Department of Agricultural, Food, and Resource Economics Feed the Future Innovation Lab for Food Security Policy

Aakanksha Melkani, Nicole M. Mason, David L. Mather and Brian Chisanga, 2019. Smallholder Maize Market Participation and Choice of Marketing Channel in the Presence of Liquidity Constraints: Evidence from Zambia, Feed the Future Innovation Lab for Food Security Policy Research Brief 161.

Abstract

Smallholder participation in agricultural output markets holds potential to move farmers out of subsistence farming to more commercial and profitable agricultural enterprise (Heltberg and Tarp 2002; Barrett 2008; Von Braun et al. 1994; Timmer 1988). Yet, a relatively low portion of smallholder farmers participate in food markets as net sellers in many sub-Saharan African (SSA) countries (Barrett 2008; Mather, Boughton, and Jayne 2013). Most studies that empirically study the reasons behind this low participation have focused on transaction costs of accessing output markets such as poor roads, infrastructure, and/or insufficient endowments of public and private assets. However, constraints that limit a household’s capacity to produce a surplus beyond meeting its consumption needs could also limit a household’s capacity to be a part of commercial agriculture. One such constraint is the inability to invest in productivity enhancing agricultural inputs such as inorganic fertilizer and improved seed due to lack of liquidity (i.e. cash from income or credit) at time of planting. There is clear evidence that liquidity constraints at planting time lead to lower agricultural output (Winter-Nelson and Temu 2005; Foltz 2004; Feder et al. 1990). This paper extends this literature to assess the extent to which liquidity constraints that constrain agricultural output can subsequently also limit the household’s capacity to sell agricultural output.

Liquidity constraints are also known to make agricultural households “sell low, buy high”, i.e. they sell their grain output immediately after harvest (when prices are lowest) to meet cash needs, and then they end up buying grain later in the lean season when prices rise. This behavior could also potentially have an impact on the marketing channel that is chosen by the participants of agricultural output markets, particularly if a channel is characterized by uncertainty of the time of purchase, purchase price, and delays in payment.

We base this study on the maize markets of Zambia. Maize is the staple food grain of Zambia, is grown by almost all farm households and is an important source of cash for many of them (Chapoto et al 2015). Using data from the Rural Agricultural Livelihood Survey (RALS), a nationally representative two-wave panel dataset of smallholder farm households in Zambia for 2012 and 2015, we study the following questions for maize smallholders in Zambia:

1. First, we assess whether liquidity constraints during the maize production period affect a farm household’s decision to participate as a net seller of maize.

2. We then study whether liquidity constrained households are less responsive to changes in maize prices with respect to this decision.

3.  Finally, we explore whether liquidity constraints have an effect on the choice of marketing channels for net sellers of maize.

This third question is of particular interest in the case of Zambia given the significant role played by the Food Reserve Agency (FRA) in both its domestic maize market and in agricultural policy in general. The role of the FRA is particularly relevant to our interest in the effect of liquidity constraints on a smallholder’s choice of maize marketing channel because, although the FRA typically purchases maize from farmers at a price that is higher than the prevailing producer sale price, the timing of FRA maize purchases each marketing season is uncertain. More significantly, there is typically a relatively long and unpredictable delay in FRA’s payment to farmers for the maize they purchase from them. We define a household as liquidity constrained in the maize production period if one or both of the following conditions are met (following the approach similar to Winter- Nelson and Temu (2005)): (1) The household claims to not have acquired fertilizer from market due to lack of cash, and/or (2) the household claims to not have obtained fertilizer from the Farm Input Subsidy Program (FISP) due to: a) not being able to afford the down payment for obtaining fertilizer through FISP and/or b) lack of cash for the mandatory cooperative membership payment required for participation in the program.

We find that more than half of all smallholders in the sample were liquidity constrained in 2012 and 2015. Being liquidity constrained is found to be associated with lower input use, smaller maize productivity and output per capita, less ownership of land-holding and livestock among other factors. The three main maize marketing channels in Zambia were identified as the FRA, private traders and other households, which were chosen by 47, 42 and 11 percent of maize net sellers for their largest maize transactions, respectively. 

We have five main findings from our regression analysis. First, we find that liquidity constraints during the production period is associated with an 11 percent reduction in the probability that a liquidity-constrained household is a net seller of maize. Although we are not able to establish causality in this relationship, it appears that because liquidity constrained households are not able to adequately invest in productivity-enhancing inputs, this limits their capacity to produce a marketable surplus, thereby decreasing their probability of being a net seller of maize. 

Second, we find that while households without liquidity constraints have a statistically significant positive response to higher maize prices, liquidity-constrained households do not respond to changes in maize prices. This suggests that because LC households are less likely to acquire productivity-enhancing inputs, this mutes their responsiveness to changes in the maize price. Third, we find that measures of market access based on the distance from the household or village to the nearest agricultural market or main district town (boma) do not have a large effect on the probability of being a net seller, for either liquidity-constrained or unconstrained households. While this result may seem counterintuitive, it is important to note that it does not imply that “market access” or road and market infrastructure do not play an important role in promoting and facilitating market participation by smallholders. What it does imply is that our use of maize prices adjusted for transportation costs to and from each village appear to be capturing an important part of differences in farmgate maize prices between more and less remote villages. In addition, these results suggest that transaction costs of searching for price information and buyers appear to be relatively low – perhaps due to relative proximity to FRA depots, good access to private traders (who visit 75 percent of villages), and the fact that nearly all villages have cell network access -- and/or that these transaction costs are being captured by other explanatory variables such as ownership of a cell phone. These results suggest that market access and competitiveness in output market in Zambia may not be as poor as is often assumed in literature. 

Fourth, we find that an additional expected moisture stress period during the growing season reduces the probability that a liquidity-constrained household is a net seller by 16 percent. This highlights the vulnerability of smallholder maize production in Zambia to drought and the potential benefit of the adoption of soil management practices and drought-tolerant maize varieties that can help to mitigate the negative effects of drought on crop productivity (Ajayi et al 2007; Haggblade, Tembo, and Donovan 2004). Finally, we find that liquidity-constrained households are 18 percent less likely to sell to the FRA, and are thereby unable to enjoy the benefits of higher FRA maize purchase prices. Although we are not able to discern the specific reason for this result based on our research to date, we expect that this may be due to uncertainty regarding the timing of FRA maize purchases each year as well as the typically long delay in payment by the FRA to farmers.

Our results demonstrate that liquidity constraints can limit smallholder participation in food grain markets as net sellers, reduce their responsiveness to changes in maize prices, and limit their access to relatively high FRA maize purchase prices. They also provide additional evidence that relatively well-off farmers (those that are not liquidity constrained) are best able to access the benefits of FRA maize purchase prices that are higher than those offered by the private sector. Further research is needed to explore policies that can reduce liquidity constraints at time of planting and incorporate mechanisms for productivity enhancement as a measure for encouraging commercial agriculture.