Storage, trade, and price policy under production instability : maize in Kenya

In Kenya, the staple of maize has been subject to government regulation since the early colonial period in an effort to ensure proper supply and affordability. This paper uses a simulation approach to measure the cost of Kenya"s current maize price band policy - in which maximum and minimum prices are set by the government - against the cost of an "optimal policy" - in which domestic prices are sensitive to world prices, domestic production, and government stocks. Price band policies, which have been almost constantly in use since Independence, have required the National Cereals and Produce Board (NCPB) to market most of the country"s supply and to purchase all excess stocks of maize at prices set before planting. According to the report, the NCPB has failed to effectively carry out such a policy. In years of surplus, absorbing maize overstock has delayed payouts to farmers and strained the NCPB"s limited financial resources. In years of shortage, importation restrictions, corruption, and bureaucratic inefficiency have resulted in inadequate supply. Implementation complexities, however, make a full shift to a market-sensitive optimal pricing policy undesirable. Instead, a gradual introduction of optimal policy aspects is recommended to enhance fiscal efficiency without jeopardizing price band simplicity. In support of such a change, the paper concluded that: (1) adding price flexibility would generate revenues to better enable the NCPB to defend official prices and (2) the degree of price flexibility required to achieve significant cost savings in the price band policy would not be large.