Project: Malawi Priorities – Agriculture

In support of the Malawi Priorities project, the research team at Limestone Analytics investigates two development questions:

• How does Malawi most effectively create access to formal markets for smallholder farmers?
• Which high-value crops are suitable for Malawi and demanded by countries with relatively low-cost transport links?

The team conducted research into Malawi’s agricultural sector through a review of past and current agricultural projects, consultations with sector experts in Malawi, and an extensive review of the literature to define a subset of intervention options that could address the key performance gaps limiting the sector.

The team also conducted a cost-benefit analysis to quantify the impacts of a subset of these interventions. The three interventions modelled using Cost-Benefit Analysis (CBA) include:

• Reform (and merger) of Malawi’s two Commodity Exchanges
• Improve national standards and practices for testing and certifying groundnut quality
• Removal of the export ban on maize

 

COMEX Reform

The Government of Malawi publishes suggested farmgate prices for different crops. However, due to a range of factors, the price paid to farmers is significantly lower than the published farmgate prices. The gap between market prices and farmgate prices of key commodities is so high that the COMEX reform intervention is even feasible if 1% of farmers start selling their output through the reformed COMEX at the published farmgate prices. 

The key assumption is that by trading through the COMEX, farmers would receive the minimum farmgate price instead of the lower prices paid to them by informal traders. In the figure below, the main benefit is disaggregated by crop. It depicts the total increase in farmer revenue across Malawi, as well as the increase in price per kilogram by crop. 

Across all crops, the average price paid to farmers would increase compared to the current average farmgate prices. The change in total revenue for chickpeas is 0 because of the small amount of production relative to the scale of benefit of other crops.

The cost parameters are estimated based on conservative estimates of the cost to reform the policies and business practices for the COMEX. There is some uncertainty around cost estimates because there are no commodity exchange reform interventions that provide reasonable comparisons or benchmarks. However, this is explored in the sensitivity analysis. 

We conducted the analysis assuming that only 10% of total production would be traded through the COMEX. The results found that this intervention would have a BCR of 17 with an 8% discount rate. Although the benefit-cost ratio (BCR) for both quality control and the export ban interventions are low, they remain above 1, meaning that the net benefits still slightly outweigh the net costs of each intervention.

Quality Control Intervention

There is a 30% gap between the domestic and international prices of groundnuts due to the quality of the produce. The second intervention aims to reduce that gap. In our research, we assumed that 9% of total groundnut production would qualify as premium, based on the experience of the Mchinji Area Smallholder Farmers Association, which currently sells premium groundnuts through a fair trade agreement to the EU. However, we expect the share of the groundnuts that qualify as premium would increase over time as more farmers are trained in proper pre- and post-harvest methods and realize increased profits for premium-grade products. 

Export Ban Removal

Finally, removing export restrictions will help farmers to export their crops to other countries, and prices in Malawi will align with international prices. Since maize is exported, open trade will translate to reduced domestic consumption and higher domestic price. In our analysis, we found that removing the export ban will result in a significant increase in maize prices. However, about 60% of consumers are also producers (Aragie et al., 2018), so this group would benefit from a significant increase in income. This benefit is adjusted in the study by the negative welfare effects on those who consume but do not produce maize – i.e. the rural landless and urban poor.