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Maize storage, credit, and price arbitrage in Kenya

Development Challenge

Seasonal price fluctuation of staple grains in developing countries lowers the welfare of both consumers and producers. In East Africa prices increase seasonally up to 300 percent in isolated rural markets. Farmers and private maize traders tend to collectively sell immediately post-harvest and accept a low price for their grains, while consumers are forced to pay a higher price during the “hungry season.” Low prices hurt farmer profits and decrease their ability to invest in productive agricultural inputs that could increase yields and benefit consumers. Selling at low prices also decreases the marginal returns to investment. Grain storage offers a potential solution to seasonal price variation, yet, there has been little research to understand the current low use of grain storage or its effects on price and consumption.  

Context

In Kenya, grain storage is common at the household level. Farmers, however, only store their grain for a short period of time and still sell at low prices post-harvest. This suggests that farmers need cash immediately post-harvest. Traders follow the same pattern despite the availability of high-tech grain storage facilities for rent through the National Cereals and Produce Boards (NCPB). Previous research with One Acre Fund (OAF) in Kenya found that offering smallholder farmers loans post-harvest or after three months increased the amount of grain stored. Farmers also stored grain longer in order to receive higher prices. The long term effects on seasonal price variation and farmer welfare are still not clear.

Evaluation Strategy

Building on their previous study, researchers will offer farmers loans for an additional two years to explore the effects on technology adoption, farmer profits and welfare, and local market prices. Stored maize serves as loan collateral, and all farmers who receive loans also receive a laminated tag with OAF’s logo attached to farmers’ stored maize. Researchers will offer loans to the same 232 groups of farmers in in Bungoma and Webuye counties in Kenya that were included in the earlier study. The groups are as follows:

Post-Harvest Loan: 77 groups (474 farmers) were randomly selected to be offered a loan directly following harvest in September or October.

Post-Harvest +3 Loan: 75 groups (480 farmers) were randomly selected to be offered a loan three months after Harvest in January.

Comparison Group: 80 groups (635 farmers) were offered no loan 

Researchers will also test whether trader underutilization of NCPB facilities is due to the rental costs. 120 traders will be randomly offered one of three subsidies on the rental rate: one-third subsidy, two-thirds subsidy, and no subsidy.  Researchers will then measure whether this increases storage among traders and the effects it has on seasonal price variation in local markets.

Results and Policy Implications

Take-up rates for both loans were high at 60-70 percent and results indicate farmers increased both storage and net revenues. Farmers who received loans saved approximately twenty percent more maize than farmers who did not. Net revenue increases were small (10 USD) and increases in per capita consumption were small and not significant. It is important to note that the harvest season was unusual as prices only increased by 20-30 percent rather than doubling at the peak period, which may have affected farmers’ profits.

The results also suggest that the timing of a loan matters as farmers who received a loan in October – immediately after harvest – held onto more maize, made more money and increased their per capita consumption. Their return on investment after loan repayment was twenty percent.

Additionally, by geographically varying the density of loans offered, researchers were able to estimate market price effects (i.e. how the loans and resulting storage behavior affected local market prices). In areas with a high density of loans, post-harvest prices are significantly higher, which is consistent with more grain storage among treatment farmers. Higher prices also benefit farmers who did not receive a loan and sold grain immediately post-harvest. This indicates that creating widespread access to credit may help reduce seasonal variations in price and also affect the benefits of credit. Overall the results suggest that increasing access to credit can increase farmers’ storage, revenue and consumption and that loans issued immediately after harvest are most effective.

Timeline

2014-

Photo Credit: Gilbert Membar, Bosco and his family with their maize harvest, Kenya (One Acre Fund).