover that liability should
the firm be liquidated. The amount did not provide room for error, especially for
an organization with poor management endowment and control. A higher ratio
provides greater ability for the firm to pay its bills and a ratio of 2.0 and above is
usually cOnsidered "safe” in many industries. In Zambia (specifically the survey
areas), the average society would not be in a position to acquire loans based on their
financial status. Net worth ratios of 3 to 4 could be helpful to the average society.

At 1.02 and 1.14 (Table 6.8), the operating and gross ratios respectively
indicated that the average society business was unable to cover operating expenses
and total expenses respectively”. The gross ratio suggested that each kwacha of
explicit expenses generated only 0.88 kwacha of gross revenue and 0.98 kwacha in the
case of the operating ratio. This was an indication of the depth of the liquidity
problem for the average society business firm.

In order to look at the use of invested capital in the business in relation to
the income generated, a capital turn over ratio of 0.64 was calculated using both

income and net worth statements. At 64 percent of gross income to the amount

 

9 In 1986, the author found an averaged operating ratio of 0.51 for three societies in

Northern province (Sipula, 1986). This survey data would suggest an improvement for the
societies. Not surprisingly, however, two of the societies visited in 1986 had dissolved when
visited in the 1991 survey.

115

invested, it would take on average only 1.6 years for the business to generate
revenues at a value equal to the total invested capital. The ratio, averaged over the
sample, was unexpectedly high indicating relatively high efficiency in the operation.
The inflation (rates rather than production and management contributions were
considered the reason for the high rate. The ratio was indeed interpreted with
caution especially since the true economic picture of the societies’ business could not

be determined as not all costs and revenues were identifiable.

6.3.1. Selected Case Studies

Eleven case studies of PCSs out of the sixteen with financial records collected
in the survey-were analyzed using individual income statements. The societies were
then separated into profit-making and loss-making categories for the 1990 financial
year. Two societies from Southern, Northern, North Western, Central and Lusaka
provinces were included and one from the Eastern province. Once individual income
statements had been prepared and the categories determined, averaged income
statements for each category were then prepared and the results are summarized in
Table 6.9. A gross ratio for each category was determined for purposes of
comparisons. The income statements were prepared for the lst January 1990 to 3lst
December 1990 financial year. The analysis was biased towards those societies that
tended to keep relatively good records.

The study of the two categories showed that there was no correlation
between the category and the regions of the PCSS. Both 1055 making and profit

making PCSS were distributed randomly across the regions. The separation of loss

Table 6.9 Averaged Category Income Statements 1990

116

 

 

 

 

Loss-making Contribution Profitable Contribution to
PCS to revenues % PCS revenues %
Receipts
Maize revenues 20,277 5.3 70,789 29.9
Input revenues 9,107 2.4 15,425 6.5
Shop revenues 276,242 71.3 60,820 25.7
Mill revenues 60,674 15.7 59,107 25.0
Shares/fees 2,986 0.8 3,898 1.7
Other revenues 17,195 4.5 26,447 11.2
Less Inventory 60,690 - 12,205 -
Gross Income 325,791 224,281
Burmese
Shop expenses 183,345 129,267
Mill expenses 33,167 10,972
Labor expenses 32,267 20,128
Transport 15,442 5,510
Repairs 2,617 8,080
Loan Repayment 17,203 2,913
Other expenses 79,322 16,737
Depreciation 20,000 20,000
Total expenses 383,363 213,607
Net Income -57,572 10,674
Gross ratio 1.2 0.95

 

 

 

making and profit making into surplus maize regions and deficit maize regions also

indicated no correlation.

The results of the category comparisons indicated that relatively smaller PCS

businesses were more profitable. The average gross income for the profit making

1 17
societies was 224,281 kwacha compared to loss-making firms with an averaged gross

income of 325,791 kwacha. For the profit-making PCSS used in the analysis, the
major revenue earner was that of the maize assembling activity which provided 30
percent of the revenues. LOSS-making PCSS on the other hand earned only 5 percent
of their revenues from the maize handling commission. The loss-making category
earned over 71 percent of it revenues from the consumer shop. Profit-making PCSS
managed to gain positive net incomes due to fewer and lower costs involved in their
major activities. As agents of the PCUS in maize assembling, no transportation, and
storage costs were borne by the societies. For societies with the major income earner
from the consumer shop, more costs were incurred from transportation of shop
inventories, poor management and poor accountability of the activity.

In both categories the milling enterprise was the next largest revenue earner
with 15.7 percent and 25 percent contributions for loss-making and profit-making
categories, respectively. For the profit making category, maize assembling and
milling if vertically integrated seemed to have potential to improve in net income
through lowered marketing costs. The societies that depended heavily on consumer
shop revenues, not only made losses but depended on an activity heavily competed
for by the private and parastatal sectors. The consumer shop activity was, therefore,
not considered as a steady source of revenues to the PCSS even though the activity
increased the volume of business to the society.

In an attempt to determine the efficiency of the two categories, gross ratios
for each category were calculated. The gross ratio for the loss-making category was

found to be 1.2 and that for the profit-making category was 0.95. The profit making

118

category was indeed able to cover its costs as each kwacha generated as revenue
required 0.95 kwacha in expenses. Even though the ratio showed a poor financial
position, the category was liquid. The loss-making category, needed 1.2 kwacha of
expenses in order to generate a kwacha of revenues. This indicated a high level of
inefficiency in the use of operating resources.

The categorized analysis of the PCSS indicated that the economic activity and
not the size or region of the PCS was the important determinant of the organization’s
liquidity and profitability. In the reformed market system were the PCSS will be
expected to operate autonomously, lowering costs of providing services may become
more important than increasing the size of the business going by the performance
criteria used above.

In general financial statements and ratios for the PCS analysis, indicated a
poor state of financial position for the sampled societies. The results showed that
on average the society firm was barely solvent and had serous liquidity problems.
The society’ 5 business was small, undercapitalized and operated inefficiently. The
results reiterated anecdotal evidence that the Primary Cooperative Societies in
Zambia did not operate as financially and economically viable business organizations.
Under the ”centrally" controlled market system, the societies survived through various
government protective policies and programs. This will not be the case under the
liberalized market conditions and improvement in the operations of the business will
have to be made if cooperative societies are to survive competition from private

traders.

119

The data presented in the analysis of the cooperatives was the most complete
possible based upon the information available from the societies. Based upon
unstructured discussions the author believes that the bias in the data is such that an

average society was made to look better than it was.

6.4. Private Trade Participation, August 1991

With the abolition of restrictions on private trading in August 1991, a snap
survey was conducted to supply insights into farmers’, primary cooperative societies’
and private traders’ immediate reactions to the new policy. Forty-five farmers and
five service millers (one in an urban setting of a rural district) were interviewed in
Central, Lusaka, Southern and Eastern provinces. The results of the snap survey
showed that over 78 percent of farmers interviewed sold maize to their PCSS and
18.2 percent directly to ZCF (Table 6.10). In the short period of the new policy, the
cooperative movement still dominated the maize market but had already lost some
market share (from monopoly status). Among the farmers who sold their maize to
cooperatives, 57.8 percent did so on belief that they had an obligation (related to the
repayment of credit obtained through the society) to their society and 36 percent
cited the neamess to the depot (society premises) as a reason for selling to the
society. Five percent of respondents advanced price and 1.2 percent suggested
prompt payment as a reasons for selling to their PCSS (See Table 6.10).

According to 79 percent of the societies, the volume of maize purchased had
not been affected by the lifted restrictions on private traders. The response,

however, appeared to conflict with expressed concern over loan repayment by the

120

Table 6.10 Private Participation Characteristics - August 1991/92 Market Season

 

Variable Value
Maize sellers (%) 51.2
Mean maize sold (bags) 38.0
Mean price received (k) 771
Sold to Cooperatives (%) of which: 97.0
Sold to PCS(%) 78.8
Sold to ZCF (%) 18.2
Sold to private traders(%) of which: 3.0
Commercial farmers (%) 56.0
Millers 19.0
Local villagers 25.0
Reason for selling to PCS:
Prompt payment (%) 1.2
Price (%) 5.0
Nearest depot (%) 36.0
Obligation/loan (%) 57.8
Maize purchasers (%) of which: 15.6
From other h/holds (%) 71.4
From shops (%) 28.6

 

Source: Based on the survey (45 farmers).

—_
PCSS. Farmers were suspected of having bypassed the societies and having sold their
maize to private traders directly to avoid loan repayments.

The survey of the 45 farmers, found evidence of private trading but this was
an outlet for only three percent of farmers. The composition of private trade turned

out to be 56 percent commercial farmers, 19 percent millers, and 25 percent local

121

villagers. The category of local villagers was unclear as to whether these were non
farmers or farmers who were net-food buyers.

The five small scale millers interviewed were all service operators who in
response to a question about their attitude about processing and selling their own
maize meal, expressed concern on maize standards and grades and maize meal
storage. The fear of buying underweight maize and that of finding foreign objectives
in the bags was strongly expressed. The one urban based small scale miller
interviewed (Choma District) serviced the local formal employed working group
which tends to have gardens in the perimeters of the district. The impression from
the interviewed millers was that demand for milling services would increase in the
future as price increases of industrial meal occur.

For farmers who sold their maize to private traders, the results showed that
an average price of 771 kwacha was attained. A transportation cost was deducted
from the official "floor" price of 800 kwacha whenever the buyer picked the
commodity from the ”farm gate". The cost was calculated on the basis of the distance
from the farm to the PCS as the official depot. The average cost of transportation
was found to be 1.43 kwacha per kilometer per 90 kilogram bag. The low average
price could explain why the farmers Still preferred the PCS over private traders.
Nearly all market participants interviewed interpreted the floor price to be the ceiling
price and no evidence of an offer above the official floor price (farm-gate price) was
found during the survey.

For the farmers who transported their own maize in order to gain the "floor”

price, the commonest mode of transportation in the survey areas was ox-carts.

122

Seventy-six percent of producers used ox-carts, 17 percent hired vehicles (one to two
metric ton) and 7 percent simply walked to the buyer.

Farmers were also asked whether they had purchased any grain or grain
products such as maize, sorghum, millet or maize meal from the market up to the
time of the survey in the 1990/91 marketing season. The purpose was to gain
insights into how well the backward linkage in the market might operate in the
liberalized market. The results showed that 15.6 percent of the respondents
purchased some grain or grain products and of these 71.4 percent obtained their
grain from other households and the rest from consumer shops (See Table 6.10).
The low percentage of buyers, however, could have been a reflection of the short
period that elapsed from the policy pronunciations to the survey. In addition,
farmers had just had their harvests and may have had adequate grain in stocks. The
survey areas were also surplus grain producing areas with farmers unlikely to suffer
deficits. In addition, the respondents may have been uncertain of the lifting of the
restrictions on private trading which may have influenced their response. The true
volumes of maize sales and purchases may not have been fully disclosed.

From the snap survey it was concluded that the low rate of private trade
participation was an indication that the new policy was yet to be comprehended. The
flow of information to market participants was rather slow and information of poor
quality. For example, some farmers indicated the they were unaware that they could
actually bargain for a better price, and at the time of the research no official
document had been released on the new policy. The only source of information that

researchers, traders and farmers relied upon was the news media. A point to note,

123

however, from the survey on private participation was the discovery of commercial
farmers’ role in maize marketing. The commercial farmers may turn out to be

formidable cOmpetitors with cOOperatives and other private traders.

6.5. Summary and Conclusions

Primary cooperative societies have been in existence in Zambia since 1914.
The growth of cooperatives in the post independence era was due to the vigorous
government promotion embarked upon between 1965 to about 1970 and then from
about 1976 to the time of total market liberalization. Many problems such as
mismanagement, and under-capitalization that plagued the societies in the 19705, can
still be found today.

Despite many problems, the cooperative societies played a significant role
in the marketing of maize. The societies are expected to continue playing a major
role even under the liberalized maize market and a less supportive government. The
study of the cooperative societies was justified on the grounds that the organizations’
role in maize marketing may still be crucial prior to private trader development.
Without an existing alternative at the time of the survey, the societies appeared to
be the avenue left for many small scale farmers. The societies could also serve as
a vehicle whereby small scale farmers could collectively acquire inputs and market
produce to their advantage, especially where private traders are not involved.

Results of the research found that primary cooperative societies were well
placed geographically in terms of proximity to farmers. The organizations were

rather large based on membership numbers, even though most of the members were

124

inactive. The society manager was found to possess most of the decision-making
power within the organization and tended to be more answerable to the provincial
unions than to the board of directors or membership.

The board of directors wielded somewhat less power than management and
had little to do with generating policies for the society, as evidenced by the
standardized economic activities and conduct of the societies surveyed.

Membership showed apathy towards the operations of the society and this
led to nepotism, tribalism and nus-management. Informal interviews suggested that
the lack of monitoring of activities within the organization was a serious problem for
societies. The members expected the upper-tier organizations to monitor the society
but this duty was at best behind schedule, leaving management and the board with
a lot of latitude as to how they used the cooperative society’s resources. This
resulted into private use of PCS resources. The administration (particularly) of the
societies was, therefore, identified as one major area that societies will have to
improve if they are to survive in the competitive market.

Regarding economic activities, the primary cooperative societies surveyed
were mostly involved in maize assembling, input distribution, credit supply, milling
and consumer retailing. In maize marketing, the society acted as an agent to the
provincial union and was compensated with a commission for the services rendered.
The maize activity was relatively small, contributing about 5.8 percent to gross
income. Had the sampled societies been autonomous in the 1990/ 91 market season
and handled the same level of maize, on average 1.24 million kwacha could have

been generated per society. This would have made a substantial additional

125

contribution to the incomes of these cooperatives and justification for supporting PCS
autonomy.

To gain more insights into the factors influencing the volume of maize
handled, a regression analysis was attempted. ‘ The non-economic variables
(regressors) explained only 28 percent of the variations in maize volume handled by
the societies in the survey areas. Regressors included age of the society, per member
farm output sales, distance to an all weather road and district and education of the
society manager. Dummy variables were used to capture regional differences. The
variables indicated the type and location of an average society likely to survive under
the liberalized market. Societies which employed educated managers and those far
from districts and far from an all weather road stand a better chance to survive in
the reformed maize market. The Southern and Lusaka provinces showed significant
regional differences with Central province as captured by the regional dummy
variables in the regression. Generally the maize assembling activity was important to
the rural farnring community (given the circumstances), but less so as a business
enterprise to the average organization. The enterprise was seen to be important for
small PCSS businesses which tended to be profit-making as well.

Input and credit distribution were both important to the farmers but less so
to the business aspect of the society. Input supply was done on behalf of the
provincial union and credit distribution on behalf of the ZCF/FS. In both cases
commissions were offered for the services rendered, with the input supply component

contributing only 4.4 percent of gross revenue. It was difficult to make predictions

126

on input and credit supply performance due to lack of appropriate data and lack of
clear government policy on the subsectors.

The milling activity was an important aspect of the business, contributing
about 14.6 percent to gross revenue. With the elimination of the provincial union
involvement in the decision making process, the activity could have lower operating
costs by basically altering such standard operating procedures. The activity could
increase an average society’s income and be able to supply maize meal to both rural
and nearby districts.

The consumer shop was the most important component of the business firm
(on average) in terms of contributions to the gross revenues. As much as 55.8
percent of the revenues came from this activity for an average society. The activity,
like the milling activity, Showed positive net incomes for the 1990 financial year
(excluding loss-making case Studies). The milling and consumer shop activity
appeared to be vital to the average PCS business size. The activity appeared to be
less essential to the farming community, as other traders provided similar services.
The importance of the consumer shop to the PCS may increase as the privatization
program eliminates rural publicly owned shops that enjoyed subsidized transportation.

Individual economic activities (enterprises) had reasonable returns.
However, some of the costs due to individual enterprises were not included for each
specific enterprise. Some costs could not be desegregated and directed to specific
activities, and as a result specific problem enterprises could not be pinpointed.

The society members indicated an interest in rural transportation as a

possible complimentary enterprise. Unfortunately, the PCSS owned no related assets

127

in this area, but could consider ox-carts as opposed to the motorized vehicles which
they preferred. Farmers and/ or cooperative societies will need to move maize over
longer distances as adjustments in buying points change and rural transportation will
become even more important.

When the average society’s firm business was considered as a whole, a net
worth of 225,837 kwacha was generated. The net worth did indicate that on average,
the PCS business was solvent but barely and certainly under-capitalized. Major fixed
assets included input storage facilities (with office space and/ or consumer shop
section) and the hammermill shed. Maize handling equipment was confined to basic
slabs and or logs and tarpaulin covers.

The negative net income generated (67,042 ZK) in 1990 financial year for
the average society in the survey was a sign of a serious liquidity problem of the firm.
Financial ratios calculated from financial records also re-enforced such findings. The
net capital, operating and gross ratio of 1.43, 1.02 and 1.14, respectively were very
low indicating that the liquidity problem was serious. Based on the financial analysis,
the cooperative societies will experience difficulties in borrowing capital for
investments.

In the short run societies seemed to be the only available market
coordination mechanism in the areas surveyed. Reported private participation in the
market, a few weeks after restrictions were lifted was only 3 percent. This may,
however, change rapidly with the market reforms. A notable group of private traders
fiom the survey was that of commercial farmers who composed 56 percent of the

private traders. Commercial farmers, like cooperative societies, are well placed to

128
small scale farmers geographically in Central, Copperbelt, Lusaka and Southern

provinces. Anecdotal evidence points to the fact that they have good storage and
transportation facilities and could, therefore, compete strongly for small scale
farmers’ products. Interviews during the survey suggested that some commercial
farmers purchased maize (of all grades) to use as animal feed. This could reduce the
availability of maize for human consumption (meat being a less efficient source of
calories) and raise policy issues regarding the commodity. Commercial farmers,
however, are likely to provide an alternative outlet to small scale farmers’ maize and
be competitors to other private traders and the cooperative societies. The growth
of the private sector is expected to pick up over time as potential participants gain
confidence that the policy will remain in place, with reduced uncertainty to make the
investment to enter the market.

Marketing cooperative societies in Zambia under the less controlled market
could provide better coordination between production and consumption, provide a
more dependable market outlet to achieve channel leadership, including vertical
integration and even market power, and provide a competitive yardstick against
which to evaluate marketing performance. Given the performance of the cooperative
societies in the past, private traders are bound to provide the performance yardstick
for measuring cooperative performance in the short run. In the long run, the
reformed cooperatives may perform the role of yardstick measure. In order for the
cooperatives to contribute to the functions listed above, societies will need to
improve their management capacities, including altering the incentives faced by

management, board of directors and members regarding business conduct norms.

129
The board of directors, for example, will need to take hold of the policy aspect of the

organization and provide leadership for the direction of each autonomous society.

Society managers, on the other hand, will need to be answerable to the board
and the members rather than the provincial unions. Attracting well-qualified
managers may be difficult given the small Size and rural location of the businesses.
The performance of societies, as already stated, will depend on the actions of
members as well as boards and managers and this is one reason why the quality and
not the quantity in membership will be an important aspect of re-organizing the
cooperatives. Favorable programs (targeted at specific financially well standing
PCSS) such as low market interest rates (loan guarantees) and even subsidies, could
be justified for assisting Specific cooperative societies in the short run. In practice,
as opposed to the theory, cooperatives in Zambia have performed poorly. The
author believes that the major reason for such performance was the lack of incentives
within the organizations as a result of the restrictive economic environment. 3 Lack
of competition and the profit motive provided no market discipline to participants.
The new environment, however, will provide an opportunity for cooperatives in
Zambia to operate as true cooperatives.

Private traders and PCSS (competition amongst PCSS is also expected) will
be competing for farmers’ attention regarding produce acquisition, input supply,
consumer retail, processing and provision of other services. Market coordination
efficiency is likely to improve as inefficient firms are eliminated under the

competitive environment.

CHAPTER SEVEN

INTERPROVINCIAL MAIZE TRANSPORTATION

The transportation system is composed of the networks over which freight is
moved, and of equipment used to transport freight. There are five basic modes of
transportation rail, truck, water, pipe and air. The system includes vehicles, terminals
or depots, highways, and railway tracks. In Zambia and in the maize sub-sector in
particular, only two reasonable possibilities exist, road and rail. There are 3,394
kilometers of rail track across the country, as shown in Figure 1. The road network
is composed of 37,359 kilometers and only 19 percent is all weather roads. In
Zambia, transportation represents the most important single element in logistics costs
in the maize market. Transportation costs have accounted for the largest share of
marketing costs and consequently subsidies (Mwanaumo, 1987).

An efficient and inexpensive transportation system contributes to greater
competition in the market place, greater economies of scale in production and
reduced prices for goods. With a poorly developed transportation system, the extent
of the market tends to be limited to the areas immediately surrounding the point of
production. Unless production costs are low enough in one market to offset
transportation costs of serving the second market, not much competition is likely to

take place. Inexpensive, high quality transportation encourages an indirect form of

130

131

competition by penetrating markets normally unavailable to certain products‘. The
goods from outside a region, therefore, have a stabilizing effect on prices of all
similar goods in a market place (Ballou, 1992).

Wider markets permit economies of scale in production by more intense
utilization and specialization of production facilities from the greater volume
provided by these markets. In addition, inexpensive transportation permits
decoupling of markets and production sites, which provides a degree of freedom in
production site selection by allowing production to be located where there is a
geographical advantage.

Inexpensive transportation also contributes to reduced prices not only because
of increased competition in the market place but also because transportation is a cost
component along with production, selling, and the other distribution costs that make
up the aggregate product cost. As transportation becomes more efficient, society

benefits through lower prices and a wider choice of products among other things.

7.1. Problem Statement
The preceding chapters showed that Since 1974 the prices for maize and maize
products were uniformly set. It was established further that this pricing mechanism

tended to prevent maize production in accordance with regional comparative

 

1See discussions by Tomek W. and Robinson K. ,(1985)_Agrig.l_lmxnl_P_r_anct_Eri§_es,

Cornell University Press, and Ballou R. H. ,(1992) W Prentice
Hall, Inc.

132

advantagez. Uniform pricing altered the regional structure of maize production by
encouraging production further away from major consumption centers (FAQ, 1992,
Mwanaumo 1987, Muntanga, 1985, Jansen,1988, GRZ 1989, Ndalamei, 1989). The
share of marketed production of maize moved steadily away from the OLR provinces
(Central, Lusaka, Copperbelt and Southern) to the high cost outlying provinces
(Eastern, and Northern).

In 1978, the OLR (low cost) provinces accounted for 80 per cent of total
maize procurement and by 1986 this had fallen to 70 per cent and 66 percent in
1988. In 1989 the OLR provinces contributed only 51 percent’. Table 7.1 Shows the
trend in marketed maize shares between the OLR and the non-OLR regions. For
example, between 1974 and 1976, the surplus OLR (Central and Southern provinces)
had a market share of 86 percent, and between 1983 and 1985 this had dropped to
53 per cent. The Off-OLR provinces of Eastern and Northern provinces gained over
25 percent of market share (within surplus regions) between 1974 to 1985 (The
market share was calculated over four provinces only).

The change in the regional structure of maize production in the country

implies increased levels of maize shipment over longer distances. Transportation

 

”The areas of Zambia which appear to have comparative advantage in the production
of maize include the medium rainfall zone (zone H) plus some additional area in the
Copperbelt province. The main attributes of these areas are: a suitable physical
environment, especially soils; presence of relatively good and well-organized research and
extension service; more experience with and wide spread use of animal draught power;
relatively good access to the rural areas and proximity to major consumption areas.

3The drop in contribution in 1989 could also have been due to the presence of drought
that tended to be more severe in low-cost maize production provinces.

133

Table 7.1 Marketed Maize Production Pattern Changes (percentage):
OLR vs Non-OLR Provinces, 1974-1985

 

 

 

OLR Region Non-OLR Region
Year C S Total E N Total
1974-76 50 36 86 11 2 13
1977-79 35 42 77 12 3 15
1980-82 32 36 68 17 7 24
1983-85 34 19 53 27 11 38

 

 

Note: C= Central, S =Southern, E= Eastern and N= Northern provinces.

Source: Derived from Mwanaumo (1987).

 

costs thus tended to be unduly high. In the 19805, market coordination costs were
increasing at an alarming rate, resulting in large increases in maize market subsidies.

Maize subsidies, expressed in 1975 prices averaged 28.5 million kwacha
between 1973 to 1979 annually. Between 1980 and 1984 the average was 37.84
million and was up to 53.7 million kwacha in the period 1985 to 1986 (Mwanaumo,
1987, p.4). In 1985, transportation subsidies accounted for 40 percent of total
marketing subsidies and 53 percent in 1986. In 1990/ 91 marketing season the cost
structure of maize meal was composed of 46.5 percent producer price, 13.1 percent
milling and retailing costs, 11.1 percent distribution costs and 29.3 percent was the
subsidy level. Sixty one percent of the subsidy was for interprovincial transportation
alone (World Bank, 1992, p.59). Together with rural transportation, transportation
costs have been estimated to be as high as 45 percent of the maize meal consumer

retail price (World Bank, 1992, p.58).

134
By liberalizing the maize market system, Zambia hopes to reduce market costs

even though geographical production structure of maize is likely to remain
unchanged in the short run. The challenge will be how to minimize the rise in
market coordination costs through minimized transportation costs.

The majOr question, therefore, is whether the introduction of a more
competitive market system will reduce or contain major upward price adjustments of
retail prices by maintaining low transportation costs in the short run. More and
better information and analysis of the transportation industry is required in order to
formulate good policy and present alternatives, particularly the potential of private
trade participation. The paucity of data on transportation system in the maize sub-
sector in Zambia is currently complicated by the transitional nature of the sub-sector

economy from centrally planned to a more liberalized one.

7.2. Objectives
Given the transitional nature of the economy, it is important to determine and
simulate the pattern of trade among regions that minimizes transportation costs. The
specific objective is to obtain the least cost transportation network for maize in
Zambia. Related objectives include:
1) to estimate the optimum physical flows of maize, and maize meal for each
region;
2) to estimate the optimum quantities of maize stored in each region;
3) to estimate the optimum quantities of maize milled in each region;

4) to illustrate the pricing implications of these optimal maize flows;

135

5) to draw implications for future maize production patterns and
6) to recommend future research areas.

The study will achieve its stated objectives with the help of a linear
Programming (LP) model. The model intends to establish the least cost pattern of
trade which minimizes transportation costs among the regions that satisfies supply,
storage, processing and demand constraints using 1990/ 91 marketing season

parameters.

7.3. Literature Review

In looking at transportation problems, the service may be viewed in terms of
the basic characteristics such as cost, average transit time, and loss and damage to
products and equipment. This section reviews the cost characteristics of
transportation. Prior to the review a spatial price equilibrium theory and model are

presented to provide the analytical framework of the transportation study.

7.3.1. Spatial Equilibrium Framework

Spatial equilibrium theory attempts to explain factors that cause prices to
differ between regions, and particularly, economic forces that are likely to cause
prices in one region to change in relation to those in the other.

The spatial price equilibrium model provides a convenient analytical

framework that may be used to determine the indirect as well as direct effects of

136

changes in production in one or more regions on the volume and direction of trade‘.
The model may be used to ascertain the price effects of relaxing or increasing trade
barriers between regions or countries.

When competitive conditions prevail, spatial price relationships are
determined largely by transfer costs between regions. Transfer costs, which include
transportation charges and other fees, loading or handling, are often high in relation
to the farm value of most agricultural commodities. Farm prices tend to difier
depending on whether the production area is near or far from the major consumption
market and modest changes in central market prices when combined with high
transfer costs, can result in wide swings in producer prices of the commodity.

The principles that underlie price differences between regions (assuming a
competitive market Structure including homogenous commodities, perfect knowledge,
and no barriers inhibiting trade), were articulated by Tomek (1985, p.151) as follows:
1) Price differences between any two regions (or markets) that trade with each

other will just equal transfer costs;

2) Price differences between any two regions (or markets) that do not engage in
trade with each other will be less than or equal to transfer costs.

Based on these principles, therefore, price differences between two regions
cannot exceed transfer costs. Any time the price difference is greater than the
transfer costs, buyers will purchase commodities from the lower priced market and

ship them to the higher priced market, thereby raising prices in the former and

 

4See Tomek W., and Robinson K., (1985) W5, Cornell University
Press, p.151 and Mwanaumo A., (1987) "An Evaluation of the Marketing System for Maize
in Zambia" a MS. thesis, Purdue University.

137

reducing them in the latter. This form of arbitrage continues until it is no longer
profitable to ship commodities between the two regions.

In the presence of barriers, such as tariffs, the structure of prices may not
conform to what would be expected based on transfer costs. Price differences may
exceed transfer costs because of incomplete or inaccurate information, preferences
on the part of the buyers for produce grown in a particular area, and institutional
or legal barriers to the movement of commodities between regions. Temporary
factors, such as short supply of vehicles, for example, can lead to price differences

between regions that at times exceed normal transport costs.

7.3.2 Spatial Equilibrium Model

Geographical price relationships can be analyzed using Spatial price
equilibrium models. These models provide insights into net prices that would prevail
in each region and the quantity of a given commodity that any one region would sell
or purchase from other regions. With spatial equilibrium models, an optimum or
"least cost" trading pattern, given supply and demand conditions and a reasonable set
of prices, can be estimated.

The general principles involved in developing inter-regional trade models can
be illustrated with the aid of Figure 2.0 (See Tomek and Robinson, 1985, p.158-166
for detail). Supply and demand functions are presented for surplus region ’A’ and
a potential deficit region ’B’. In the absence of trade, demand and supply would be
equated at a price of p1 in region ’A’and p2 in region ’B’. At a price above p1 in

region A, some product will become available for shipment to another region.

138

 

 

 

 

 

 

 

 

 

 

 

region A region B
(Surplus) (Deficit)

Excess Supply(ES)

a region A

8

0

3 ’3

[-1 cees Demand (ED

35 region B

.8 X

E

 

 

 

t \W— Volume Of Trade line
I Y Q
q1 C12

Note: Based on Tomek G.W. and Robinson LK. (1985)
Agricultural Product Prices, Cornell University Press.

 

SASBueSmbSchednhqDADBmdemandSehedules.

Figure 5 Two-Region Spatial Equilibrium Model

139
Imports would be required to satisfy demand in region B if the price were below p2.

Excess Supply (ES) and Excess Demand (ED) curves can be generated from the two
schedules as in Figure 5.0.

The ES curve is based on the horizontal distance between supply and demand
curves in region ’A’ at prices above the point of equilibrium p1 (e.g. point ’b’ minus
point ’a’). ES is zero at the equilibrium price of p1. The ES curve is positively
sloped like the conventional supply schedules since the gap between supply and
demand widens as the price increases.

The horizontal distance between the demand and supply curves below the
point of equilibrium in region ’B’ ( e.g. point ’d’ minus point ’c’) provides the
information needed to construct the ED curve. The ED demand curve is negatively
sloped Since the gap between the demand and supply curves widens as the price
declines. The ED schedule intersects the vertical axis at the equilibrium price of p2
per unit, since there would be no unfilled demand at this price.

The ES and ED schedules intersect at a price of p3 per unit. If no transfer
costs exist between these two regions, a total of q2 units of the commodity would be
shipped from region ’A’ to region ’B’ (ab=cd= q2 units). The price in both regions
would be the same, p3 per unit.

The effect of changes in the transfer costs on the amount shipped between
regions can be illustrated by constructing what Tomek (1985) calls a ”Volume of
trade” line which is shown as the diagonal line ’xy’ in Figure 5.0. The vertical
intercept for this line indicates the transfer cost at which no trade would occur. It

is determined by subtracting the price at which ES curve intercepts the vertical axis

140

from the price at which the ED curve intercepts the same axis. No trade will occur
if the transfer cost equals or exceeds ’x’ per unit. The horizontal intercept of the
"volume of trade" line shows the maximum trade that can occur when transfer costs
are zero and is located directly under the point of intersection of ED and ES
schedules at q2 units.

The volume that would be exported from one region to the other at any given
transfer cost can be determined by drawing a horizontal line intersecting the vertical
axis at the value which represents the transfer cost per unit. The number of units
which will be transferred is indicated by the point at which the line representing
transfer costs intersects the "volume of trade” line. For example, with a transfer cost
per unit of ’t’ the total amount transferred would be q1 units. Given this
information, the prices that could be expected to prevail in each region can then be
determined. In the example, the effect of introducing a transfer cost of ’t’ per unit
would be a total transfer of q1 units. The expected prices would be a reduction of
price from p2 to about p6 in region ’B’ and a rise in price from p1 to about p5 in
region ’A’. An increase in the transfer costs, would, therefore, result in higher prices
in deficit regions and lower prices in surplus regions. The absolute change will
depend on how steep(less elastic or more inelastic) ED and ES schedules are.

When there are several markets to which producers may ship their product
and several surplus producing areas, the determination of Spatial price relationships
(structure of prices) is no longer intuitively obvious. The identification of the pattern
of trade and the structure of prices becomes more complicated and the aid of

mathematics is required.

141

Once the surplus and deficits levels have been estimated for each region,
linear programming mathematical techniques may be used to determine the optimum
or least cost routing system (Tomek, 1985, p.161). The linear programming solution
insures that all the requirements of deficit areas are met and also indicates how
much will be shipped from each surplus region to each deficit region. In the final
solution, the sum of all transfer costs is minimized and producer prices are
maximized under the supply and demand relationships specified.

In Zambia, spatial equilibrium models to study the maize sub-sector
transportation were applied by Muntanga (1984), Mwanaumo (1987), and Mulwanda
(1989). Mwanaumo undertook an optimization study on transportation, storage and
maize meal demand. He used provinces as market regions and applied quarterly
data for 1982 and 1985. The use of quarterly data allowed him to study temporal
maize issues as well. Muntanga, applying annual data of 1978 and 1981, used
selected districts as market regions. Mulwanda, adopting Muntanga’s model, applied
data for 1988.

All three researchers mentioned above concluded that Eastern and Northern
provinces were at an economic disadvantage in maize supply to major consumption
areas due to high transportation costs. Western province was found to be the most
disadvantaged source of maize (as well as destination) due to its poor physical
endowment (thus likely to have above average production costs) and due to high
transportation costs. They determined that the marketing system was inefficient and

that transportation costs were a major component of the market coordination

142

expenses in Zambia. The general recommendation was for a ”free" market system
to be instituted.

This study intends to provide insights into the transportation of inter-provincial
maize using 1991 data and estimates under the on-going market reforms. Sensitivity
analysis will be conducted to generate information useful to policy formulators and

potential private investors in the transportation of maize.

7.3.3. Transportation Costs and Rates

Cost (price) of transportation is the line-haul cost for transporting goods plus
any accessorial or terminal (depot) charges for additional service provided.
Additional costs could, for example, be insurance and preparing goods for
transportation. Determining the actual cost for a particular shipment requires cost
allocations which may include back haul costss.

Back-haul shipments tend not to be allocated their total costs, which may
make the cost per forward shipment high. The forward-haul transport rates,
therefore, run the danger of being set at a rate that restricts volume. In Zambia in
the maize sub-sector it has been difficult to balance the forward-haul with the back-
haul due to poor market information and difficulties in timing of imports of inputs
to be distributed in the country. Empty back haul costs were, therefore, simply

added to the forward haul costs.

 

5'Ihe forward haul is the heavy traffic direction and the back haul is the light traffic
direction (Ballou, 1992, p.203). In Zambia, maize haulage is considered as the forward-haul
and inputs, particularly fertilizer, and consumer goods as the back-haul.

143

Transport rates are the prices that carriers charge for their services. The most
common rate structures are related to volume, distance and demand. Demand for
the product and / or transport service may dictate the level of rates. Users of
transportation services may have an upper limit which the rates cannot exceed in
view of the demand and price conditions existing at the destination.

Shipments in consistently high volumes tend to be transported at lower rates
than small shipments. If the quantity is small and results in very low revenue for the
carrier, the Shipment may be assessed a minimum charge. High volumes, therefore,
tend to attract transporters and even special lower rates (discounts) on the service.

Transport rates as a function of distance can vary directly or be invariant with
distance. A transport system could have a uniform rate where there is one transport
rate for all origins to destinations or it could have rates that are proportional to
distance. A transport rate structure where the desire may be to meet rates of
competitors in a given commodity or region may be a blanket rate. Blanket rates are
single rates that cover a wide area at the origin, destination, or both.

Another common rate structure is one where rates taper off. In this structure,
rates increase with distance but at a decreasing rate. The degree of tapering may
depend on the level of fixed costs that the carriers have and the extent of the
economies of scale in line-haul operations. Charges can be distributed over more
kilometers with increased distance of the shipment, and other costs.

Generally in Zambia, in the past and in the maize sub-sector, transportation
costs were not reflected in the price differential of goods at source and destination

or in the final product price as stated earlier. Government fixed transport rates

JR
1

144

were applied throughout the country without differentiation based on road condition,
supply and demand conditions or the form in which the commodity was transported.
The controlled fixed rates (market subsidies hid the economic rates) carriers received
were quoted on distance and weight basis and reflected a tapering rate structure as
shown in Table 2.5 for selected years.

In addition to controlled transportation rates, the transportation industry
operating in the sub-sector faced other constraints. Major challenges included the
bulky nature of maize, limited time in which to haul maize to safe storage,
inadequate and inappropriate location of the storage facilities, inappropriate location
and domination of the processing of food commodities by parastatals operating
medium and large-scale plants, poor transport infrastructure and lack of suitable
vehicles and spare parts.

Rural transportation, on the other hand, suffered from the general use of large
and heavy trucks which were unsuitable for small feeder roads and weak bridges.
Estimates suggested that only 25 percent of utility vehicles were suitable for rural
transportation in Zambia in 1990/91 market season (World Bank, 1992, p.60). Ox-
cart transportation has been under-utilized due to lack of incentives to move maize
for long distances from the farm gate (due to the presence of many PCS depots).
The railway system, which tends to concentrate on products which are of low value
per unit of weight and size, has unfortunately, not been used widely even for inter-

district and inter-provincial transportation of grain and / or maize meal‘.

 

('Ihe Copperbelt province, which imports about eighty percent of its maize, transports
only about thirty percent of this by rail on average annually.

145

Documented reasons for the under-utilization of the rail system were not identified
by the author.

Road transportation has dominated the maize sub-sector in Zambia. Contract
Haulage (CH), a publicly owned trucking organization, and the cooperative
movement (publicly supported organization) dominated the industry, with private
traders participating on contract basis with the government. In addition to legal
restrictions, private participation in the market was also limited by negative market
margins and the cumbersome problem of recovering payments from government
ministries.

Subsidies, poor information, uniform pricing, institutional and legal barriers
to the free movement of the commodity between regions, contributed to the
distortiOns in the spatial price relationships in Zambia.

Competition is expected to achieve an economically optimal allocation of
resources and hence remove the costly distortions brought about by the subsidy
programs. The government, however, will still need to provide guidelines to the
market on, for example, transportation rates to provide an orderly working

environment.

7.3.4. Maize Storage and Processing

Prior to the liberalized maize market system, publicly owned or controlled
NAMBoard and the cooperatives purchased maize and hauled it to central depots
from rural holding centers before transporting and storing it near the major

consuming centers. This exercise had to be done within a short marketing period

146

(usually 3 months), and provided tremendous pressure on scarce and dear transport
resources resulting, in a significant percentage of the produce spoiling with the on set
of rains.

The available storage capacity for grain in Zambia has been estimated at 12.5
million bags (90kg), of which 1.2 million are silos, 3.6 million are in covered sheds
and 7.7 million are on concrete Slabs (hard-standings) with tarpaulin covers (FAO,
1991,p.10). The high physical storage losses, estimated at 15-20 percent of
production in the country, is partly explained by the fact that 62 percent of storage
capacity consists of hard standings (FAO, 1991, p.10 and Mwaba, 1984)7. Good
storage capacity (see Table 7.2) is not sufficient especially in times of high marketed
production and carry-over stocks. For example, in the 1989/1990 marketing season,
the carry over stocks were over 7.0 million bags, far in excess of good and safe
storage capacity. With good storage, losses can be as low as three percent
(Mwanaumo, 1987).

The Central, Copperbelt, Lusaka and Southern provinces have the largest
storage capacities. The off-OLR have a lot less of the good quality storage
facilities. The on-farm storage has not been well developed as a consequence of
pan-seasonal producer pricing, market restrictions, and mealie meal subsidies,
farmers had little incentive to incur costs on surplus maize storage. At times
consumer subsidies created incentives for farm households to sell nearly "all” their

maize immediately after harvest and repurchase it as low cost maize meal.

 

7Grain stacked on hard-standings is insufficiently protected against rains and predators.
Tarpaulins are often of poor quality.

147

Table 7.2 Provincial Capacities (’000x90kg), 1990: Annual Production,
Storage, Milling and Final Product Demand

 

 

Storage Milling Demand Surplus
Province Supply Capacity Capacity Capacity (Deficit)
Central 2,538 2,292 1,845 840 1,698
C/belt 582 1,590 3,511 4,300 (3,718)
Eastern 1,909 213 350 420 1,489
Luapula 327 79 220 410 (83)
Lusaka 475 835 1,544 2,600 (2,125)
Northern 1,508 298 578 350 1,158
N /western 138 225 275 265 (127)
Southern 2,188 2,810 2,288 920 1,268
Western 255 251 785 350 (95)
Zambia 9,920 8,593 11,397 10,455 (534)

 

SourcezPerviS Dennis (1986), and the Ministry of Cooperatives, 1990.

—_

In Zambia, over 80 percent of the maize is consumed as mealie meal and the
rest is used for beer brewing and animal feeds. The two forms of industrial mealie
meal commonly produced in Zambia are Break-Fast (BF) and Roller-Meal (RM)
with a transformation rate of 65 percent and 92-98 percent, respectively. Roller
meal is little different from rural hammerrrrill processed meal, on the basis of taste,
texture and nutrition. Neither roller meal or the rural milled flour are decorticated.

Generally milling capacities in most of the regions are adequate for the
processing of mealie meal to meet demand within the region (Mwanaumo,1987,
p.16). In most cases these regional capacities (Table 7.2) are in excess of regional

demands.

148

Major industrial maize milling facilities are concentrated in Central,
Copperbelt, Lusaka and Southern provinces along the OLR. The bulk of maize
milling is done by large-scale milling companies, almost all of which are publicly
owned or controlled by government through National Milling Company (N MC) and
cooperatives. Privately owned large commercial mills were nationalized in 1986 after
the food riots, which were partly blamed on the industry (Sipula, 1987).

Rural small-scale processing was restricted and of a service nature until in the
late 19805. For urban areas, large scale milling continues to be important. The
liberalized maize market is expected to improve the market margins, introduce
seasonal price differentials and thus attract more private participation and investment
in storage and processing facilities. Provincial maize demand estimates are presented

in Table 7.2 with indications of whether the province is surplus or deficit in the last

column.

7.4. Methodology and Data

In the transportation study, secondary sources of data were used as discussed
in the previous section. Data on capacities of supply, storage, milling and demand
are presented in Table 7.2 (maize being a staple food item, is relatively price
inelastic and demand levels are stable over time). The 1991 (post August)
transportation rates as shown in Table 2.5 were used in the model. The value of
maize was that of the official "floor" price in 1990/ 91 market season. Storage and

milling costs were generated by the author using data from various sources in

Zambia.

 

 

. 149
The country had maize imports averaging 19 percent per year of total
procurement between 1979 to 1986. In the 1990/ 91 market season, the country
experienced a total annual deficit of maize, and imports were necessary. The model,
therefore, included this source and assumed unlimited supplies from the rest of the
world. The landed cost of the commodity to the Copperbelt was used and

tranSportation to other regions were adjusted accordingly”.

7.4.1. Market Boundaries and Distances

If producers have the option of shipping to different markets, the boundary
between supply areas is determined by the price of each destination less the cost of
transferring the commodity from each point of origin to each destination. Given free
choice producers will always ship to the market offering a highest net price. But
some producers may be located at points where the price is the same whether they
Ship to one market or the other. The locus of these points would determine the
market boundary (see Tomek, 1985, p.1550). Under the uniform pricing system,
maize flows were centrally allocated and provincial boundaries were used. These
administrative provincial boundaries where adopted as "market boundaries” in this
study and secondary data on production, storage capacity, processing capacity and
maize demand was available and better organized at these regional levels.

Within each province, the provincial district center was taken to represent the

province as the origin (node) and a basis for calculating the inter-regional distances

 

8Sources of maize imports include The United States of America (mostly yellow as
maize food aid), Kenya, South Africa and Zimbabwe.

150
Table 73 Transportation Costs to Storage Facilities (ZK per 90kg bag), 1990/ 91.

 

 

 

 

 

 

 

 

 

 

 

 

r-To C B E L K N T S W
From

C 8“) 1087 993

B 8“)

E 1784 8m 1423

L 8“) 1297

K 8m

N 1574 1561 8(1)

T 8“)

S 1149 80)

W 1575 8G)

I 3720 3297 3015

 

 

 

 

 

 

 

 

 

 

 

 

Note: C=Central, B=Copperbelt, E=Eastern, L=Luapula, K=Lusaka, N=Northern, T= North
Western, S = Southern, W=Western provinces and I=Imports from the rest of the world.

 

(Central province (C) was represented by Kabwe, Copperbelt (B) by Ndola, Eastern
(E) by Chipata, Luapula (L) by Marisa, Lusaka (K) by Lusaka, Northern (N) by
Kasama, North Western (T) by Solwezi, Southern (S) by Choma and Western (W)
by Mongu). The districts (see map, Figure 1) were not exactly the true
representative of the provinces in terms of location centeredness. North Western
province could have been represented better by a district like Kabompo which is
even further away from Copperbelt with an all passable road. The distances were
not also necessarily the shortest routes between provinces. For instance, the all
weather road between Kasama in Northern province and Chipata in the Eastern

province is via Central and Lusaka regions (the route through Lundazi is not

151
favorable). A direct route could cut the distance by nearly two thirds. The

distances between district provincial headquarters were adhered to for consistency

in the model.

7.4.2. Transportation Routes and Costs

Given the history of the maize flows and existing transportation routes, the
nodes and branches included in the model are Shown in Table 7.3, 7.4 and 7.5, with
obvious inefficient routes eliminated and intra-provincial costs omitted. A
schematic representation is given in 6. To illustrate how to interpret the tables some
examples are presented below.

The branch in Table 7.3, Row ’E’, Column ’E’ (Row, Column) or (E,E), shows

a value of 800 kwacha. The value reads that a bag of maize valued at 800 kwacha
is acquired in Eastern province and taken to storage in Eastern province. In (B,B)
shows a value of 1,784 which means that a bag of maize was acquired at 800 kwacha
from Eastern province and transported to the Copperbelt province (B) storage
facilities and a transportation cost of 984 kwacha per bag was incurred. The activity
carried, therefore, a total cost of 1,784 kwacha.

In Table 7.4, (B,B) with a value of 98 kwacha shows that a bag of maize
stored on the Copperbelt had a storage cost of 98 kwacha. In the case of (B,B) the
value ( 1,082 ZK) contains the cost of storage (of 98) incurred in Eastern province
and the transportation cost to the copperbelt for milling. Table 7.5, (B,B) shows the

within province cost of milling (664 ZK) a bag of maize and (Q8) Shows the value

(95 1 ZK) for maize processed in Central province and transported to the Copperbelt.

152
Table 7.4 Transportation Costs to Processing Plants (ZK per 90kg bag), 1990/91

 

 

 

 

 

 

 

 

 

 

To C B E L K N T S W
From

C , 98 385 291 873
B 98 521 388

E 1082 98 721

L 1356 98

K 98

N 859 98 1149

T 98

S 803 497 1260 98 1025
W 98

 

 

 

 

 

 

 

 

 

 

 

 

Note: Notations as in Table 7.3

An empty coordinate indicates that the branch was not included in the network due
to limitations of the modelling programs and obvious inefficiency. The rest of the
values from the three tables can be read in a similar way.

Supply constraints were imposed such that maize acquired in a region was
most likely stored within that region. Similar restrictions were made on milling and
demand requirements’. In the model, production, storage and milling costs in each

region were assumed identical, thus the only variable cost involved was that of
transportation. The problem was, therefore, more of determining distribution routes
to be used and the quantity to be shipped via each route so that all distribution

center demands could be met with a minimum total transportation cost.

5"The demand requirements at each stage were assumed to have been adjusted for losses
.nd transformation rates.

 

 

153

Table 7.5 Transportation Costs to Demand Destinations (ZK per 90kg

processed maize), 1990/ 91

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

To C B E L K N T S W
From
C 664 951 1466 857
B 664
E 664
L 664
K 664
N 1425 1161 664
T 954 664
S 1642 1013 664
1309 664

 

 

 

 

 

 

Note: Notations as in Table 7.3.

A linear programming model was used in order to determine the least cost

route system of maize flows in Zambia. Assumptions of the LP transportation model

used included:

1)

2)

3)

all units of the product available in each region are homogenous with respect
to quality and appearance; consumers are assumed to be indifferent as to the
source of supply;

production and consumption within each region are presumed to occur at
precisely the same point and transfer costs within regions are ignored;

N 0 physical or institutional barriers exist to prevent the movement of goods

between regions;

154

Supply orage 111mg Demand
Capablty apa it y apacry Capacrty

c C , ..._..C

B ‘4 B L \.
In \VIB _ .B

\\ {VIE \'

:VZ’I“ "/ ‘E
Ila. A".

:l/l . I\ Iii
/l. (:07

[I] "I. ..
/, W— w -—-—---W

I ,

 

 

 

 

 

 

 

C=Central; B=CopperBelt; E=Eastern
L=Luapula; K=Lusaka; N :Northern
T=NorthWestern;S=Southern; W=Western

I =Imports

Figure 6 Interprovincial Maize Transportation in Zambia

 

 

155

4) Transfer costs are assumed to be uniform per unit of product, and to remain
constant regardless of volume or direction of movement;

The first assumption implies that the commodity would attract one price in
each region. If consumers, for example, preferred a commodity of a particular
appearance from a particular region, then the price of that commodity would differ
from the optimal price which may exceed normal transportation costs.

Assumption two was applied mainly for analytical purposes. The limitations
from this assumption precludes inter-temporal issues. Transportation, storage and
processing constraints could be staggered out and the form in which the commodity
is stored becomes more important when inter-temporal variables are introduced.
Maize meal, for example, stores much more poorly than grain and this could affect
when and where the milling is conducted if included in the model. Assumption 3,
attempts to remove non economic distortions in order to give all participants the
same chance in the market.

Assumption four assumes that the quality of the infrastructure such as roads
is uniform and that only distances matter. In reality, good infrastructure may attract
more services and lower transportation rates. With this assumption regions with poor
infrastructure had the same probability of being served as those with good
infrastructure. The assumption simplifies the model to manageable levels but
weakens it.

With the resource constraints, objective function coefficients, routes selected
and the assumptions narrated above, an initial tableau was set up and a linear

Interactive and Discrete Optimizer (LINDO/ PC) program was employed to run the

156
model. The results of the model are presented and analyzed in the following

chapters.

CHAPTER EIGHT

ANALYSIS OF TRANSPORTATION MODEL

The transportation problem arises frequently in planning for the distribution
of goods and services from several supply locations to several demand locations.
Usually the quantity of goods available at each supply location (origin) is limited
and there is a specified amount needed at the destination point (demand). With a
variety of shipping routes and differing costs for the routes, the objective is to
determine how many units should be shipped from each origin to each destination
so that all destination demands are satisfied and total transportation costs are
minimized. In this chapter, the results of the transportation model are analyzed and

presented

8.1. Optimal Solution

In this study the acquisition of maize was from ten sources (origins). Once
the maize was acquired it had to be stored in nine locations (storage nodes), one in
each province. From storage facilities maize was transported to nine milling facilities
(milling nodes) for processing and, thereafter, processed maize went to meet demand

in nine final demand destinations.

157

158

8.1.1. Minimum Marketing Costs

The linear programming computer optimal solution generated showed that the
maize market system in Zambia could have minimized costs to meet demand in each
region at no less than 21,056 million kwacha in 1990/ 91 marketing season. The total
cost was inclusive of storage, milling and transportation. Under the 1990/91
marketing environment when the government undertook most of the maize marketing
functions, would have used 7,936 million kwacha to purchase maize from farmers and
for imports. Storage costs would have cost 1,025 million kwacha and the milling
costs would have been 6,942 million kwacha. Transportation of the optimal
quantities to meet demand in each region would have cost 5,153 million kwacha.
Transportation costs which the government subsidized in full, was 25 percent of the
total marketing costs under the optimal conditions as determined by the model. The
optimal solution was large considering the country’s total government budgeted
expenditures of 47,347 million kwacha in 1991 (US. government, 1992). The optimal
solution was influenced by the demand conditions imposed on the model, the storage
and milling constraints as they existed and the fact that the country was in a maize
deficit situation in 1991. The constraints, for example, forced small quantities of
maize to be shipped between regions in order to satisfy the demand restriction of
equality imposed on the model.

In addition, the large value could have been a result of high rates of inflation
which made nominal numbers astronomical (See CPI trends in Table 2.7). In reality,

however, the marketing costs were not incurred since the market system simply

159

allowed for short falls to occur and made food aid inevitable. The demand as
specified by the model was not met in the actual situation in 1991 and the issue of
food aid was not considered in the model.

Since ° the actual maize flows of 1991 were unavailable to the author, a
comparison of the savings made between the optimal maize flows and the actual
maize flows for 1991, could not be made. The alternative was to compare the 1985
maize flow savings as determined by Mwanaumo (1987). Mwanaumo determined
that the optimal flow of maize could have saved 53 percent in reduced transportation
costs compared to the actual flow of maize in 1985 (the government deliberately
allocated maize to each province). The market system as a whole would have saved
38 percent. Using these savings and inflating the figures to the 1991 prices, the
optimal solution as determined indicated that savings would have been substantially
greater than 38 percent. The savings would have been higher due to increased
demand for industrial maize meal in the last decade. Secondly, the restriction of the
model to meet all demand requirements, may have contributed to the large estimate
of cost savings percentage. Thirdly, real prices of maize, maize meal, milling and
transportation have been increasing as the price decontrol measures have been
undertaken and any deviation of maize flows from the optimal solution would imply
higher costs and hence less savings. Even though the comparison of the 1985
conditions and those of 1991, just before market reforms were seriously implemented,
was weak, it does provide an indication of the savings that could be realized from

rationalizing the transportation system.

160
Table 8.1 Optimal Provincial Maize Flows to Storage (’000x90kg bags)

 

 

 

 

 

 

 

 

 

 

 

 

 

To C B E L K N T S W I
From
C 2538
B 582
E 411 969 529
L 232 95
K 475 q
N 927 581
T 138
S 2188 I
W 755
I 535
Total 2538 1920 969 232 1539 676 138 2188 255

 

 

 

 

 

 

 

 

 

 

 

 

C = Central province; B = Copperbelt; E = Eastern; L = Luapula; K = Lusaka; N = Northern;
T = Northwestern; S = Southern; W = Western; I = Imports.

The optimal solution provided the quantities of maize shipped between each
destination. Tables 8.1, 8.2 and 8.3 show maize movement from supply sources to
storage facilities, from storage to milling and from milling to retail demand
destinations, respectively. To illustrate how to read the tables, an example is
provided below. Looking at Table 8.1, row E, column B, (B,B) shows that 969,000
bags of maize should have been acquired and stored within the Eastern province.
For cell (E,K), 529,000 bags should have been acquired from Eastern province and
shipped to Lusaka province (K) for storage.

From Table 8.2, reading of (C,B) cell indicates that of the maize stored in

Central province, 947,000 bags should have been shipped to the Copperbelt province

161
Table 8.2 Optimal Provincial Maize Flows to Mills (’000x90kg bags).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

To C B E L K N T S W I
From

C 1591 947 I

B 1793 127

E 614 350 5

L 12 220

K 1539

N 98 578

T 138

S 47 E46 95

W 255
Total 1591 3511 350 220 1544 578 265 2046 350

 

 

 

__
for milling. An example from Table 8.3 using (C,B) cell reads that, of the processed
maize in Central province, 751,000 bags should have been sent to the Copperbelt
towards meeting the later’s demand of 4,300,000 bags. The market system as a whole
imported 535,000 bags of maize from the rest of the world and the amount was
shipped directly to Lusaka province as shown by (I,K) cell in Table 8.1. An empty
cell indicates that the activity did not take place and the rest of the maize flows in
each cell can be read in a similar way from the three tables.

The last rows of Tables 8.1, 8.2 and 8.3 show the optimal storage, milling and retail
demand, respectively. For each region, the value is equal to or less than the capacity

of the activity in question.

162
Table 8.3 Optimal Provincial Maize Flow to Retail Demand Destination

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(’000x90kg bags)
To C B E L K N T S W Supply
From
C 840 751 1591
B 3511 3511
E 350 350
L 220 220
K 1544 1544
N 38 190 350 578
T 265 265
S 70 1056 920 N46
W 350 350
dzma 840 4300 420 410 2600 350 265 920 350 10455
n

 

 

__

According to the optimal solution, all available maize in each region was
acquired. Since equality constraints were imposed on consumer demand, all demand
levels were met in each province, as indicated by the last row of Table 8.3. With
regard to storage, Central province did not utilize all its storage capacity and showed
a slack of 206,000 bags. Eastern province, North Western, Southern and Western
provinces also showed storage slacks of 154,000, 40,000, 622,000 and 236,000 bags
respectively. In processing, Central province had 254,000 bags, North Western had
10,000 bags, Southern had 243,000 bags and Western had 435,000 bags worth of
unused milling capacities. Table 8.4 shows the optimal storage and milling capacity
utilization and slacks for each region. Specific aspects of each region are discussed

below under provincial analysis.

163
Table 8.4 Optimal Provincial Storage and Milling Capacity Utilization

 

 

(’000x90kg bags)

Province Stored Storage slack Milled Mill Slack
Central 2538 N6 1591 254
Copperbelt 19N - 3511 -
Eastern 969 154 350 -
Luapula 232 - 2N -
Lusaka 1539 - 1544 -
Northern 676 - 578 -
Northwestern 138 40 265 10
Southern 2188 622 N46 243
Western 255 236 350 435

 

8.1.2 Provincial Level Analysis

In addition to providing optimal maize flows, the model provided reduced cost
values or shadow prices. Reduced costs or shadow prices (shown in Table 8.5 as
opportunity costs for non-optimal routes) indicate how much the objective function
coefficient of each decision variable would have to improve (get smaller) before it
would be possible for the variable to assume a positive value in the optimal solution.
In other words, the reduced costs show how much the marketing costs would increase
by forcing in a non optimal route. If the decision variable is already positive in the
optimal solution, its reduced cost is zero (Anderson, and others, 1988, p. 82).
The discussion below provides the analysis of both maize flows and reduced costs on

a regional basis.

164
Table 8.5 Opportunity Costs for Using Non-optimal Routes, 1990/ 91 Marketing

 

Season (ZK per 90kg bag)
Reduced Reduced
Route Cost Route Cost

 

Central to Lusaka 267 Central to Western Milling 266
Northern to Central 300 Southern to Lusaka Milling 5

Southern to Lusaka 5 Southern to Northwestern 167
Milling

Western to Central 1,284 Central to Eastern Demand 242

Imports to C/belt 62 Central to Lusaka Demand 262

Imports to Southern 62 Northwestern to C/belt 580
Demand

Central to Lusaka 267 Western to Lusaka Demand 1,223
I ['l]' g

C/belt to Lusaka 784
Milling

 

 

 

8.1.2.1. Central Province

Central province met all its supply, storage and milling requirements from
within the province. A demand satisfaction of 840,000 bags was met. A reduction
in the cost of transportation of maize from Northern to Central province of 300
kwacha would be needed if this transfer route were to be used (Table 8.5).
Alternatively if this route was forced into the solution, the cost of marketing would
have increase by 300 kwacha. Western province as a source of maize to Central
province would have required a transportation cost reduction of 1,284 kwacha per
bag. With this shadow price, the province would be a high cost source of maize for

the Central province if used.

165
8.1.2.2. Copperbelt Province

The Copperbelt region used up all its maize supplies, storage and milling
capacities but could not satisfy its final product demand. The region obtained
additional maize for storage from Eastern (411,000) and Northern provinces (927,000
bags). The province then needed 947,000, 614,000, 12,000, 98,000 and 47,000 bags
from Central, Eastern, Luapula, Northern and Southern provinces respectively, for
milling purposes. In the meantime the province had to send 127,000 bags of its
stored maize to North Western province for milling.

Other relatively economic sources of maize for the Copperbelt province would
have been imports from the rest of the world since only an additional cost of 62
kwacha would be incurred for forcing in this route. North Western province, on the
other hand, if forced to supply the Copperbelt with processed maize would increase
the marketing costs by 580 kwacha for each bag transported. This would have been

a high cost source of maize for the Copperbelt.

8.1.2.3. Eastern Province
Eastern province utilized all its maize supplies, and milling capacities. The
milling capacity was the most restrictive constraint and as a result processed maize
had to be imported into the province. A quantity of 70,000 bags of processed maize
was shipped from Southern province. Central province could have supplied the
Eastern province with processed maize if the transfer costs were reduced by 242
kwacha per bag (Table 8.5). Imports of processed maize from other provinces

carried a high opportunity cost and was, therefore, not economical.

166
Eastern province, although favored by the large number of small scale

farmers, good soils and good rainfall, is unlikely to have production costs low enough
to counter high transportation costs if the region were to produce maize for major
consumption centers. Transportation costs which are equally high for input supply

contribute to increased production costs in the region.

8.1.2.4. Luapula Province
Luapula province, with a demand for processed maize of 410,000 bags,
produced 327,000 bags and had a milling capacity of only 220,000 bags. In order to
process the extra quantity of maize produced within the region, the province sent
95,000 bags for storage to Northern province (See Table 8.1) and in return received

190,000 bags from Northern province in form of processed maize (Table 8.3)

8.1.2.5. Lusaka Province
Lusaka province, a major deficit region, utilized all its storage and milling
capacities. However, to meet all its processed maize demand, the province imported
535,000 bags of maize from the rest of the world (Table 8.1). Eastern province
supplied a small amount of 5,000 bags to fill up the gap for milling capacity (Table
8.2). To meet processed maize demand, the province acquired an additional
1,056,000 bags from Southern province.
For an extra bag of maize brought into Lusaka from the Southern province,
only a transport cost increase of 5 kwacha per bag would be incurred. The low
transport shadow price was a strong indication that Southern province was a

relatively good source of maize supply to Lusaka. Other sources of maize to Lusaka

167

could be obtained only at higher transport cost reductions. Central province needed
transport reduction costs of 267 kwacha to supply Lusaka storage and milling and 262
kwacha to supply processed maize. The Copperbelt could supply Lusaka at an extra
cost of 784 kwacha. The Copperbelt region though near Lusaka, is a deficit region
and hence the high opportunity cost to supply Lusaka province.

In case of processed maize, Southern province was equally favored, as only 5
kwacha reduction in transfer costs would be necessary in order for the activity to take
place. Western province (1,223 ZK), as expected, was less favored as a source of

processed maize for Lusaka province.

8.1.2.6. Northern Province
Northern province met its requirements from within the region for maize
supplies, storage and milling. The province sent 927,000 bags for storage (See Table
8.1), 98,000 bags for milling (See Table 8.2) and 38,000 of processed maize to the
Copperbelt (See Table 8.3). The province also supplied Luapula province with

190,000 bags of processed maize.

8.1.2.7. North Western Province
North Western province, with a supply of 138,000 bags, had extra storage
capacity of 40,000 bags and extra milling capacity for 10,000 bags. The province
obtained 127,000 bags extra maize for milling from the Copperbelt (Table 8.2). For
the North Western province to utilize all its milling capacity, Southern province

would be the cheapest source of maize but a transport cost increase of 167 kwacha

168
per bag would be incurred. The Southern province would be a relatively good source

of maize for North Western province.

8.1.2.8. Southern Province
The Southern province, a major source of maize supply showed surplus
storage capacity of 622,000 bags and extra milling capacity of 243,000 bags (Table
8.4). The province met its processed maize demand from within the area. Extra
processed maize of 1,050,000 bags and 70,000 bags were sent to Lusaka and Eastern
provinces, respectively. The province also sent 95,000 bags to Western province and
47,000 bags to the Copperbelt for milling (Table 8.2). Imports from the rest of the

world into Southern province could occur at a transport cost increase of 62 kwacha.

8.1.2.9. Western Province

Finally, the Western province was limited by the amount of maize produced.
As a result a slack of 236,000 bags storage and 435,000 bags milling capacities were
recorded. All the maize consumed within the province was milled within the region.
For any stored maize from Central province to get to Western province transport
cost of 266 kwacha would be incurred indicating that Western province was a costly
region to supply maize to.

Given the restrictions imposed on the model and the prices used, the results
of the model were expected. The small quantities of maize (5,000 bags) moved from
Eastern to Lusaka province would probably not occur in reality. The fact that the
inter-temporal and product form issues were not covered, may have influenced the

flow of maize from regions with extra storage and milling capacities. For example,

169
Southern province, with its excess storage and milling capacities, could have utilized

the capacities and exported more processed maize had the product form
considerations been included in the model.

In general, the results of the model showed that maize moved from maize
production surplus regions of Central, Southern, Northern and Eastern provinces to
deficit areas of Lusaka, Copperbelt, North Western, Western and Luapula regions
as expected. The surplus provinces, with the exception of Eastern province met their
demand requirements within the province and exported the rest. Eastern province,
with the milling capacity limitations exported maize and imported processed maize
to meet demand.

From the non-optimal routes (reduced cost) values generated it was clear that
as a source of grain and processed maize to other regions, Western province was the
least favored among the deficit regions. The province was also the most costly one
to supply maize to. Northern province was the least favored among the surplus
regions. The highest opportunity cost to supply other regions with processed maize
within major consumption areas was held by the Copperbelt region.

Luapula region could increase its storage and milling capacities in order to
meet its demand, but production for export to other regions would not be
economical. Eastern province imported processed maize from Southern province,
implying that the maize moved out of the region before returning as processed maize
meal. The second haul was unnecessary and could be eliminated through increased
milling capacity. The improvement of milling capacity in Eastern province would
reduce costs tremendously as the dual prices suggest (See dual price section). Rural

hammermills would be a great option for increasing the milling capacity in the

170
Table 8.6 Dual Prices for Maize Supply Sources (ZK per 90kg bag)

 

Maize Supply Region Dual price
Central 2571
Copperbelt 2858
Eastern 1874
Luapula 1600
Lusaka 2497
Northern 2097
North Western 3148
Southern 2153
Western 3080

 

 

province without a large volume of investment needs. The private sector and

Primary C00perative Societies could easily undertake such investments.

8.1.3. Dual Price Analysis

For further analysis of the transportation cost minimizing problem, dual prices
were generated by the LP model. A dual price (associated with a constraint) was
defined as "the Mprovement in the optimal value of the objective function resulting
from a one-unit increase in the Right Hand Side (RHS) value of the constraint”
(Anderson et al., 1988, p. 82). In a minimizing problem, negative dual prices indicate
that the objective function will not improve but worsen if the value of the RHS is
increased by one unit. Dual prices could be considered as shadow prices associated

with the RHS constraints.

171

8.1.3.1. Supply Constraint Dual Prices

Dual prices (or shadow prices) for maize supply sources are presented in
Table 8.6. Dual prices for milling capacities are presented in Table 8.7 and those for
consumer demand constraint are presented in Table 8.8. Shadow prices for storage
were all zero showing that the regional activities were optimal and/ or with a slack.

The supply shadow prices are positive even for exporting regions because an
increase in supply from a surplus region would reduce imports from the rest of the
world. Imports (inclusive of transportation costs) were much more costly than
domestic supply sources.

From the reading of dual prices, increasing the supply of maize by one bag in
North Western and Western provinces (deficit and off-OLR) would reduce marketing
costs by 3,148 and 3,080 kwacha per 90kg bag supplied, respectively (See Table 8.6).
The benefits from supplying maize from within the provinces, therefore, would
provide an opportunity for savings in the market system.

These results imply that the two regions are indeed disadvantaged regions in
terms of obtaining maize from other areas. With high potential for savings from
local production, the provinces could increase local production and/ or substitute
other grain such as millet and sorghum to meet grain demand. The disadvantage in
maize supply by the two regions go further than the shadow prices suggest. The
production costs for maize in the regions are known to be high due to sandy soils in
Western province and acidic soils in North Western province. Both soil
characteristics are unsuitable for hybrid maize production and even better resource

allocation could be achieved by a reduction in maize demand.

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Table 8.7 Dual Prices for Milling Capacity (ZK per 90kg bag)

 

 

Mill region Dual Cost
Eastern 1,257
Luapula 994
Lusaka 5

 

The Copperbelt, Central, Lusaka, and Southern regions were respectively with
relatively low dual price values. Within this group, the Copperbelt province provides
savings of 2,858 kwacha per extra bag produced in the province. Production of maize
should be encouraged on the Copperbelt compared to Lusaka province, for example
(as deficit regions with 2,497 kwacha dual price). More cost reductions could be
attained if Central (2,571 ZK) and Southern (2,153 ZK) provinces increased their
maize supply even though they are currently surplus regions. This would decrease
import needs of maize. Eastern province is the most disadvantaged surplus region
for increasing maize production with a dual price of 1,874 kwacha per 90 kilogram
bag. An extra bag of maize supplied in Eastern Province would reduce total
marketing costs by only 1,874 kwacha, a poor source of market savings compared to
other surplus regions. Northern province (2,097 ZK) and Luapula province (1,600
ZK) are relatively poor sources of maize supply, as shown by dual prices, which
suggest that little could be gained from increased maize production in the areas.

The above analysis reiterates the need for maize to be produced in the major
consumption areas of the OLR regions, whether currently deficit or surplus.

Increasing maize production in Northern and Eastern provinces (surplus off-OLR)

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Table 8.8 Dual Prices for Final Product Demand (ZK per 90kg bag)

 

Retail demand region Dual price OLR/Off OLR
Central 4,133 OLR

C/ Belt -4,420 OLR

Eastern -4,693 Off OLR
Luapula -4,156 Off OLR
Lusaka -4,064 OLR

Northern -3,659 Off OLR
North Western -4,710 Off OLR
Southern -3,715 OLR

Western -4,642 Off OLR

 

would contribute little to lower the total marketing costs. The two off-OLR surplus

regions do not have a comparative advantage in the economics of maize supply.

8.1.3.2. Milling Constraint Dual Prices

With respect to milling activities, an increase in milling capacity in Eastern
province would improve the objective function by as much as 1,257 kwacha (See
Table 8.7). Savings of 1,257 kwacha would be attained if the milling capacity was
increased to process an extra bag of maize. Similarly 994 kwacha reduction in
marketing costs would be realized for every unit increase of milling capacity in
Luapula province. Lusaka’s need for increased maize milling capacity was small and
its contribution to lowering costs was only 5 kwacha‘. This suggested that importing

processed maize from other regions was more desirable over grain imports. The

 

1Dual prices for storage were zero for all regions

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study did not address the product form or inter-temporal issues that could have

better covered this issue.

8.1.3.3. Final Product Demand Constraint Dual Prices

Demand is one area were a unit increase would bring about an increase in the
objective function value. An increase in the objective function value implies that
total costs would be increased due to a unit increase in the demand constraint. The
negative reduced costs as reported in Table 8.8 are an indication of this fact.

North Western (-4,710 ZK), Eastern (-4,693 ZK) and Western (4,642 ZK)
provinces showed relatively large increases in market costs (differences reflecting
transportation costs) brought about by a unit increase in the final product demand
in each region.

The Copperbelt as a deficit but major consumer would also be discouraged
from increased maize consumption with a dual price of -4,420 kwacha. However,
given the situation on the Copperbelt, where a large population works in the mines
and depends on marketed food, increased local production of maize rather than
reduced demand would be recommended.

Unlike Western and North Western provinces, the Copperbelt province has
good ecological conditions for maize production and is served by a rail link that
provides low cost imported inputs. The opportunity cost of maize supply for the
province also supports local production. Luapula (-4,156 ZK), Central (-4,133 ZK),
Lusaka (-4,064 ZK), Southern (-3,715 ZK) and Northern (-3,659 ZK) would have had
less effects on the marketing costs if demand increased compared to the four

provinces presented earlier.

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With the LP assumptions, and the 1991 constraints, price coefficients used in
the model and given the optimal maize flows, a minimum marketing cost of a locally
produced, stored, and milled final product would have been 1,562 kwacha in each
region. The lowest prices for each region that were derived from the optimal maize
flows of maize, therefore, would be 1,562 kwacha for Central, Southern and Northern
provinces which were net exporters of maize. The other derived minimum regional
prices are presented in Table 8.9. The prices were determined based on the cost of
the last bag of maize to satisfy demand for each respective region (i.e., price equal
marginal cost). Lusaka province would have had the highest price level of 5,031

kwacha per bag of the final product. The Copperbelt was next with 4,565 kwacha.

Table 8.9 Derived Minimum Final Product Prices by Region

 

 

Province Derived Price
Central 1,562
Copperbelt 4,565
Eastern 2,540
Luapula 2,059
Lusaka 5,031
Northern 1,562
North Western 1,852
Southern 1,562
Western 2,489
Mean OLR price 3,180
Mean off-OLR price 2,100

 

(Source: Transportation mode.

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The average level of prices for the OLR regions was determined to be 3,180 kwacha

which was higher, as expected, than that of the off-OLR regions with an average
price of 2,100 kwacha. Trade would therefore, occur between the two regions as long
as the transportation costs were at or below the price differentials (i.e., average of
1,080 ZK). The consumer at the time of the research was not only paying less than
the transport cost but far below the cost of the final product. The consumer was
paying an equivalent of 700 kwacha and the rest was covered by a government

subsidy program (See also Sipula and Maleka, 1991).

8.1.3.4. Conclusion

The generated dual prices reaffirm what most researchers such as Muntanga
(1985), and Mwanaumo (1988) found in Zambia. Western province, North Western
province as deficit regions were disadvantaged in terms of producing and receiving
maize from other sources. Eastern and Northern provinces as surplus regions do not
have a comparative advantage in maize supply for major consumption centers. little
would be gained for increased maize supplies in these regions, and alternative crops
and / or livestock production are good subsectors for consideration.

The deficit and surplus regions in major consumption areas, on the other
hand, would provide large savings from increased maize production. The Copperbelt,
in particular, needs to increase its production, storage and milling capacities in order
to contribute to decreased maize marketing costs.

Although the study reaffirmed, in Zambia’s case, what other researchers have
found and in conformity with trade theory, the issue of magnitude was also brought

out. The transportation and indeed market cost for meeting demand with the

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production levels available for the 1990/ 91 market season was astronomical. Major
savings could be expected from an optimal maize marketing arrangement. It was
especially important to change the production and demand patterns, given the limited
resources needed for investments in infrastructure.

The optimal market cost levels provided insights into how much investment
might be required in production, storage, milling and transportation industries and
in which region each activity would be concentrated. Would the private sector be
able raise large investments and what type of market structure would develop? More
importantly, what would be the effects on the final product price in each region? To
answer these questions, more research would be needed on a regular basis to inform

the policy making process.

8.2. Sensitivity Analysis

An introduction of the rail transportation system, were available, to the
optimal solution would have reduced marketing costs by 25 percent. The rail
transportation rate was assumed to be 30 percent lower than the road transportation
rates. The sensitivity test was conducted in order to gain insights into the importance
of the alternative transportation system for maize. The results indicated that the rail
linkage was a viable alternative and could provide savings of up to 25 percent.

In order to learn about the stability of the optimal solution sensitivity analysis

was conducted on some other costs and constraints for each region. The stability of

178
Table 8.10 Objective Function Coefficient Ranges

 

Branch Coefficient Increase Decrease Branch Coefficient Increase Decrease
CCS 800 0 - NCS 1,574 + 300
, cas 1,087 + 0 NBS 1,561 300 0
as 993 + 267 NNS 800 0 1,600
BBS 800 2,858 - rrs 800 3,148 -
EBS 1,784 0 300 sxs 1,149 +' 5
EES 800 62 o 383 800 5 -
EKS 1,48 0 62 wcs 1,575 + 1,284
LLS 800 0 - wws 800 1,284 -
LNS 1,297 1,600 0 ms 3,720 + 62
KKS 800 2,497 - IKS 3,297 62 1,600

 

 

+ , -, denote allowable infinite increase or decrease respectively.

 

the solution refers to the degree of variation in the coefficient that can be absorbed
by the model before a change in the optimal solution. Results of the sensitivity
analysis are shown in Table 8.10 for objective function coefficient ranges (cost
ranges). The Right Hand Side ranges (constraint ranges) are shown in Table 8.11.
Before the analysis is presented, some notations are explained below.

In Table 8.10, the column labelled "branch” shows the origin and destination
of the route. For example, ’CBS’ shows Central province (C) supply to Copperbelt
province (B) storage route. The first letter stands for the origin province, the second
letter for the destination province and the third letter stands for the activity at the
destination (where; ’8’ denotes storage; ’M’ denotes milling; and ’D’ denotes demand
for the final product). In the case of ’CBM’, it reads that Central province maize

from storage goes to the Copperbelt milling facilities. Similarly, ’CBD’ would read

179
Table 8.10 (Continued)

 

Branch Coefficient Increase Decrease Branch Coefficient Increase Decrease
188 1,315 + 62 EKM 721 5 0
CCM 98 580 0 LBM 1,356 0 994
CBM 385 0 300 LLM 98 994 -
CKM 291 + 267 KKM 98 0 -
CWM 873 + 266 NBM 859 0 0
BBM 98 0 0 NNM 98 0 -
BKM 521 + 784 NTM 1,149 + 0
BTM ‘ 388 0 580 'ITM 98 3,148 -
EBM 1,082 62 0 SBM 803 5 62
EEM 98 1,257 - SKM 447 + 5
STM 1,260 + 167 KKD 664 5 -
SSM 98 242 5 NBD 1,425 0 -
SWM 1,025 266 1,223 NLD 1,161 + 994
WM 98 1,284 - NND 664 + -
CCD 664 + - TBD 954 + 580
CBD 951 580 0 'ITD 664 + -
CED 1,466 + 242 SED 1,642 242 1,257
CKD 857 + 262 SKD 1,013 262 5
BED 664 0 - SSD 664 + -
EED 664 1,257 - WKD 1,309 + 1,223
LLD 664 994 - WWD 664 + -

 

Central province processed maize goes to the Copperbelt province to meet final

product demand.

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Table 8.11 Right Hand Side Ranges (’000 bags)

 

 

 

RHS Increase Decrease RHS Increase Decrease
Supply Storage
C 2,538 N6 154 C 2,744 + 206
B 582 411 465 B 1,920 614 154
E 1,909 535 465 E 1,123 + 154
L 327 411 95 L 232 95 12
K 475 535 465 K 1,539 5 154
N 1,508 411 465 N 676 614 98
T 138 40 138 T 178 + 40
S 2,188 535 47 S 2,810 + 622
W 255 95 47 W 491 + 236
Mill Demand

C 1,845 + 254 C 840 154 535
B 3,511 751 254 B 4,300 154 535
E 350 70 47 E 420 47 70
L 220 12 38 L 410 38 190
K 1,544 614 5 K 2,600 47 535
N 578 98 38 N 350 38 350
T 275 + 10 T 265 10 127
S 2,289 + 243 S 9N 47 535
W 785 + 435 W 350 47 95

 

8.2.1. Objective Function Coefficient Ranges

The original objective function coefficients (variability based on transport costs
only) are shown in column labelled "coefficient.” The signs ’+’ and ’-’ stand for
allowable increase to infinity and allowable decrease to infinity, respectively.

The objective function coefficient sensitivity analysis indicated, for example,

that Central province could supply the Copperbelt (CBS) and Lusaka province (CKS)

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storage facilities over a wide range of increased transport costs without altering the
optimal solution (as shown by positive infinity value). An example from Copperbelt
illustrates a relatively stable situation. An increase of 2,858 kwacha could occur
without altering the optimal solution allowing for a relatively large increase in
transportation cost (in this case local price).

Another example to include allowable decreases, can be obtained from route
’SED.’ Southern province would continue to supply Eastern province with maize if
the transport cost were to be increased by 242 kwacha from 1,642 (value includes
milling cost of 664 ZK) to 1,884 kwacha without altering the optimal solution. If the
cost was reduced by 1,257 kwacha, the same solution could be maintained. The
range of 1,499 kwacha was relatively stable. Stability of other specific routes can be
read from the Table 8.11 in a similar way.

In general, routes originating from Central province at all the stages of the
chain were relatively stable, as shown by the allowable increase to infinity. Central
province was highly favored to supply several regions with maize over a wide range
of transport costs.

Routes leading to the Copperbelt were the most unstable ones, as suggested
by the low range of allowable increases. Routes originating from Southern province
tended to be relatively less stable as well. This could be explained by the fact that
Southern province had many alternative outlets for its maize and small transport
changes could bring about re-routing of the commodity. The Copperbelt was

unstable based on the many sources of maize supply available to the region.

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8.2.2. Right Hand Side Ranges

In Table 8.11, RHS ranges are shown and they contain information that as
long as the constraint RHS value stays within these given ranges, the associated dual
price gives the improvement in the value of the objective function per unit increase
in the RHS. For example, an increase in supply of one bag of maize on the
Copperbelt would reduce the marketing costs by 2,858 kwacha (its dual price). This
dual price would remain valid for increases of maize production of up to 411,000 and
decreases of up to 465,000 bags.

Central, Eastern, North Western, Southern and Western provinces could
increase their storage capacities over large ranges without increasing the minimum
costs. Central, Eastern, North Western, Southern and Western provinces could
reduce storage capacities just by their slack capacities otherwise, the optimal solution
changes.

Copperbelt province had a higher range for the RHS constraints and with a
high dual price, implied higher opportunities for total cost reductions in producing,
storing, and milling. Eastern province also followed that pattern but needed to
reduce production of maize and increase the milling capacity. Specific RHS range
results can be read from Table 8.11.

Sensitivity tests of the results of the analysis indicated that the conclusions
drawn from these results were stable across a relatively wide range of parameter
values. The stability allows increased confidence in both the representativeness of

the data and its use as a basis for future analysis.

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8.3. Summary and Conclusion

The results attained in the transportation model were found to be consistent
with past studies in Zambia and indeed economic trade theory. Major consumption
centers and regions nearby ought to produce more maize to satisfy demand within
and import less from other regions.

The price level of maize is expected to be higher in OLR provinces compared
to off-OLR regions. Southern and Central provinces will supply more maize to the
Copperbelt and Lusaka provinces as suggested by low transportation cost shadow
prices.

The deficit regions off-OLR have a higher opportunity cost for not producing
maize locally. Imports of maize from other regions carried a high transportation cost
(shown by the large shadow prices) for North Western, and Western provinces.
Eastern and Northern provinces, on the other hand, had lower opportunity costs for
increasing maize production and it would not be economical to do so.

The Copperbelt provided a situation where the opportunity cost for the
province not to increase production was high but the opportunity cost for not
increasing the processing facilities was low. This suggested that more could be
gained from increased production from the farming sector than from the increased
processing capacity. Should demand for maize increase in the province, however,
both aspects would become important.

The transportation study brought out the seriousness of the marketing
problem through the magnitudes of transportation costs involved. The analysis
showed that the controlled and government funded market system was very

inefficient and that more resources had been mis-allocated than believed. Since the

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government did not have resources to meet all the market requirements, benefits had
to be rationed through food aid and persistent short falls of supplies. The benefits
and costs were very unevenly distributed, disavantaging especially the rural net grain
buyers. The need for reforms was, therefore, overwhelming if marketing costs,
particularly transportation costs, were to be minimized. Once price differentials
reflect transportation costs, for example, production patterns will change and so will
consumption patterns. With maize being a staple food and relatively price and
income inelastic, an efficient market system can reduce the final product price and
help contain potential political disturbances.

The limitations of the transportation model were that regional production
costs were assumed uniform, thus taking away the advantage of the low costs areas,
some of which may be far from major maize consumption areas. However, when
considered together with input transportation costs, the problem becomes less
serious. The lack of inter-temporal and product form considerations also weakened
the model, as did the assumption of uniformity within regions and the large regional
units of analysis used. Smaller regions would have provided better results. Similarly,
uniform transport rates, storage costs and milling costs limited the model. Uniform
transport rates weighed against areas with good infrastructure, especially those on the
OLR.

Apart from the government having to continue to provide market
infrastructure, information, legal support, grades and standards etc., more urgent
problems appear to be those of facilitating competition in the market by investing in
infrastructure, and provision of market information to participants. The

transportation industry specifically is a high-cost industry and requires a substantial

185

amounts of imported capital and operational variable inputs in form of imported
fuels and before one invests he / she needs information on how profitable the activity
is and good infrastructure is necessary for low costs to be attained. The government
policy should be to facilitate the development of an efficient transportation system.
In general the government should create a conducive environment for investments
through the provision of infrastructure, information and enforcing contracts, grades
and standards while maintaining stable and consistent economic growth policies.
Further research is recommended in the areas of transportation with issues
of differentiated production costs, inter-temporal, final product form, market margins
and retail prices addressed in a more complete way. In Zambia, a 90kg bag is used
for grain packaging and little bulk transfer are made. The costs of bags are high, as
is the labor requirement for packaging. A study to look into sources of reducing
costs, therefore, should include packaging. The credit and detailed transportation
studies are two areas of concern for the Zambia maize market liberalization
program. How the maize sub-sector will perform will greatly depend on the

transportation industry.

CHAPTER NINE

SUMMARY, CONCLUSION AND POLICY IMPLICATIONS

Three issues on maize marketing liberalization in Zambia have been
presented in the dissertation covering: 1) The evolution of maize pricing and
marketing policies; 2) the role of primary cooperative societies and 3) the inter-
provincial maize transportation system.

The social, demographic, geographic and economic characteristics, the
agricultural sector and the maize sub-sector, have been presented in the dissertation.
The past maize pricing and marketing policies were also reviewed and were
accompanied by a discussion on what a market system is and why the Zambia
government undertook to reform it.

Considering that market liberalization in itself would not automatically
introduce an efficient marketing system, a discussion was presented on the role the
cooperative societies could play in the market, especially in the short run (taken to
be about ten years). The four-tier cooperative system was referred to in the
discussion, but the focus was on primary cooperative societies which have been
involved in maize marketing as agents between the farmers and the provincial

marketing unions. The primary cooperative organizations were perceived to be

186

187

important in the reformed market system especially before the development of the
private sector.

Another issue analysed in the dissertation, was the inter-provincial maize
marketing problem. Transfer costs had been a major drain on government revenues
because of uniform pricing which did not reflect the costs in the final product prices.
A transport cost minimization problem was conducted with the help of a linear
programming model and the results were analyzed and their implications were drawn
for maize production patterns, storage, milling and transportation rates. The present
chapter summaries and presents conclusions and draws policy implications of the
three issues discussed in the dissertation. Further research areas are then

recommended.

9.1 Summary

Under the past pricing and marketing policy reviews (before August 1991),
social, demographic, geographic and economic characteristics of the country are
presented before discussing the agricultural sector and the maize sub-sector in
particular. The discussion laid out the challenges of regional dispersions, asymmetric
population densities, relatively high urbanization rate (over 50 percent) and the
vastness of the country for marketing. The importance of the agricultural sector was
recognized and maize was identified as the most important crop in the country. Over
70 percent of cultivated land area is usually under maize and 90 percent of the grain
produced in the country is maize. Most of the marketed maize comes from small

scale farmers (70 percent in the 1980s).

188

Past agricultural pricing and marketing policies increased the market share of
small-scale farmers, but brought about mis-allocation of resources in terms of
production patterns, since transportation costs were not reflected in the producer,
into-mill, input and final product retail prices. The major maize consumption areas
in Zambia are concentrated along the OLR in Lusaka and Copperbelt provinces (See
Figure 1). The OLR regions are suitable for maize production and are relatively
dominated by commercial production. Small-scale and emergent farmers (over 90
percent of the farmers), on the other hand, are scattered all over the country, and
especially in off-OLR regions such as Eastern and Northern provinces.

The increase of maize production in off-OLR regions by small scale farmers
was a result of uniform pricing and monopoly marketing arrangements. The OLR
surplus regions of Southern and Central provinces, with a market share of 86 percent
in 1974-1976, lost a part of the market to surplus off-OLR (Eastern and Northern)
regions. By 1983-1985, the OLR regions had only 53 percent of the market (See
Table 7.1). Pan-territorial and pan-seasonal pricing policy was introduced in the
early 19705, in order to draw into the market, farmers who may not have been
reached by the ”free" market system. In addition, to reach the targeted farmers, the
government vigorously promoted cooperatives between 1965 and 1970.

For the uniform pricing system to work, accompanying institutional
arrangements were needed. Publicly owned monopoly organizations were, therefore,
necessary and were in charge of maize marketing until 1991, when private
participation restrictions were lifted. The institutional arrangements brought about

inefficiency in production and marketing of maize, and the government had to heavily

189

subsidize the maize marketing system in order to provide the urban areas with low-
cost food. This was not only a drain on government funds, but also contributed
significantly to high rates of inflation (consequently the real per capita GDP dropped
from 207 kwacha in 1983 to 148 kwacha in 1989).

Under the fixed-price system, producer prices were set below border prices,
thus implicitly taxing farmers. Consumers, on the other hand, benefitted from low
final product prices brought about by subsidy programs and below-border prices.
Pan-seasonal pricing and legal restrictions discouraged on-farm storage and rural
processing of maize.

The change in production patterns necessitated the need for major
interprovincial maize movements, thus increasing the cost of transfers. The
government budgetary shares of the subsidies became uncontrollable, especially since
final product prices had to be maintained at low levels. For example, in 1988, the
subsidy as a percentage of the retail final product price was 118 percent and in 1990,
the maize related subsidies were 120 percent of the government budget deficit. A
large percentage of the subsidy went towards market coordination mechanisms,
mostly by running inefficiently operated NAMBoard and / or cooperative
organizations.

With increased subsidy levels the government was aware that its equity goal
was in fact resulting in inequities, favoring the urban consumers. The terms of trade
between the urban and rural areas worsened against the rural population, some of
whom consequently migrated to the urban centers. The goal of increasing food

production, increasing rural incomes, decreasing unemployment and containing rural-

190

urban migration could not be attained through the existing system. Consumer
subsidies were draining government funds that could go to essential investments such
as schools, infrastructure, research and extension. The government, therefore, was
left with little choice but to seek other market system alternatives.

By 1980, having determined that the controlled market system was not
sustainable and because of a push from international funding agencies (WB and
IMF), the government began to liberalize the economy including the maize market.
The liberalized economic system is expected to introduce an element of market
competition, which is expected to attract private traders in pursuit of profits.
Competition and the pursuit of profits are expected to bring about a more efficient
market coordination arrangement by the elimination of inefficient firms.

If the government plays its role of facilitating competition, providing better
infrastructure, market information, legal support and in special~cases guaranteeing
credit, the liberalized market could be expected to improve the economic
performance. In Zambia, the liberalized market is expected to change the maize
crop production patterns, with the OLR picking up more maize production, since
prices will reflect transfer costs. The remote areas are expected to reduce their
marketed maize shares and concentrate more on other suitable food and cash crop
production and other agricultural activities.

The privatization process, an essential component of market liberalization, is
expected to develop slowly since private traders have to build confidence in
government policies prior to committing their investments. Private traders tend to

specialize in market functions which could not only improve efficiency but increase

191
employment opportunities through forward and backward linkages. This could

contribute to reduced rural-urban migration. Before privatization matures, however,
cooperative societies may be needed to fill the gap left by government monopolies
in maize marketing.

The cooperative system has been involved in maize marketing from as early
as 1914. In 1964, when the new government took over, the cooperative system was
promoted vigorously. Unfortunately, the performance of the cooperative system has
not been any better than the publicly owned monopolies like NAMBoard. Reasons
for the poor performance ranged from members attitudes to the institutional
arrangements and government direct control. Under the liberalized market system,
cooperatives and cooperative societies in particular are expected to operate
autonomously and under economic and financial viability requirements.

The study of the cooperative societies indicated that the societies were well
scattered around the country, with easy access to the small scale farmers. The
societies were, however, poorly organized, with apathy shown by the general
membership. Apathy resulted in mismanagement, nepotism, tribalism and mis-
appropriation of funds by management. One of the reasons for the poor conduct was
that the management and the board of directors were answerable to the upper-tier
provincial unions and not to their members. The PCUS could not monitor societies’
activities closely, and auditing of financial records could be as much as four years
behind schedule. This allowed management and board to have no supervision and

hence no market discipline.

192

Major economic activities of primary cooperative societies in the survey areas
included maize assembling, input distribution, milling and retailing of consumer
goods. The maize enterprise was found to be profitable, but could have done better
under the ”free" market system. The maize assembling activity contributed 5.8
percent to gross revenue of the sampled 43 societies. This activity is expected to
expand under the liberalized market. Concerning the PCS’s role as an agent in input
and credit distribution, not much could be determined due to lack of data. The other
major economic activity was that of milling. The enterprise was found to be
economically viable but barely so. The main reason for the undesirable performance
was the unfavorable standard operating procedures which involved the provincial
marketing unions as participants in the decision making process. The decision
making process was unnecessarily prolonged, just as in the case of the retailing
enterprise. The consumer shop, however, provided the largest percentage of
revenues, contributing 55 .8 percent to gross revenues. However, as operated the
consumer shops were not contributing to profits. The enterprise was therefore
important in the firm’s effort to realize economies of scale.

The PCSS as a whole business firm tended to have high overhead costs and
were poorly operated. Financial statements and ratios averaged over the survey
showed that the firms, in 1990, were barely solvent and in serious liquidity positions.
A net worth of 225,837 kwacha, indicated a liquid, but small-scale business
enterprise. Financial ratios (Table 6.10) were low and indicated that the societies
could not easily cover their liabilities, that their asset management performance was

poor and that the firms were under-capitalized.

193
Even though the sampled PCSS showed poor financial, economic and

administrative performance, they have some experience in maize marketing over the
private traders and may hold an advantage in this respect. In the short run,
cooperative societies may need to conduct many market functions. In order for them
to do so, investments will be required and the government may consider loan
guarantees to potential staple food marketing cooperatives and private participants.
The cooperative societies may face competition from commercial farmers, (private
trader groups) who have the assets and ability to engage in the assembling enterprise
and will likely do so if it is profitable. This will provide a competitive environment
for the societies, calling for a change in working norms.

The study concluded that milling and consumer shop enterprises will remain
important for stabilizing the societies’ financial positions. The cooperative societies
will, however, be important to their communities in carrying out necessary functions
such as maize assembling, input supply, credit distribution, maintenance of standards
and grades, market information and rural transportation. The chances of c00perative
societies being involved in interprovincial maize transportation appeared to be
extremely low, according to the study. The smallness of the societybusiness and the
large volume investments required in road transportation point to this conclusion.

Transportation costs remain the most costly component of maize marketing
and will likely continue to be as long as maize production patterns remain
unchanged. In order to gain insights into the problems of transportation in maize
marketing, a study was conducted using 1990/ 91 market season parameters. A

provincial transportation network problem was developed and linear programming

194

model was applied. The network included constraints of supply, storage, milling and
demand capacities, with the objective of minimizing transportation costs of maize in
the country (storage and milling costs were added but assumed uniform across
regions).

The optimal solution suggested that the minimum cost for marketing maize
in the 1990/ 91 marketing season given the location of production and demand was
21,056 million kwacha. A value nearly half that of 1991 government expenditure
budget plan. Considering that the government was conducting nearly all the market
functions up to retail, this could not have been undertaken and in reality, short falls
and food aid became part of the market system. Major savings could have been
made by adopting optimal maize flows. In the optimal solution of maize flows
Central, Eastern, and Southern provinces supplied the major consumption areas of
Lusaka and Copperbelt. Eastern province imported maize meal from Southern
province due to its milling limitations, and Lusaka imported maize from the rest of
the world.

Shadow prices generated for non-optimal routes showed that Western and
North Western provinces were costly regions to supply maize to. In case of surplus
regions, Eastern and Northern provinces were unfavorable sources of maize to major
consumption areas, and Central and Southern provinces were the best placed to
supply the urban areas.

According to the results of the transportation study, the off-OLR deficit
provinces (Western and North Western provinces) could have produced their maize

requirement within their regions. This was indicated by the high production shadow

195
prices generated of 3,148 and 3,080 kwacha for Western and North Western

provinces, respectively (See Tables 8.10 and 8.11). The OLR deficit regions (Lusaka
and Copperbelt) had lower opportunity cost for not producing locally compared to
the off-OLR deficit regions. Lusaka had a dual price of 2,497 and Copperbelt had
2,858 kwacha per extra bag of production. Production within the major consumption
regions had a lower opportunity cost than those far from consumption areas since
they had nearby low cost supply sources.

Surplus OLR regions such as Central (with a dual price of 2,571 ZK) and
Southern (2,153 ZK) provinces could still increase their maize supply and reduce
marketing costs (transport costs) to the market system much more than the off-OLR
surplus regions of Eastern (with a dual price of 1,874 ZK) and Northern (2,097 ZK).
Increased maize production in the off-OLR would not have made significant savings
to the market system. Luapula and Eastern provinces needed to increase their
processing capacities in order to meet demand for maize meal from within their
respective provinces. The results of the study suggested that Southern, Central,
Lusaka and Copperbelt regions had an absolute advantage in maize supply. Eastern
and Northern as surplus regions had an absolute disadvantage in maize supply.
Deficit provinces of North Western and Western provinces were the costliest places
to supply maize or maize meal to.

The findings of the study reiterated what similar studies concluded but showed
in addition the magnitude of the marketing costs involved if maize were to keep
moving according to the 1990/ 91 marketing season production and consumption

patterns.

196
The low population density and dispersed rural settlement patterns, the high

proportion of population that resides in urban areas, high unemployment rates, high
costs of transportation, underdeveloped information, credit, and infrastructure
systems and lack of confidence in government policies all contributed to the high
costs of marketing maize and currently provide a formidable marketing challenge to

the policy planners.

9.2 Policy Implications

The first tentative step toward an efficient maize market system was
undertaken by the government in 1980. The effort to liberalize the economy and
specifically the maize market, was an important first step towards achieving the goal
of reduced marketing costs. The first effort attempted to decontrol prices, but a total
lifting of price controls was threatened by potential urban food riots. This made it
necessary to maintain some level of subsidies and targeted subsidies were provided
to the urban vulnerable groups. The above problem illustrates the difficult task of
reforms and problems likely to be encountered in the liberalization program.

Consequences of rules and regulations can be anticipated or unanticipated,
desirable or undesirable. The challenge for policy makers in Zambia will be to make
clearly defined, stable and consistent policies and not waver to different pressures
that may be applied by those who may find the new rules and regulations
undesirable. As the economic system changes, efforts should be directed to

modifying the new situation rather than the abandoning the entire program as

197

happened in the past. This will be an important aspect for the success of the
liberalization program.

As stated in the policy review section, the liberalization of the maize market
alone is unlikely to provide an efficient market and the government will need to
facilitate the privatization process of the market by providing information, deve10ping
the legal support system, and improving infrastructure for domestic and international
trade. In the short run, as privatization takes place, utilization of existing institutions
to conduct market functions, will be necessary. In the Zambia maize market, the
cooperative system is one market coordination alternative already in place. The
primary cooperative societies in particular will have to fill the vacuum left by the
public monopoly marketing boards that were dissolved.

Even though cooperatives may be criticized for being less efficient than other
organizational forms in Zambia, the cooperatives did not have a chance to operate
independently and this may change. With good incentives, cooperatives may change
their working norms and compete well with private traders. Once controls and
movement restrictions are removed and private participation is significant, the
cooperatives could provide an opportunity to many farmers to exercise location
market power. This could be important in Zambia as maize production is done by
a large number of dispersed farmers who act as price takers. Consequently,
cooperatives could have an overall favorable impact on the economy thus justifying
favorable policies as well as use of public resources to promote them in addition to

promoting private trading.

198
C00peratives will likely engage in the assembling of maize and this could be

a major activity for the rural organizations. Maize is a bulky commodity and thus
costly to transport. Rural transportation of the commodity will likely to be conducted
by farmers using ox-carts and the PC85. Interprovincial transportation, on the other
hand, might become a preserve of the private sector. The transport industry is
characterized by increasing returns to scale and a large volume capital investment is
required before production can commence at any level. At least the business needs
to be large enough to employ a whole truck. A truck is a large investment under the
Zambian standards. Once this capital investment has been made, additional
increments 'of output can be achieved at low cost. Because of such requirement the
privatization of the maize market industry is expected to have a long gestation period
since in the past publicly owned or supported organizations dominated the industry.

To speed up the process, the government may have to provide incentives to
attract private investments, such as tax exemptions on utility vehicles and developing
guidelines for transportation rates, for example. Guidelines are important in order
to prevent conflicts among participants. This is also true for any orderly market
system.

In the long-run, as maize production and consumption patterns change and
transportation costs reduced, the government’s role in the market may include some
supply and price stabilization programs. The government will need to be buyer of
last resort if the goal of stabilizing rural incomes is to be maintained. There will be
need to maintain maize stocks if prices will be kept low to the urban consumers.

The stocks could be used in emergencies arising out of lowered production. Stocks

199

could be used to control maize prices by purchasing excess supply in order to protect
producer prices. In order to protect consumers when there is excess demand, stocks
could be released to lower final product prices. All such programs can work only
when market forces determine the price, as would be the case in a less regulated
market economy. The issue, therefore, to policy makers in Zambia is whether and
how to implement and maintain the reforms program in view of the unanticipated

problems which will arise and the political importance of food supplies and prices.

9.3 Further Research Recommendation

In future food policy research, the challenge lies in designing inquires that can
inform policy about the on-going market reforms so that policies can be made based
on more than just theory and ideology. There are many areas which require
empirical data, but this study identifies three areas that need attention.

Major areas for further research include the credit system, milling and the
maize transportation industries. Financing of marketing organizations such as the
primary cooperative societies and the transportation industry will be crucial to the
performance of the maize sub-sector. Economic variables such as price effects on
maize purchase, should be studied in the future. Issues of availability of funds and
lending regulations have to be investigated. Milling and locations and large industrial
and rural mills should be determined and information supplied to potential investors.
The capacity and cost of rural mills will be important to the satisfaction of rural and
urban demand as privatization continues. This area of study could provide a area of

cost minimization for maize meal.

200

Under the transportation studies, the major issue would be how to promote
rural and interprovincial maize transportation focusing on infrastructure, regional
production, storage, and milling cost, packaging, product form and inter-temporal
issues. Adding more origin and destination points to the optimizing analysis, would
improve the results. Adding production costs would reflect comparative advantage
as opposed to absolute advantage. Answers are required on how to reduce
transportation costs over the adjustment period from current production and
consumption patterns to patterns expected to be quite different. Investments in the
transportation industry is also closely tied to credit facilities and the two areas,
therefore, will be crucial to an improved maize market performance. A better maize
sub-sector performance can help the whole economy grow and with it the standard

of living of the majority of people in Zambia.

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