Maize market interaction in Eastern and Southern Africa

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MAIZE MARKET INTERACTION IN EASTERN AND SOUTHERN AFRICA

Introduction

In ESA, the agricultural sector as a whole and maize markets in particular have evolved rapidly over the past decade. Production has expanded swiftly, trade flow patterns have changed and price formation has become increasingly complex, influenced by a multitude of factors in global, regional and domestic markets. While the purpose of this study is to provide forward looking analysis related to policy alternatives in the region, any forward-looking analysis of alternative future outcomes must first consider the point of departure. An understanding of past price relationships, as well as the impact that trade and policies have had on these relationships, is critical for the correct structure and specification of forward looking simulation models (Meyer et al., 2006). Hence the purpose of this chapter is twofold – firstly to provide context and understanding related to changing market fundamentals over the past decade and secondly to add to the existing body of literature related to maize price relationships across ESA. Despite the importance of maize within broader agricultural sectors in the region, only 5% of global maize production occurred in SSA between 2014 and 2016 (OECD-FAO, 2017). Therefore, regardless of the isolation of SSA maize markets that results from the preference for non-GM white maize and high transportation rates (Baffes et al., 2015; Minot, 2011), any changes in regional maize markets must still be considered within the context of global market dynamics. For this reason, the chapter starts with a brief overview of global maize markets over the past decade, before providing a more detailed synthesis of the evolution of regional maize markets in ESA since 2006.Following the market overview, it presents an in-depth evaluation of maize price relationships in the region, both in terms of existing literature and empirical analysis.It considers long run cointegration, price transmission and short run adjustment rates between different markets, as well as the impacts of policy application on these relationships. The quantification of past price relationships provides the understanding of price formation that underpins the proposed modelling structure and the analysis conducted with it in later Chapters.

Overview of the global maize market

Maize consumption globally has expanded at an unprecedented rate over the past decade. Remarkable economic growth in China supported rising demand for meat products in the most populous country in the world, which in turn stimulated the demand for animal feed. The emergence of the biofuel sector, where maize offered a popular feedstock for ethanol production added further impetus and from 2006 to 2016, world maize consumption increased by an annual average of 3.5%. Maize used for biofuel production increased by 8.8% per annum, to reach more than 17% of total maize use by 2016, from merely 9% in 2006. Maize use in the animal feed market also expanded rapidly at 2.6% per annum of a much higher base, whereas food use grew by 1.9% per annum (Figure 2.1). Over the next ten years, the OECD-FAO (2017) projects a significant slowdown in growth rates to 1.1% per annum. Following the rapid decline in oil prices since mid2014, ethanol production has largely stagnated at mandated levels, with limited growthnprojected for the coming decade. At the same time, domestic credit limitations and the transition to a consumer driven economy have weakened the growth prospects in China. Combined with per capita meat consumption in China starting to approach the levels observed in developed economies, this slowdown in growth underpins slower meat consumption growth and consequently also feed grain imports. Despite slowing to 1.6% per annum over the coming decade, the demand for animal feed remains the strongest driver of total maize consumption going forward (OECD-FAO, 2017). Strong demand has been an important factor behind the so-called commodity super cycle, as global maize prices shifted to new levels post 2007. This price cycle also induced substantial production growth, firstly by initiating an expansion of 1.8% per annum in the area cultivated to maize globally since 2006 and secondly by stimulating investment in technology that aided yield growth of 1.8% per annum since 2006. Consequently, production expanded by 3.6% per annum between 2006 and 2016 (Figure 2.2). In South America, both area expansion and yield gains outpaced the global average, inducing production growth of more than 5% per annum.abundant regions of South America, particularly Brazil, is expected to outpace that of the USA and China over the next decade. Consequently, a rising share of global production will originate from South America in future. Following the drought conditions experienced in the USA in 2012, global supply has exceeded consumption for a number of years, replenishing stock levels and leading to a significant decline in prices. With ample stocks in the market, international institutes such as FAPRI (2017) and the OECD-FAO (2017) indicate that prices are expected to continue on a lower path for some time. While some recovery is expected in the medium term, prices are expected to remain well below the peaks of 2011-2013 in the absence of major supply shocks. In real terms, this implies a return to the long term declining trend.

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Acknowledgements
Abstract
Table of Contents
List of Tables
List of Figures
Acronyms
1. Introduction
1.1 Background
1.2 Problem statement
1.3 Research objectives and justification
1.4 Conceptual framework
1.5 Statement of hypothesis
1.5.1 Hypothesis 1: Regional market interaction
1.5.2 Hypothesis 2: Model structure and validation
1.5.3 Hypothesis 3: Model application and policy simulations
1.6 Delimitations
1.7 Dissertation outline
2. Maize market interaction in Eastern and Southern Africa
2.1 Introduction
2.2 Overview of the global maize market
2.3 Overview of maize markets in Eastern and Southern Africa
2.3.1 Maize consumption trends in Eastern and Southern Africa
2.3.2 Maize production trends in Eastern and Southern Africa
2.3.3 Evolution of maize trade in Eastern and Southern Africa
2.4 Maize price relationships in Eastern and Southern Africa
2.4.1 Price transmission and co-integration in Southern African maize markets
2.4.2 Data and methodology for analysis of trade defined regimes
2.4.3 Results for analysis of trade defined regimes
2.4.4 Data and methodology for analysis of policy defined regimes
2.4.5 Results for analysis of policy defined regimes
2.5 Conclusions
3. Trade flow specification and price formation
3.1 Introduction
3.2 Review of trade and price formation in different modelling frameworks .
3.2.1 Homogeneous products and the spatial equilibrium condition
3.2.2 Heterogeneous products and the Armington assumption
3.2.3 Gravity models for trade analysis
3.3 Applicability of different methods to maize markets in the ESA region .
3.4 Proposed structure of the trade model
3.5 Trade-flow parameters
3.6 Price formation
3.7 Concluding remarks
4. Domestic market specification and model validation
4.1 Introduction
4.2 Model specification
4.2.1 Domestic supply
4.2.2 Domestic demand
4.3 Model validation
4.3.1 Historic simulation
4.3.2 Simulation of 10-year outlook: Baseline
4.3.3 Sensitivity to global and domestic markets shocks
4.3.4 Simulation of 10-year outlook: Volatility
4.4 Concluding Remarks
5. Model application to forward looking scenario simulations
5.1 Introduction
5.1 Short term application: Discretionary export controls to reduce domestic
prices
5.1.1 Implications of export bans
5.1.2 Implications of the regional drought in Southern Africa in 2016
5.1.3 Simulation results
5.1.4 Concluding remarks on the impact of export control
5.2 Long term application: Productivity gains in Tanzania
5.2.1 Potential for productivity gains in Tanzania
5.2.2 Impacts of productivity gains
5.2.3 Simulation results
5.2.4 Concluding remarks on productivity gains
5.3 Conclusions
6. Summary and conclusions
List of References
Appendix 1: Unit root tests associated with trade defined regimes
Appendix 2: Unit root tests associated with policy defined regimes
Appendix 3: Trade parameter assumptions