WHY THE GROUNDNUT VALUE CHAIN IN MALAWI: Setting the Scene

Presentation at Multi-stakeholder workshop on Groundnut Value Chains in Malawi and Zambia

At Crossroads Hotel, Lilongwe, Malawi24-26th April 2013

Dr Gideon E. Onumah(Marketing/Finance Economist, Natural Resources Institute, University of Greenwich, United Kingdom)

G.E.Onumah@greenwich.ac.uk

Ms Candida Nakhumwa(PhD Student, Natural Resources Institute, University of Greenwich, United Kingdom)

C.Nakhumwa@greenwich.ac.uk

Agriculture and the Malawi economy

• Contributes around 34% to the GDP • Accounts for over 80% of Malawi’s export

revenue, 84% of labor force • Agriculture is closely linked to economic short-

term growth (particularly tobacco, which accounts for 60% of the country’s exports and half the Government’s tax base)

• Risk: Heavy reliance on tobacco exports, a crop with declining global demand prospects

• Therefore Malawi urgently requires to diversify its export base

Groundnut: suited to pro-poor growth

• Groundnut is one of the strategic crops in the National Export Strategy (NES) and also MGDSII

• Majority of farmers in Malawi, including women, have long history and experience in the growing of groundnuts.

• Groundnut requires less inputs compared to other high valued crops such as tobacco

• It is grown for both food and income generation• Groundnut provides 25% of smallholder

household income in Malawi (Diop et al., 2003). • Builds soil fertility and therefore will help

replenish the declining soil fertility

Can Malawi return to old heights in groundnut export?

• Groundnut exports ranked second only to tobacco in terms of foreign exchange earned by Malawi

• The country lost its share of the world market for groundnuts in the mid 1980s.

• This is due in part to high incidence of aflatoxin and at a time when the EU imposed stringent standards on aflatoxin.

• Other supply side factors also contributed to decline in groundnut exports

• The evidence is: Malawi has the natural endowment but is unable to meet domestic and regional demand as well as regain its foothold in the global market

Supply-side challenges: at producer level

• Lack of/inadequate quality seed and extensive use of low-yielding recycled seed

• Poor access to credit, limiting farmers’ ability to procure yield-enhancing inputs

• High rural labor cost – due in part to competition for labor from other high valued crops such as tobacco

• Emerging impact of climate change – particularly increasing incidence of midseason drought, making farmers more vulnerable and scaring banks

• Limited access to farm extension – under-funded public extensions institutions

• Poor pest and disease control• Poor management of aflatoxin contamination at both

production and post harvest levels Science and technology can address some of these challenges

but is it sufficient (enough investment and on its own)??

Marketing constraints in groundnut chains

• Smallholder farmers who dominate groundnut production of have difficulty accessing markets

• Producer prices are often squeezed as a result of the following:- Poor rural road infrastructure contributes to high inflate transport costs- Lack of efficient storage infrastructure leads to high post-harvest losses- Traders are severely under-capitalized and, therefore, unable to absorb

surplus at harvest. This leads to glut and very low prices at harvest- Marketing chain is often long with several intermediaries, leading to low

producer margins• Considerable cheating on weight occurs in the trade - Reported that nominal price at farmgate is often very close to into-

warehouse price paid by NASFAM• Quality premium is not paid at farmgate level due to:- Small size of quality-sensitive market: insignificant volumes export under

Fairtrade; low volumes to SA; domestic formal/regional markets do not enforce quality standards

Going forward: holistic/value chain approach needed

• Not just science and technology: breeding, inputs subsidies, inputs credit, enhanced farm extension and improved post-harvest management:

- Double your yield not always equal to double your farm income • Holistic VCA can help identify opportunities to be

exploited and intervention areas to improve competitiveness and chain-wide efficiency.

- Market-based approaches need attention

Going forward: market challenges

• Emerging evidence suggests that price incentives matter in fostering adoption of improved tech and better husbandry practices but currently:

- Fairtrade market – size too small and margins too low (farmers virtually taxed to fund community programmes)

- Regional market quality-sensitive market (mainly South Africa) – growing but sorting and grading occurs at exporter level denying farmers opportunity to gain from quality premium

- Sizeable domestic formal market does not enforce quality standards, putting consumers at risk

- Similar situation in other regional markets (predominantly informal)

Going forward: some options

• Expand size of quality-sensitive market and create space for farmers to enjoy quality premium through:

- Enforcing quality standards in formal domestic market - Fostering more formal regional exports – collaboration between

farmers organisations may be an option e.g. EAFF, SACAU- Enforcing quality controls at exit ports to regional markets as formal

market expands- Sensitisation of the population may be helpful- Need to strengthen domestic quality enforcement capacity

Going forward: some options (2)

• Strengthen role of primary-level farmers organisations in groundnut marketing:

- To lower aggregation cost and improve quality at farmgate level- Case of Tanzania coffee where primary organisations have been more

effective

• Promote institutional infrastructure and regulatory framework that encourages investment in trade and logistics infrastructure:

- Working with the commodity exchange is one option