Price risk and small farmer maize storage in Sub‐Saharan Africa: New insights into a long‐standing puzzle

Abstract

Maize prices fluctuate across seasons in rural markets in many low income countries, and agricultural households struggle to sell their grain at an optimal time. We provide new insight into a persistent puzzle: small farmers in lowincome countries tend to sell their maize at harvest, when prices are low, rather than storing and waiting until prices increase later in the year. Our descriptive analysis uses 20 years of data from 1038 retail markets in 30 African countries to demonstrate that the lean season price (the "high price" season) fails to rise above the harvest season price (the "low price" season) 16.3% of the time on average in countries with a single maize season and between 15.9% and 24.9% on average in countries with two maize seasons. On the basis of that stylized fact, we propose that aversion to these negative returns may contribute to farmers' decisions to opt out of storage at harvest. Using a smaller dataset of 425 retail markets in 10 countries with a single maize season, we show that even moderately risk averse farmers would opt out of storage in 15.3% of market years. Farmers cannot always predict returns to storage and output price risk may dissuade farmers from storing maize for the purpose of future sales, despite credit access. Our results indicate that other mechanisms, such as forward contracts or multiyear credit, may be necessary to mitigate downside price risk.

Incentive mechanisms to exploit intraseasonal price arbitrage opportunities for smallholder farmers: Experimental evidence from Malawi

“…Similarly, groundnut prices did not increase in only 4 years, and soybean prices did not increase in 7 years. These findings are consistent with recent evidence from Cardell and Michelson (2022) who found that across 30 countries in SSA over 20 years maize prices did not rise between harvest and lean season nearly 16% of the time on average. In total, this information suggests that legume crops are relatively more viable as a stored commodity to exploit price arbitrage opportunities compared to maize in Malawi.…”

“…In this study, we focus on legumes, specifically groundnuts and soybeans, because their prices typically exhibit relatively larger seasonal price variations and fetch higher prices compared to maize. This is in line with empirical evidence from some recent studies in SSA that find limited price seasonality in maize during certain seasons (Abass et al, 2014; Burke et al, 2019; Cardell & Michelson, 2022; Channa et al, 2022). The Ministry of Agriculture's monthly price data for Malawi from 1989 to 2017 also showed larger intraseasonal variations in average prices for legumes relative to maize between harvest and lean season (Appendix 1).…”

Agricultural windfalls and the seasonality of political violence in Africa

“…The other insight relates to interventions aimed at motivating storage in rural Africa. Indeed, one of the persisting puzzles has been the low storage uptake by farmers in sub‐Saharan Africa (e.g., Cardell & Michelson, 2022). Whether selling the crop at harvest or storing it for later sale reduces the risk of becoming a target of violence is an important question for future research.…”

Subjective preferences, liquidity constraints and price risk management under large-scale farm management

“…Findings suggest that storage conditions (Aggarwal et al. , 2018; Tesfaye and Gebremariam, 2020), liquidity constraints (Cardell and Michleson, 2023; Kadjo et al. , 2018; Stephens and Barrett, 2011), and subjective preferences like risk attitudes (Ruhinduka et al.…”

“…Some scholars have focused on China and other developing countries, conducting research on farmers' price-risk-management behaviors in these countries. Findings suggest that storage conditions (Aggarwal et al, 2018;Tesfaye and Gebremariam, 2020), liquidity constraints (Cardell and Michleson, 2023;Kadjo et al, 2018;Stephens and Barrett, 2011), and subjective preferences like risk attitudes (Ruhinduka et al, 2020;Bellemare et al, 2021) can affect farmers' selling behaviors and their management of agricultural product price risk. Although these previous studies greatly contributed to our understanding of farmers' agricultural risk management, several gaps remain.…”