Fishy deals loom in maize market

The current conditions in the maize market have created a perfect environment for another maize scandal.

Maize prices have hit the roof. In some parts of the country, reports say that the price of a two kilo pack of maize has hit Sh120 from Sh80 a few weeks ago.

I think that the rapid and unpredictable rise in consumer prices of this commodity is not necessarily the result of scarcity.

People with large stocks - farmers and traders- have looked at the poor weather conditions and calculated that prices will go up. Market conditions are telling them to hold onto their stocks.

In January this year, President Uhuru Kenyatta directed the National Cereals and Produce Board (NCPB) to purchase two million bags of maize from farmers at Sh2,500 per 90Kg bag.

But as it turned out, the National Cereals and Produce Board (NCPB) only managed to buy 418,000 bags from farmers.

Two factors contributed to the poor response by farmers. First, the vetting process that NCPB introduced to determine genuine farmers and to ensure that only maize from them was accepted only served to introduce inordinate and bureaucratic delays in the process. Secondly, even as NCPB was buying maize, market prices rose rapidly, outpacing the politically and administratively-set prices announced in January. In the circumstances, the farmers were faced with two choices: having to go through lengthy and time-wasting vetting by the NCPB or selling directly to traders who were not only offering better prices, but were also paying cash on the spot.

But why do I say that current market conditions provide a perfect setting for another maize scandal? It’s because we are right now in a situation where the largest stocks of maize in the country are in the hands of the government. If you add the maize purchased during the just concluded buying programme, the estimate is that NCPB is now sitting on about four million bags.

We must not forget that when he made the big announcement in January, Mr Kenyatta also directed that some 1.7 million carry-over stocks in NCPB’s stores and warehouses would be released to the market at Sh1,600 per bag. As it turned out, selling cheap maize at a price of 1,600 per bag at a time when the board was active in the market also buying from farmers at Sh2,500 per bag was dropped.

The upshot is that the NCPB is still holding these stocks of cheap maize. What method will the NCPB use to sell this cheap maize in its stores? We must not go back to allocation committees and letters from Kilimo House. When you have a market with multiple price regimes, you create opportunities for payoffs, transfer pricing and arbitrage. What we have now is a perfect environment for what economists call arbitrage: once you get an allocation letter from a powerful government official, you sell that allocation letter in the secondary market to a miller at a handsome profit. Those who are able to peddle influence between Kilimo House and NCPB offices become overnight millionaires, exploiting the huge difference between the cheap maize from NCPB and the prices in the open market. Maize allocation committees, price controls, quotas and subsidies will always promote rent-seeking behaviour.

If the cheap maize is to be sold, let the government come up with a method that is not only transparent but is also capable of delivering good prices to consumers of maize meal. Instead of selling most of the subsidised maize to millers, why can’t the NCPB use its extensive network to sell directly to consumers, the majority of who buy their maize meal from hammer mills.

Contrary to popular belief a far greater majority of citizens of this country do not consume processed and packed maize meal.

With a total of 110 outlets spread throughout the country, the NCPB has the capacity to sell the cheap maize directly to small traders and to consumers who take their maize to hammer mills.

My mind is still fresh on what happened during the 2010 maize scandal. A well-intentioned maize subsidy programme was turned into a gravy train. Influence peddlers and briefcase commodity traders became overnight millionaires. Let’s have a more transparent arrangement this time round.