SPATIAL MARKET INTEGRATION AND PRICE TRANSMISSION OF SELECTED GROUNDNUTS MARKETS IN ZAMBIA

ABSTRACT
With increasing population in the main consumption regions of Zambia, there is a persistent shortage in the supply of groundnuts especially in Lusaka and the Copperbelt regions. This is despite the major producing areas of Eastern and Northern regions having significant surpluses. This is a clear indication of market failure to stimulate groundnut production and distribution in addition to excessive price volatility, information asymmetry, and lack of organized and consistent markets. Knowing about the extent of market integration and price transmission in groundnut markets is important for agricultural policy decisions. The general objective of the study is to investigate the degree of integration and price transmission among geographically separated groundnut markets in Zambia in order to enhance the flow of market information among groundnut market participants. The specific objectives of the study are to characterize the spatial price differentials of groundnuts between deficit and surplus areas, to determine the extent of market integration between the deficit and surplus areas and lastly, determine the speed of adjustment in the retail prices between the surplus and deficit areas. The study analyzed monthly average retail price data covering the period from January 2001 to March 2017. Descriptive statistics revealed that consumption regions had the highest nominal mean prices with Lusaka and Kitwe recording K12.32 and K8.82 per Kg respectively while the producing regions recorded the lowest mean groundnuts prices. The Augmented Dickey-Fuller (ADF) and Kwiatkowski Philips Schmidt Shin (KPSS) tests were both used to test for stationarity, Johansen Co-integration test was used to test for long- run relationships among the variables while the Vector Error Correction Model was used to ascertain the speed of adjustment between the deficit and surplus areas. Both the ADF and KPSS showed that Chipata, Chadiza, Petauke and Kasama markets were non-stationary at level, meaning that the prices in these markets had a unit root process, but Lusaka and Kitwe prices were stationary at their original levels. However, after the first difference, all the markets were stationary and significant at 1 percent level. After establishing that there was Stationarity among the variables, Johansen Co-integration test showed the existence of co- integration at 5 percent level of significance. Furthermore, granger causality showed bi- directional causality between Kitwe and Chadiza markets. The VECM showed that after exogenous shocks, most of the corrections were made by the urban markets which are the deficits markets. The study recommends that policy makers or private and public development practitioners should consider development and constant use of market infrastructures in order to enhance efficiency in the groundnut markets.

CHAPTER ONE 
INTRODUCTION 
Background to the study 
Agriculture continues to be one of the key priority sectors in Zambia as it contributes to the country’s export base and general growth of the economy. The agricultural sector contributes 20 percent towards the country’s Gross Domestic Product (GRZ, 2013). In 2015, the agriculture sector contributed 8.5 percent towards the Gross Domestic Product and 9.6 percent of the national export earnings (Chapoto and Chisanga, 2016). The sector is dominated by smallholder farmers growing a variety of crops for their livelihood and income generation as it acts as a source of employment. With around 58% of the Zambian population living in absolute poverty, the sector has remained the prime blueprint to the achievement of the New Sustainable Development Goals (SDGs) designed to alleviate poverty and hunger in all its forms (UNDP, 2013). 

As a result, agriculture has continued to receive priority attention by the government of Zambia through increased budget allocation. This is in an effort to increase agricultural productivity that will, in turn, increase food security, employment rates and reduce poverty (ZDA, 2011). Despite the importance of the agricultural sector as a whole, the government has given much priority to maize production which takes up more than 60% of the share of arable land (CSO/MAL, 2011). Other vital crops like groundnuts among others are given less consideration. 

Groundnut is the fifth most widely grown crop in the Sub Saharan Africa after maize, sorghum, millet and cassava (FAO, 2010). However, it is the second most widely grown crop after maize by smallholder farmers and constitutes 8% of arable land in Zambia (Mukuka et al., 2013; Chapoto and Chisenga, 2016). The crop thrives well on a vast range of conditions with the majority of smallholder farmers in Zambia and SSA growing exclusively for both consumption and as a cash crop (FAO, 2008). The major groundnut-producing areas in Zambia are Eastern and Northern Provinces in agro-ecological zones I and II, which are suited for its cultivation (MAL, 2012). In Eastern province, smallholder farmers produce 30 percent of national production (CSO, 2011). 

Groundnuts are not only rich in proteins, but also a source of income for rural households. The crop also serves as an important raw material in the manufacturing of products such as peanut butter, oil and animal feeds. Also, as a legume crop, it provides nitrogen fixation thereby enhancing soil fertility (Setimela et al., 2004). In the years between 2000 and 2011, land under groundnut production was expanded by 22% with over 18% of the farmers in the country joining groundnut production. This led to significant increases in groundnut yields in the country (Zulu et al., 2014). As an incentive, farmers need stable and competitive prices for their groundnuts. 

Agricultural markets and market information are cardinal for effective participation of smallholder farmers in agricultural markets (Mawazo et al., 2014). Smallholder farmers, particularly groundnuts producers, have challenges to access market information such as the price of a commodity in the local markets (Ross and De Klerk, 2012). This, in turn, affects the producers’ capacity to participate in informed and profitable trade as well as taking advantage of seasonal and spatial arbitrage. Due to the lack of market price information, smallholder farmers will only negotiate for the price that the buyers provide, hence jeopardizing their marketing decisions. 

The defunct National Agricultural Marketing Board (NAMBOARD) had traditionally been responsible for the buying and selling of agricultural commodities. This conditioned private traders to obtain licenses for every agricultural product they wanted to engage in. Furthermore, obtaining licenses was not an easy task, as such entry into the market was highly restricted. This made the government through respective agencies to be responsible for determining prices of agricultural commodities. It was, later on, discovered that government involvement in pricing commodities prevented competition among traders leading to farmer exploitation that affected farmers’ morale. As an incentive, the Zambian government saw it befitting to liberalize markets in 1992 to improve market sufficiency (MOA, 2004). 

Several strategies and policies have been put in place to enhance market access, market information and market participation by smallholder farmers. The National Development Plan is committed to the aspirations and determination of the country to foster a prosperous middle-income status through the two main economic pillars of Vision 2030 and the New Sustainable Development Goals (GRZ, 2013). This can best be achieved by creating a favourable environment for the growth of the agricultural sector by taking the interest of the smallholder farmers who are the majority. To successfully implement this, a study on agricultural crop market performance and its associated price dynamics will be a vital contribution to an effective marketing system of agricultural products. 

Despite the government embarking on these policies, groundnut marketing in Zambia has remained inefficient with farmers experiencing excessive price volatility, information asymmetry and lack of organized and consistent markets (Ross and Klerk, 2012). These inefficiencies in the market have led to the acute demand of groundnuts in the scarcity areas despite the surpluses in the main groundnut producing areas (Ross and Klerk, 2012; Mofya- Mukuka and Shipekesa, 2013). Hence, there is the need to establish an efficient and well- coordinated market system capable of effectively transmitting price signals among markets in spatial locations and distribute groundnut from surplus regions to regions of demand. This will assist in regulating and monitoring groundnut prices in different markets. 

The study explored the network of buyers, sellers and other actors that converge to trade in a particular product (groundnuts), thereby determining the pricing efficiency in the market. This would help to ascertain the extent to which spatial markets are integrated. To do so, the study focused on certain markets in Eastern and Northern Provinces which are the major producing areas. Additionally, the study also focused on Lusaka and Copperbelt Provinces that have traditionally been regarded as the main consumption areas (Chiwele et al., 1998). There is need to identify areas that are plunged with chronic groundnut deficit to devise an appropriate mechanism for ensuring that the area has enough food all the time. However, regulating and monitoring of prices cannot be done in each area or village of Zambia. This can be done through selecting few markets and establishing if these markets are integrated or not. 

Economic theory suggests that optimum distribution of resources can be attained if markets and marketing channels are functioning properly. Spatial market integration approach is used to test relationships between markets. Market integration exists when there are co-movements in prices of similar commodities in different markets and if trade occurs across spatial markets. According to Goletti et al. (1995), the study defined spatial integration as a smooth price transmission of both information and price signals through across markets. A well- integrated market is cardinal for a well-functioning market economy. Ahmad and Gjolberg (2015) argue that spatial price relationships have often been used to indicate overall market performance. Also, an understanding of spatial market integration enables policy makers to formulate good economic policies. 

When markets are integrated, food commodities flow from surplus to deficit areas. Deficit areas are usually associated with high prices, thereby creating an incentive for traders to bring food from surplus areas to deficit areas. Rational traders will join the market and capitalize on these arbitrage opportunities increasing the demand for the commodity in the surplus area while increasing supply of the commodity in the deficit areas. This tendency continues until the prices in both markets reach an equilibrium level. Thus, trade at this point is unprofitable (Semira, 2014). 

The price differences that cannot be explained by transportation and transaction costs show inefficient arbitrage and most likely the presence of market power. When markets are not integrated, it reflects the existence of imperfect competition, poor infrastructure and missing institution that disturb the efficient flow of commodities (Ahmed and Gjolberg, 2015).

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Item Type: Kenyan Postgraduate Material  |  Attribute: 64 pages  |  Chapters: 1-5
Format: MS Word  |  Price: KSh900  |  Delivery: Within 30Mins.
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