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"ANALYSIS OF WHEAT PRICING POLICY IN ZIMBABWE  by  THEODORA MERCY KAVIZA B.Sc., Odessa Institute of National Economy, 1980 M.Sc., Odessa Institute of National Economy, 1982  A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF SCIENCE in THE FACULTY OF GRADUATE STUDIES (Department of Agricultural Economics)  We accept this as conforming to the required standard  THE UNIVERSITY OF BRITISH COLUMBIA September 1992 \u00A9TheodraMcyKviz  \u000CIn presenting this thesis in partial fulfilment of the requirements for an advanced degree at the University of British Columbia, I agree that the Library shall make it freely available for reference and study. I further agree that permission for extensive copying of this thesis for scholarly purposes may be granted by the head of my department or by his or her representatives. It is understood that copying or publication of this thesis for financial gain shall not be allowed without my written permission.  (Signature  Department of Agricultural Economics The University of British Columbia Vancouver, Canada  Date ^  DE-6 (2/88)  \u000CABSTRACT  In Zimbabwe, wheat is the principal crop planted in winter occupying about 95 percent of winter planted acreage, it is also one of the most tightly regulated of the controlled crops. Even though Zimbabwe's wheat industry is well developed by regional standards, domestic production has not kept pace with demand making imports necessary, draining scarce foreign exchange and heightening concerns about national food security. The study has reviewed how pricing policy has to date affected production and consumption trends of wheat. Three forms of policy intervention have been identified in the wheat industry in Zimbabwe: The producer price of wheat is consistently set below the world price. -  A subsidy on imported wheat to the millers is maintained in order to keep the consumer price of wheat and wheat products low.  -  The government through foreign currency controls limit the amount of wheat that can be imported into the country.  Using a Nerlovian Dynamic Supply Response Model the price supply elasticity of wheat in Zimbabwe was estimated, and used to construct a model of the wheat industry. The results of the model were then used to evaluate the impact of different policy interventions on wheat production, through policy simulation. Government policy in Zimbabwe taxes wheat producers while subsidising the consumers, thus current policy acts as a ii  \u000Cdisincentive to increased output supply on the one hand, while it encourages increased demand on the other. Although studies from other countries show that wheat production is responsive to price incentives, the results of this study however show a very low short run price responsiveness (0.11). Thus raising producer prices, without redressing all the other factors affecting wheat production such as cost and availability of irrigation facilities, prices of substitutes etc, would have limited impact on total production. This study quantified the welfare effects and foreign exchange costs of current and alternative policy scenarios. Current policy in the wheat industry taxes the producers in excess of $39 million which is partly transferred to consumers and partly to government as revenue. Imports cost the country about $33 million in foreign currency in addition to a consumer subsidy of $4 million. The study also showed that uncompensated losses accounted for $1.08 million. The question for Zimbabwe is how to create the necessary conditions to increase price responsiveness, i.e what policy changes are necessary to increase total supply of wheat. The overall conclusion is that there is not a simple low cost option to redress the situation in the wheat industry in Zimbabwe. The situation calls for a review of all the policy instruments currently in place, in addition to external factors such as the world price of wheat.  iii  \u000CTABLE OF CONTENTS Abstract ^ Table of Contents ^ List of Tables ^ ^vi  List of Figures  ^vii  Acknowledgements CHAPTER 1 1.1 1.2 1.3  ^ INTRODUCTION Study Objective ^ Methodology ^ Research Procedure ^  CHAPTER 2 2.1 2.2 2.3 2.4 2.5 2.6 2.7  CROP PRODUCTION IN ZIMBABWE The Role of Agriculture in Zimbabwe Geo-Physical Regions and Agro-Ecological Regions Climatic Conditions ^ Crop Production in Zimbabwe Agricultural Pricing Policy Objectives ^\u2022^\u2022^\u2022 ^ Price Setting Procedures Land Distribution: Policy Implications ^\u2022^\u2022^\u2022  6 6 7 10 11 13 15 18  Chapter 3 3.1 3.2 3.3 3.4  ^ THE WHEAT INDUSTRY IN ZIMBABWE Development of the Wheat Industry: ^ Wheat Production and Consumption Trends:^.^\u2022^\u2022 ^ Policy Options for Wheat in Zimbabwe ^ Literature Review'  21 21 24 27 30  CHAPTER 4 APPLICATION OF THE NERLOVIAN SUPPLY RESPONSE MODEL TO WHEAT PRODUCTION IN ZIMBABWE^.^. . . 4.1 Explanatory Variables ^ 4.2 Model Specification ^ 4.3 Estimation Procedures ^ ^ 4.4 Model Validation 4.5 Assessment of Data used ^ ^ 4.6 Discussion of Regression Results 4.7 Price Supply Elasticities ^ 4.8 Conclusions  41 41 44 48 55 56 58 60 61  CHAPTER 5 5.1 5.2 5.3 5.4  POLICY SIMULATION ^ Price Policy Analysis:^Theoretical Perspectives Effects of Policy Intervention*^ Policy Simulation Exercise ^ ^ Sensitivity Analysis  iv  1 4 4 5  62 62 64 68 73  \u000CCHAPTER 6 CONCLUSIONS AND POLICY IMPLICATIONS 6.1 Conclusions* 6.2 Policy Implications* 6.3 Issues for Future Research  APPENDICES ^  ^75 ^76 ^77 ^83  87  BIBLIOGRAPHY ^  91  V  \u000CList of Tables Table 1  Production of Principal Commercial Crops  .^\u2022 \u2022  12  Table 2  Wheat Production and Consumption Trends .  .^\u2022 \u2022  26  Table 3  Summary Regression Results  Table 4  Model Results  Table 5  Demand and Supply Elasticities of Wheat .  Table 6  (1) Effects of Pricing Policy ^  74  (2) Welfare Effects ^  74  Results of Sensitivity Analysis ^  76  Table 7  ^  52 53  vi  .^. .  63  \u000CList of Figures Fig 1^Wheat Production and Consumption in Zimbabwe  ^2  Fig 2^Agro-ecological Regions of Zimbabwe  ^9  Fig 3^Factors Influencing Production and Consumption of Wheat  ^33  Fig 4^Observed and Predicted Acreage  ^55  Fig 5^Plot of Residual Errors  ^56  Fig 6^Effects of Policy Intervention.  ^70  vii  \u000CACKNOWLEDGEMENTS  My sincere thanks to Dr. Mary Bohman for her invaluable supervision of this thesis, Dr. Rick Barichello for helpful comments and Dr. Peter Boothroyd for his support and faith in me. I am also grateful to Gwynne, Retha and Kathy who in many different ways helped get this thesis done, and to all the friends I made while I was in this Department. Special thanks to my husband Ronald, my son Mudhi and my daughter Mindo, for their warmth and affection and their belief in me. Indeed, I am forever indebted to all my family and friends for their prayers and love. I am also grateful to the University of Zimbabwe for giving me this opportunity and to CIDA for financial support. I dedicate this thesis to the memory of my brother Kennedy Masawi, may he rest in peace. In Almighty God we trust.  viii  \u000CCHAPTER 1 1.0 INTRODUCTION  Rapidly increasing demand in Zimbabwe for wheat products, particularly bread, has generated interest in wheat production and consumption policies. Agricultural policymakers face the problem of how to bridge the gap between local production and demand of wheat as shown in figure 1. Zimbabwe now imports wheat, resulting in a drainage of scarce foreign currency thereby heightening concerns about national food security. An important question in the food security debate is whether or not wheat production should be expanded. Zimbabwe's population growth rate is estimated at 3.6 per cent per annum which is among the highest in Africa. The net effect is that the Zimbabwe population will double over the next twenty years. The average annual growth in volume of production in the 1980s was 2.6 percent for food compared to 3.8 percent for non-foods. Productivity gains in food production have therefore been more than offset by population growth. The threat of food shortage is further compounded by the fact that since 1982 the economy of Zimbabwe has experienced a downward trend as a result of a combination of internal factors such as a high population growth rate, and the drought, besides external factors. The global recession and certain overseas policies have reduced the demand for Zimbabwe's exports, depressing foreign currency earnings, and increasing the country's balance of payments deficits leaving Zimbabwe with the need to limit its dependence on imports.  1  \u000CSimilar to the situation in many tropical countries, wheat has become a staple food in Zimbabwe, especially for urban consumers. Wheat consumption has increased as a result of consumers' rising incomes and interest in convenience foods and the desire for a more diversified diet. Longmire and Byerleel have estimated per capita consumption of wheat at 16 kilograms per year for Sub-Saharan Africa. More importantly, governments have encouraged the consumption of wheat and wheat products through favourable pricing policies for bread. Government supported large scale investments in capital intensive milling and baking industries, have also helped expand demand for wheat. Wheat is mostly grown by large scale commercial farmers who are sensitive to profitability considerations. This feature of the commercial sector makes it especially important that policymakers get prices right in establishing agricultural production priorities. Studies on wheat production in Zimbabwe (Longmire et al 1986)2, and studies on wheat production in the tropics, such as CIMMYT publication on \"Wheat in More Tropical Environments\"3 put low profitability as the major constraint to wheat production, making pricing a major concern in considering the problems of increased wheat production.  Byerlee D.and J. Longmire \"Wheat in the Tropics Whether and When\" CIMMYT, Mexico (1985) 2  Longmire P., P.Ngobese, S. Tembo \"Wheat Policy Options in Zimbabwe and SADCC Countries\" (1986) 3  Byerlee D \"Wheat in Tropical Environments\" CIMMYT Economics Program, Mexico (1985) 2  \u000CWheat Self-Sufficiency Levels  1982-1990  83 84 85 86 87 Year Production ^ Consumption  \u000C1.1 Study Objective:  This study will therefore review how pricing has to date affected production trends in the wheat industry, how the same pricing policy if maintained will affect the industry in the future. Finally, the effects of alternative policy options facing the wheat industry in Zimbabwe, will be simulated for their impact on producers and consumers, government revenue and foreign currency. The following questions will be addressed -  How does the agricultural pricing policy in Zimbabwe affect wheat production and consumption?  -  What policy changes are necessary to resolve the \"food policy dilemma\" which stems from the conflict of interest between the producers and consumers?  1.2 Methodology:  In order to achieve the objective of this study, the price supply elasticity for wheat in Zimbabwe will be estimated, which will be used to construct a model of the wheat industry in Zimbabwe. The results of the model will be used to evaluate the impacts of different policy interventions on wheat production. I will not estimate the demand elasticity but I will use estimates from other studies. Sensitivity analysis will be used to explore the robustness of the policy analysis to elasticity values. 1.3 Research Procedure  Chapter 1 covers the introduction, the problem statement 4  \u000Cand the objective of the study. Chapter 2 provides the background to the agricultural sector in Zimbabwe, the geo-physical and agro-ecological regions, the climate and the crop production. Chapter 3 reviews agricultural pricing policy and price setting procedures. Land distribution and its policy implications will also be discussed in this chapter. Chapter 4 deals with wheat production and the policy options for wheat in Zimbabwe. This is followed by a review of relevant literature on wheat in the tropics and more specifically on wheat production in Zimbabwe. Chapter 5 provides the empirical model and the data used in this study. This is followed by the results of the estimation, and their implications. Chapter 6 provides policy simulation based on the results of the study, provides conclusions and offers recommendations for future research.  5  \u000CCHAPTER 2  2.0 CROP PRODUCTION IN ZIMBABWE  2.1 The Role of Agriculture in Zimbabwe Agriculture is the backbone of Zimbabwe's economy, with more than 70 percent of the population dwelling and deriving their livelihood in this sector. The growth of the economy is largely conditioned by the performance of the agricultural sector which, in addition to providing more than 90 percent of the food requirements of the society accounts for 41 percent of total merchandise exports and contributes more than 25 percent to the GDP, making it the largest contributor after manufacturing. It is also the largest employer of labour, providing about 30 percent of total formal employment. The agricultural sector in Zimbabwe comprises three main sub-sectors, namely Large Scale Commercial Sector (LSC) Small Scale Commercial Sector (SSC) Communal Farming Areas (CFA). The LSC comprises about 5 400 farmers mostly white. This sector occupies 4.8 million of the 8.6 million hectares potential arable land. Land ownership in this area is under the free hold system. The SSC sector occupies the former African Purchase  6  \u000Careas4 and comprises about 9 000 black farmers occupying 1.4 million hectares of which only 0.5 million hectares are poten-  tially arable. The majority of this area is under free hold system with a small area still in the lease hold phase. The CFAs cover 16.4 million hectares of land with only 3.3 million hectares arable. The area has the country's highest population density with 700 000 black families living here. Land is held under the traditional tenure, i.e occupants have the right to use but do not hold title deeds.  2.2 The Geo Physical and Agro Ecological Regions -  -  Situated in tropical Southeastern Africa, Zimbabwe's principal geologic feature is a broad plateau that forms an elevated savanna region, or highveld through the centre of the country. Lower plateau regions on either side of it slope to three river basins: the Zambezi on the northern border, the Limpopo in the South, and the Sabi in the Southeast. Zimbabwe as shown in the map (fig 2) is marked by four regions defined primarily in terms of relief or altitude but associated in varying degrees with bio-climatic zones. The first of these is the Highveld, land between 1 200-1 500 metres extending through the centre of the country from southwest to northeast. The second region, land between 900 and 1200 metres is the Middleveld. As the descending plateau approaches the  4  African Purchase Areas Land set aside for purchase by Africans who wished to own land 7  \u000Cnorthern and southern borders marked by the Zambezi and the Limpopo rivers, it becomes the Lowveld, land under 900 metres. The most extensive area of Lowveld lies in the Limpopo and Sabi basins. The land here is gently undulating with areas of agricultural potential, limited mainly by the absence of water. The fourth region consists of the eastern highlands, which are mountainous in contrast to the plateau that characterises the rest of the country. These factors therefore are key influences on the availability of water, the types and patterns of vegetation and the spatial distribution of agro-ecological zones. Zimbabwe is classified into five main \"agro-ecological\" or \"natural regions\", wherein agricultural development is conditioned by a variety of dominant natural characteristics. This agro-ecological classification provides a good guide to the natural factors governing agricultural production. Natural regions I, II and III are dominated by LSC farmers producing cereals such as maize, wheat, sorghum and barley in addition to tobacco,cotton,oilseeds (groundnuts, soybeans and sunflower). Most Communal farming is confined to natural regions IV and V, with maize, tobacco, cotton and groundnuts as the main crops.  2.3 Climatic Conditions:  Although Zimbabwe lies within the tropics its altitude, relief and inland location modify the climate to create subtropical conditions over most of the country. The Highveld is cool while the Middle and Low velds are warm to hot during most 8  \u000Cof the year. The Eastern Highlands experience cool humid conditions and good well dispersed rainfall. Agricultural conditions are controlled by seasons. The cool dry season late May to mid August is a period of dry weather. Wheat may be grown under irrigation during this period, but low night temperatures and an almost total absence of rainfall prevent dryland cropping. The warm dry season mid August to late October is marked by a rise in temperature. The rainy season late October to late March varies considerably in character over the country. The type and distribution of rainfall is a major natural limitation to agricultural development. Much of Zimbabwe has a dry climate. The infrequent rainfall comes in heavy storms which cause severe erosion. The areas with the most fragile ecosystems suffer from both the drought and the rainfall variability, and only 8 percent of seasonal rainfall contributes to the annual stream flow. This small amount supplemented by limited amounts of groundwater provides the total national supply.  9  \u000CFig 2^Agro-ecological Regions of Zimbabwe  MT  . nmilinnlin. An MIS@ OneenunliMAk Ann nntilimniernasi.nr\" 40np nnillannth nnMS-IS ngnOVSABOOnn nnnni. n annannanS spun S \u2022\u2022\"11.12MOSS nenr.r.alit \u2022 .:Fif..: mynas MOO ns, AWL :i.i ...i.\".. ..7:1111SSSSOnnanliNS lignIISSInnnUMOSSC Maga onnannannn. Mange ennOnaMOOSI Alnnennegn MMMMM MSS n&amp;rminnnOnnignilininan, Oranna=0... .NIANDS. A -nlnlymn SININESe  Itogion I  2  LE! -  Major wheat-growing areas:  4  Highveld and Middleveld  FIA5  Lowveld  Source: Morris M.L. \"Comparative Advantage and Incentives for Wheat Production in Zimbabwe\" CIMMYT Economics Programme, Working Paper  10  \u000C2.4 Crop Production in Zimbabwe: Crop sales to the government marketing agencies from 1980 to 1990 are shown in Table I. Maize is produced by the majority of the commercial farmers and by all the communal farmers, except in the southernmost parts of the country where more drought tolerant millets are predominant. Production of maize has on several occasions approached 3 million tonnes, although production variability is high because most of the crop is grown under rain fed conditions. After maize the most important crops in quantitative terms are cotton, wheat, tobacco, soyabeans and groundnuts all of which are grown on both commercial and communal farms, except for wheat which can only be grown under irrigation and is grown only by the commercial farmers. Despite the fact that communal farmers are entering the market in increasing numbers, most commercial agriculture in Zimbabwe is still in the hands of the Large Scale Commercial farmers featuring high levels of input use, extensive mechanisation and high levels of management.  11  \u000CTable I^Production of Principal Commercial Crops 1980-1990 Maize  Wheat  Cotton  Tobacco  S/beans  G/nuts  ('000t)  ('000t)  ('000t)  ('000t  ('000t)  ('000t)  1980  2^813.2  207.9  157.6  120.0  97.4  77.7  1981  2^728.6  228.2  170.6  69.4  72.9  118.8  1982  1 785.8  251.1  134.9  89.2  91.6  111.4  1983  844.0  204.7  146.5  94.0  80.6  32.8  1984  1 283.0  207.2  221.7  116.9  98.7  25.9  1985  2^952.0  176.6  274.2  107.0  87.2  66.7  1986  2^486.0  189.0  247.2  84.0  72.4  73.2  1987  958.0  241.9  237.0  84.0  94.8  75.7  1988  2^034.0  245.5  323.3  84.0  120.4  87.9  1989  1 196.8  262.5  261.4  101.0  121.0  65.6  1990  1 165.6  242.2  224.7  n.a  108.0  77.2  %growth  -41  16  42  9  -1  Year  rates * g/nuts - groundnuts, s/beans - soybeans Source: Agricultural Marketing Authority (various issues), Morris L.M. Comparative Advantage and Policy Incentives for Wheat Production in Zimbabwe CIMMYT working Paper 12  \u000C2.5 Agricultural Pricing Policy Objectives  In its Transitional National Development Plan (19811985) the government outlined the main objectives of the agricultural sector as; -  achievement and maintenance of food self-sufficiency to ensure food security,  -  extension of the role of the agricultural sector as a major foreign currency earner,  -  a greater degree of economic security and welfare for the majority of the population who live in the rural areas.  There is no formal statement of national objectives specific to the wheat industry but it is assumed that the objectives which relate to the wider issues of national food security, foreign currency earning and improved welfare also relate to the wheat industry. It is on the basis of these agricultural objectives that the pricing policy is designed. Agricultural pricing in Zimbabwe is highly interventionist, with the producer and consumer prices of most major products being administratively determined. Thus the government uses pricing mechanism to influence production, consumption and marketing trends in the agricultural sector. At the heart of the pricing policy is the central role played by the price of maize, because of its weight in consumer expenditure and the high proportion of land and other productive resources dedicated to it by producers. To a considerable 13  \u000Cextent the price levels of most other crops are determined in relation to the price of maize. This interventionist policy framework dates to the 19305, and was part of government effort to provide producers with a framework of predictable prices to facilitate investment and planting decisions. After independence 1980 the objectives of price policy were reviewed to include: i)  provision of food for consumers at moderate prices,  ii)  promotion of the agricultural industry in the Communal areas,  iii) restraint of the growing budgetary cost of agricultural intervention, Clearly there are conflicts within and among some of these objectives. For example the need to restrain the budgetary cost of agricultural intervention conflicts with the desire for food security stock holding and also with expansion of the rural network depots designed to encourage production by making marketing facilities accessible. Because Zimbabwe's pricing policy is a holdover from the colonial era, in which it was designed to serve a small agricultural elite; present pricing policy is not necessarily optimal from an efficiency, equity or budgetary standpoint. The level of prices has had an important effect on resource allocation and has historically always favoured the LSC farmers. This problem is over shadowed by an even greater conflict. Providing producers with the necessary incentive to produce by raising the 14  \u000Clevel of their incomes conflicts with provision of food for consumers at moderate prices especially at a time when the economic situation in the country is forcing the government to reduce consumer subsidies. This is the core of the conflict of interests in agricultural policy in Zimbabwe.  2.6 Price Setting Procedures: Producer and consumer prices for the commodities handled by the marketing boards are set annually by the Cabinet on the basis of submissions from the Ministry of Lands Agriculture and Rural Resettlement (MLARR) which is itself a result of a complex process of analysis and lobbying. The lobbying starts with the Agricultural Marketing Authority (AMA) perspective of the marketing boards, and the Joint Presidents Agricultural Committee (JPAC) of the three farming unions. MLARR reviews the submissions with particular attention being paid to likely stock levels at the close of the marketing year, expected intake, domestic demand, export opportunities, and in respect to wheat the price and quantity of imports. Cabinet makes the final decision and the prices are effective for a year starting April 1. The process of price negotiations is subject to restrictions of confidentiality. It is possible however, to make general observations on the interplay between the different interests. In the great majority of cases, the final prices announced are identical with or very close to the recommendations of the MLARR. It is therefore justifiable to say that the 15  \u000Cpricing procedure is really based on the MLARR price analysis, which applies the following criteria5: i)  cost of production which is used to assess the likely effect of a given price on farm profitability, and the likely supply response in the following year,  ii)  supply and demand conditions, and stock levels are taken into consideration with relative prices between crops being given considerable attention,  iii) year-to-year variability of producer prices is considered with the goal that producers' price levels be predictable to facilitate decisions on investment and cropping patterns. Reviewing the criteria employed during the process of setting administered prices highlights some strengths and some weaknesses of the system. A strength of the system is that on a consistent basis it involves the main participants in the industry, allowing intensive discussion at both the technical and political levels. At its best it provides the mechanism for explicitly identifying conflicting objectives and enabling compromises to be arrived at. The continuity of the system also builds on institutional knowledge to a considerable extent. There are three principal weaknesses in the present analytical approach to price determination.\u00B0 Takavarasha T. and A. Rukovo \"Food Security Issues and Challenges for the 1990s\". In Mandivamba R., Mudimu G and Jayne T,eds. Food Security Policies in the SADCC Region (1990) 5  6  Ibid 16  \u000C-  First is the lack of well-based estimates of price elasticity for the main crops.  -  Second, the food security and income implications of alternative price levels are not systematically drawn out. Price analysis tends to be based on crop specific budgets without sufficient attention being paid to the farm or household context.  -  Thirdly, the MLARR do not have the means at their disposal to carry out research on the impact of alternative price levels on important variables such as supply and demand of the commodity, income distribution, public and private stocks levels and on the financial position of the marketing Boards.  In general, agricultural pricing policy since Independence has created an incentive structure for producers that is broadly consistent with the type of structural change in agriculture that government sought. Efforts by Government to promote diversification in production patterns towards higher value export crops appear to have been reasonably successful as far as the commercial farming sector is concerned. Those prices controlled by government have not generally kept pace with inflation, with the result that the real value of output prices has been falling. Since many of the major commercial crops are close substitutes in production, commercial farmers are able to shift from one crop to another. Therefore, relative price ratios have a large impact on output decisions. 17  \u000C2.7 Land Distribution: Policy Implications To be effective any agricultural policy in Zimbabwe has to take into account the political and economic implications of the historical perspective of land distribution, a factor which among other things explains why despite the fact that communal farmers have entered the market in increasing numbers since independence, most commercial agriculture in Zimbabwe is still in the hands of the Large Scale Commercial farmers. It also explains why alongside this highly successful commercial sector, featuring high levels of input use, extensive mechanisation and high levels of management, exists an impoverished peasant sector. The performance of Zimbabwean farmers is highly impressive even by international standards. During years of adequate rainfall, yields on commercial farms rival those achieved anywhere in the world, and Zimbabwe's two major export crops tobacco and cotton usually command quality premiums on world commodity markets. The distribution of land in Zimbabwe is highly skewed in favour of the white minority and, therefore, has been an especially controversial issue throughout the country's history. Preferential land policies for white settlers were an integral part of colonial policy which persisted until independence. During the war for independence land redistribution was an effective rallying point for the Nationalist forces, so that at independence expectations for redistribution were very high. The land policies before independence led to the European 18  \u000Carea being expanded through appropriations7, until it came to encompass a substantial portion of the granite based light sandy soils and a large portion of the more fertile loams in the country's Natural Regions 1,11 and III. The country's black population was pushed further into Natural Regions IV and V, marginal areas with the poorest soils,and prone to drought. In the late 1970s the whites in Zimbabwe held 62.6 percent of the land suitable for specialised farming and 73.8 percent of the land best suited for intensive crop and livestock production. Policymakers face the dual objectives of attempting to redistribute the land and other resources equitably, while maintaining the high level of productivity needed to sustain development in the sector. The two major issues regarding land that policymakers face are: i)  the extent and pace of land redistribution,  ii)  identifying the means for transferring land that minimises economic and social disruption.  To date only 162 000 families have been resettled compared to more than 666 000 families identified at independence in 19808. In attempting an equitable distribution of economic resources the government has deliberately kept the prices of those crops grown by the LSC at lower prices than those grown by the peasant sector. So the price of wheat has been kept low 7  Auret D \"A Decade of Development Zimbabwe 1980-1990\" The Catholic Commission for Justice and Peace in Zimbabwe (1990)  8  Thompson Publications Zimbabwe \"Zimbabwe A Field for Investment 1989/90\" Department of Information (1990) 19  \u000Cbecause of government fears that a high price to the wheat producers may be seen to be a continuation of the colonial policy to favour the white farmers. Therefore, until the land question is resolved or the government has invested in irrigation in such a way that some peasant farmers can also grow wheat the pricing policy will continue to disadvantage wheat.  20  \u000CCHAPTER 3  3.0 THE WHEAT INDUSTRY IN ZIMBABWE: 3.1 Development of the Wheat Industry in Zimbabwe:  As in most of Africa, wheat is assuming greater importance in Zimbabwe because of rapidly increasing demand. However Zimbabwe is one of the few African countries that grows significant quantities of its needs. Wheat was introduced in Zimbabwe in the 19th century by the European missionaries. A sizeable industry only developed in 1965 as a result of Unilateral Declaration of Independence (UDI)9 which reduced commercial grain imports and precipitated the need for self-sufficiency in basic cereals. In 1965\" only 4 000 tonnes of wheat were grown in the country meeting only 4% of total requirements. The nation's 2000 commercial farmers responded to the challenge in remarkable fashion, creating a viable wheat industry within a short period:\" Wheat is the principal crop planted in winter, occupying about 95% of the winter planted acreage. Other crops grown on a smaller scale are barley, oats and winter legumes. The summer crops grown in rotation with wheat are maize, soyabeans and 9  UDI Unilateral Declaration of Independence  10 Rukuni M. \"The Development of Zimbabwe's Agriculture 18901990\" Working Paper 7/90 Department of Agricultural Economics and Extension, University of Zimbabwe (1990) II Grain Marketing Authority Report and Accounts : Year ending March, 31 1990, Harare, Zimbabwe 21  \u000Ccotton. The study carried out by Longmire et al showed that maize was the principal summer crop grown in rotation to wheat. Several factors made the development of a domestic wheat industry possible. First, climatic conditions, i.e the cool winters, in Zimbabwe are generally favourable for irrigated wheat. Irrigation also makes yields quite stable. The national average yields are among the world's highestu at 4.5 tonnes/ha in the Lowveld and between 5.5 and 5.7 tonnes /ha in the Highveld where temperatures are lower. Whereas much of SubSaharan Africa is too hot for wheat, the Middleveld and Highveld of Zimbabwe have temperatures ranging from 0-20\u00B0C, well within the limits tolerated by wheat. Rainfed wheat in the summer is constrained by excessive heat and disease. Small amounts of wheat are grown at Kairesi range in the Eastern Provinces where the Research and Specialist Services are experimenting with summer rain-fed wheat varieties. Second, the similarity in production technologies between wheat and other crops grown in Zimbabwe made it relatively easy for commercial farmers to shift into wheat, while Government policies created strong incentives for commercial farmers to take up wheat production. In the later half of the 1960s, producer prices for wheat were maintained above import parity prices, and subsidised credit programs were introduced to promote wheat production. Zimbabwe's success in wheat is also  Agricultural Marketing Authority Economic Review of the Agricultural Indusrtry of Zimbabwe (1989) 22  \u000Cattributable to excellent research. The varieties most suitable are the dwarfs and semi-dwarfs, all developed within the country. Continuing research is essential, because the threat of rust limits the use of each variety to a period of 3-5 years only. Previous governments stimulated interest in wheat growing since 1965 by establishing high producer prices, well above import parity. At first most of the wheat was grown in the Lowveld on irrigated land developed by the Sabi-Limpopo Authority. However farmers in the highveld assisted by long term low interest loans from the government, invested in irrigation and highveld wheat production increased. Higher yields than in the Lowveld were achieved. Producer prices levelled off and decreased in the early 1970's as they became aligned to Highveld rather than Lowveld production costs. Production in the Lowveld decreased as more land was planted to crops such as sugar and cotton with higher returns. The government raised the producer price by the end of the 1970's to compensate for escalating input costs but it was kept below the border price. Zimbabwe is a high cost producer relative to world prices.13 Capital costs of establishing a new irrigation scheme for 1987 were estimated by the Commercial Grain Producers Association at $1 600/ha, 317 percent higher than in 1977. In the meantime operating costs have also risen steeply so that 13 Report of the Commission of Inquiry into the Agricultural Industry under the Chairmanship of Professor Gordon Chavunduka (p. 41) 23  \u000Csome established wheat producers have chosen to cut back production. This implies that while demand for wheat will continue to grow as a result of increased urbanisation, domestic supply will decrease even further.  3.2  Wheat Production and Consumption Trends: Consumption of wheat and wheat products has grown even more  rapidly than domestic wheat production (Table 2). Total consumption tripled in the past two decades, and per capita consumption doubled. The forces underlying this rapid increase in consumption are similar to those found elsewhere in the SubSaharan region, and in much of the developing world, such as rising incomes, increasing urbanisation, changes in consumer tastes and preferences. More importantly is the relatively low prices of wheat compared to the prices of traditional staples. In 1970 Zimbabwe reached self-sufficiency and even exported small quantities, but this was short lived. In the following year unprecedented increase in the demand for wheat products coupled with a bad rainy season resulted in total import requirements of upto 85 985 tonnes. Self-sufficiency has eluded the wheat industry with imports peaking at 121 495 tonnes during the drought in 1984. The government controls consumption of wheat through rationing. The millers speculate that demand for wheat could be 25-30 percent more without rationing. The Grain Marketing Board (GMB) has predicted that consumption of wheat could easily 24  \u000Cexceed 320 000 tonnes per year without rationing. This proved to be an under estimate since sales for 1987 with rationing were 333 319 tonnes. The Agricultural Marketing Authority (AMA) has predicted that by the end of this century Zimbabwe could be consuming as much as 500 000 tonnes of wheat per annum.14 The GMB has consistently run a deficit on its wheat account amounting to a peak of Z$95.52/t in 1988/89. The wheat trading deficit accounted for 21 percent of the Board's total trading loss between 1981-1989 marketing years. There is a lot of support for Zimbabwe to continue growing wheat even from the influential Report of the Commission of Inquiry into the Agricultural Industry under the Chairmanship of Professor G.L.Chavunduka which has recommended that production of wheat in Zimbabwe makes a good deal of sense. The major considerations being the need to conserve foreign currency and the unreliability of external transport. Also of great importance is the complementary nature of wheat in farm operations, since it is produced in the winter, an otherwise slack period. Thus labour can be more fully utilised around the year and development of irrigation will improve crop production since the water can also be used to supplement for moisture in summer crops.  Agricultural Marketing Authority Grain Situation and Outlook Report , various issues 1970-1990 25  \u000CTable II  ^  Wheat Production and Consumption Trends 1977-1990  Year  Area  Prod'n  Yield  Cons'n  per cap  Imports  (ha)  (t)  (t/ha)  (t)  Cons(t)  (t)  1977  36 138  141 300  3.91  191 701  19.17  50 401  1978  37 881  161 752  4.27  221 655  21.43  59 903  1979  41 599  182 620  4.39  189 657  24.39  7 037  1980  41 834  207 915  4.97  221 681  28.79  13 766  1981  41 872  228 202  5.46  250 031  30.30  21 829  1982  44 132  251 111  5.70  272 111  30.97  21 000  1983  37 904  204 682  5.40  307 432  29.38  102 750  1984  36 042  207 242  5.79  328 737  27.57  121 495  1985  32 707  176 618  5.4  219 134  29.83  42 516  1986  32 878  189 049  5.75  210 702  29.69  21 653  1987  44 808  241 963  5.41  333 319  31.62  91 356  1988  43 067  245 482  5.71  309 514  32.86  64 032  1989  46 298  262 510  5.68  300 267  38.36  37 757  1990  49 321  242 166  4.92  295 916  37.39  53 750  36.5 71 25 54 95 - percentage growth rates period 1977-1990  6  Source: Agricultural Marketing Authority of Zimbabwe Grains  Situation and Outlook Report various issues period 1970-1990 26  \u000C3.3 Policy Options for Wheat in Zimbabwe  Wheat along with soybeans, is among the most tightly regulated of the controlled crops in Zimbabwe. LSC farmers who are responsible for 95 percent of all production sell directly to the Board, and with milling being exclusively on a large industrial scale, wheat is almost wholly marketed through a single channel from the producer through the board to the millers and then to consumers through the wholesale and retail network. Previous studies have concentrated on policy options for the wheat industry. The study by Jim Longmire et a115 outlines three basic options to meet the growing demand for wheat in Zimbabwe, vis;  -  expansion of wheat production,  -  adoption of policies to slow down consumption growth,  -  continue to import wheat.  Zimbabwe has learned from other developing countries the problems of allowing food imports to build up during the \"good years\" i.e the years of high export returns the author assumes that within the current economic situation of Zimbabwe the government will not adopt the policy to import unlimited quantities of wheat. Currently most wheat imports have been arranged as barter or triangular swap arrangements for maize 15 Ibid 27  \u000Cbeing sent as food aid to other African countries e.g Mozambique. In good rainfall years there is no problem in this arrangement because of the excess maize. The problem arises in drought years in which the government can not raise the necessary excess maize to barter and the scarce foreign currency has to be used to import maize which is the staple. The adoption of policies to slow down growth of wheat consumption has political repercussions which may make governments reluctant to implement it. Bread has replaced the staple food maize for most of the urban population because of its convenience, its price and easy accessibility. The urban population represent a powerful electorate, and at a time when government has set a freeze on wage increases an increase in the price of bread is politically undesirable.16 However, such a policy could be effected if prices of other alternatives were simultaneously reviewed. Presently maize products are priced higher than wheat products. In their study Longmire et al draw the conclusion that if retail prices of bread and maize products were set to reflect the supply prices of these grains at the producer level, this would increase wheat to maize price ratios and slow the growth in consumption of wheat products, thereby increasing the relative demand for maize products.  Masters W.A. \"The Value of Foreign Exchange in Zimbabwe: Concepts and Estimates\" Working Paper AEE 2/90 Department of Agricultural Economics and Extension, University of Zimbabwe (1990) 28  \u000CAnother factor affecting wheat production in aggregate is the relative profitability of alternative crops. Since wheat already occupies 95 percent of the winter irrigated area there is little potential for further substitution of wheat for other winter crops on existing wheat farms. However there is scope for substituting water away from supplementing summer crops to irrigating wheat. In addition, some farmers currently not growing wheat might be induced into its production if prices of export crops declined relative to wheat. Small holder farmers could be induced into wheat production if the government increased investment in irrigation. There are a lot of inconsistencies in the way government has been setting prices in the wheat industry. On the one hand, producer prices, have been kept below import parity since the late 1970's: producers received an average of Z$460 compared with an estimated import parity of Z$620/tonne in 1990. On the other hand Zimbabwe has maintained a subsidy on wheat imports to the millers in order to maintain low consumer price of bread since 1965. In addition to which export crops have been priced above export parity, notably maize, cotton and tobacco thereby making export crops relatively more profitable than wheat. Thus government does not offer any incentives to domestic wheat producers while at the same time they encourage consumption of wheat by maintaining low consumer prices. Studies from a number of countries suggest that industry wide production of wheat is responsive to price incentives. The 29  \u000Cquestion for Zimbabwe is how responsive to producer prices and other incentives will the wheat industry be in the future. The adjustments of the industry to price changes in the late 1970s and in the early 1980s suggests there is significant responsiveness. Evidence from other countries with irrigated wheat grown in rotation with summer crops also adds weight to this point. For example, Seeley (1985) reports that wheat production in Pakistan, India, and Egypt has responded by between 1 to 8 percent for every 10 percent increase in producer prices. In summary, three important policy issues, relevant to the wheat industry have been identified -  the producer price of wheat is consistently kept below import parity,  -  a subsidy on wheat to the millers has been maintained to keep consumer prices of wheat low,  -  The government controls the quantities imported through rationing of foreign exchange made available to the industry.  3.4 Literature Review: Derek Byerlee, of CIMMYT17 has indicated that wheat has a special significance in the analysis of food policy and food imports in the Third World, because cereals constitute the bulk 17 Byerlee D.^\"The Political Economy of Third World Food Imports: The Case of Wheat\" Economic Development and Cultural Change Vol 35 (2) 30  \u000Cof Third World food imports, and among cereals wheat is by far the dominant food grain import. In 1986, wheat accounted for 86% of food grain imports by Third World countries. Most developing countries lie within the tropical belt in which the climate is unsuitable for wheat production, hence the basic inconsistency between the traditional food staple and the importation of wheat a non traditional staple with little immediate prospects for local production. Byerlee's paper develops a framework to analyse the recent patterns in consumption and imports of wheat by developing countries, in light of both national food policies and the policies of the exporting countries. His study shows the biases in national and international food policies in favour of wheat products and he also discusses policy measures to arrest growing dependence on food imports. Fig 3 is a schematic representation of factors influencing consumption. On the right hand side are the factors which influence demand through their effects on incomes and food preferences, while the left shows those factors related to supply that influence the quantity and price of imported wheat relative to local food staples. A number of government policies, such as consumer subsidies, investments in the marketing and processing infrastructure influence the demand for wheat. In Byerlee's study many of these factors were confirmed by cross-country regression analysis of per capita wheat consumption in 39 countries. The results of the regression analysis 31  \u000Cshow that the strongest determinant of per capita wheat consumption in the tropical developing countries is per capita income which is closely correlated with urbanisation. This phenomenon is also observable in the case of Zimbabwe. The upsurge in urbanisation since independence in 1980 there has resulted in an unprecedented increase in the consumption of wheat and wheat products particularly in the form of bread. Morris\"in his paper \"Comparative Advantage and Policy Incentives for Wheat Production in Zimbabwe\" developed a framework for measuring comparative advantage of using local resources to produce a particular crop when measured against the possibilities of trade. He expressed comparative advantage by means of the resource cost ratio (RCR) which is a measure of the cost of domestic resource to a country of producing a particular commodity.  18  Morris M.L. \"Comparative Advantage and Policy Incentives for Wheat Production in Zimbabwe\" CIMMYT Economics Working Paper 88/02 (1988)  32  \u000CFig 3 Factors Influencing Production and Consumption of Wheat  Domestic Food Supply and Marketing jr Local Wheat Processing Industry  Wheat Exporting .0 Countries  Consumer Price of Competing Food Staples Consumer Incomes  World Wheat Supply and Prices Grain Transport and Storage Infrastructure .11\u25A011111111.\u2022  \u25A0\u25A0\u25A0\u2022411111111.  Foreign Exchange\u2014I\" Rates Price of Food Aid Wheat Consumer Price Imports for Wheat \u2022^ Products  Market Promotion Consumer^ Preferences^and Development  4^  Urbanization Consumer Subsidies f  Domestic Wheat Production and Marketing  Source: Byerlee D. \"The Political Economy of Third Food Imports: The case ^of Wheat\"^1989  33  1  \u000CFrom this study the author drew the conclusion that  Zimbabwe enjoys comparative advantage in wheat production during periods when irrigation water is plentiful, but this comparative advantage is lost during times of drought when water becomes a limiting factor of production. An important issue raised in this study is that water is more valuable when used on crops other than wheat since farmers apply water inefficiently to wheat. There is growing evidence to show that the total amount of water applied to wheat can be reduced significantly without drastically affecting yields. Therefore Zimbabwe's future selfsufficiency in wheat depends critically on research designed to increase the efficiency of water use by the crop. Bond win her paper \"Agricultural Responses to Prices in Sub-Saharan African Countries\" reviews econometric evidence on supply responses to farm prices in sub-Saharan African countries in order to assess the quantitative significance of price in the agricultural sector. In view of the importance of the agricultural sector for growth and adjustment, governments need to determine what policies are best suited to stimulate agricultural production. In particular the crucial question is the extent to which pricing policy can be used to encourage agricultural growth. Many economists including those at the World Bank maintain that inadequate government-administered prices were a principal reason for the poor performance of wBond M.E. \"Agricultural Responses to Prices in Sub-Saharan African Countries\". International Monetary Fund Vol 30 December 1983 34  \u000Cagriculture in Africa. Bond's paper is important because of her attempt to give the reasons for why it is difficult to econometrically assess the responsiveness of crop output to prices and other variables in developing countries. First the data are of poor quality or simply not available. Second a positive correlation between the producer price and marketed output indicates very little about the relationships underlying the choices of farmers between leisure and production, food crops and cash crops, and wage work and work on own farms. In addition to relative prices, another important variable that affects a farmer's cropping decision is his perception of risk, particularly risks pertaining to weather patterns and dependency on markets. As Bond concludes, lack of reliable data and shortage of research tools such as computers make it difficult for most African countries to simulate all the factors to develop comprehensive models. Berhmann discussed various a priori hypotheses about the supply responsiveness of underdeveloped agriculture to price changes. He divided the hypotheses into three major categories: -  The hypothesis that farmers in underdeveloped agriculture respond quickly, normally and efficiently to relative price changes  -  The hypothesis that the marketed production of subsis-  nBehrman J.R \"Supply Response in Underdeveloped Agriculture: A case study of Four Major Annual Crops in Thailand 1937-1963\" North Holland Publishing Company (1968) 35  \u000Ctence farmers is inversely related to price  -^the hypothesis that institutional constraints are so limiting that any price response is insignificant. A major proponent of the first hypothesis T.W.Schultz emphatically presented the following hypothesis: \"The rate at which farmers who have settled into a traditional agriculture accept a new factor of production depends upon its profit, with due allowance for risk and uncertainty, and in this respect the response is similar to that observed in modern agriculture\"21 That farmers in developing countries respond to price incentives can also be shown by the tremendous increase in wheat production between 1960 and 1970 in Zimbabwe. Good prices, kept above import parity, coupled with government support in the form of irrigation loans saw a boom in wheat production in less than a decade. The exact opposite happened when prices dropped below import parity. The questions about supply response are basically quantitative, requiring quantitative estimates to answer them. However, there is little quantitative evidence to prove one or the other theory. No satisfactory econometric study of Zimbabwean agricultural supply responsiveness has as yet been conducted. Studies for other low income areas, however, are increasing in number. Behrman22 summarised the price responses which have 21 Schultz T.W. \"Apathy on Hunger Assailed by Myrdal\" Nov 23, 1965 22Ibid 36  \u000Cbeen estimated for total production of various specific crops in low-income agriculture. Several general comments are suggested by the pattern of these estimates, the most important being: -  For annual crops there is a tendency to use area as the dependent variable because yields are often found to be unresponsive to price changes.  -  The estimates being taken as a whole lend some support to the hypothesis that price responsiveness in underdeveloped agriculture is of an order of magnitude quite comparable to that observed in the agriculture of high-income areas.  Using Marc Nerlove's Dynamic Supply Response Mode1,23 Behrman'  S24  work was the first major study to estimate struc-  tural parameters for output of several crops cultivated in Thailand, with the aid of nonlinear statistical procedures. Behrman used a four equation version of Nerlove's model. Behrman25 discusses the advantages of using area planted to a crop as a proxy for planned total output since time series data for planned output is not available. Planted acreage is generally the best available method of gauging how cultivators translate their price expectations into action. The area 23Nerlove M. \"The Dynamics of Supply: Estimation of Farmers' Response to Price\" Baltimore, The Johns Hopkins Press (1958) 24Behrman J.R. \"Supply Response in Underdeveloped Agriculture: A case study of four major annual crops in Thailand, 1937- 1963\" North Holland Publishing Company Amsterdam (1968) 25Ibid 37  \u000Cactually planted to a particular crop is to a much greater degree than output, under farmers control and thus presumably a much better index of planned production. All users of the Nerlovian model have included an expected price as a determinant of desired (actual) area planted in a crop, but Askari and Cummings26 have raised concerns about which prices would be appropriate. In his analysis Behrman used the ratio of the price received by the farmers relative to alternative crops. The associated coefficient is expected to be positive, since an increase in the price should make production of the crop more desirable. Nerlove did not include yield in his initial study because he did not see any \"striking trends\" in the yields of the crops under study. In some of his later analysis27 for a later time period Nerlove did include an expected yield. Askari and Cummings outlined the following as the advantages of including the yield factor: 1)  with the term (yet.i _ Yt- 1) it is possible to account for unexpected variations in yield, and for how rapidly cultivators adjust their yield expectations.  2)  a more fully specified model allows government officials to obtain evidence as to the effects of potential policies on crop yield.  26Ibid 27  Nerlove M, W. Addison \"Statistical Estimation of Long-Run Elasticities of Supply and Demand\" Journal of Farm Economics Vol 40 (1958) 38  \u000CCHAPTER 4 4.0 APPLICATION OF THE NERLOVIAN SUPPLY RESPONSE MODEL TO WHEAT PRODUCTION IN ZIMBABWE This section presents the regression equation and the results of the model used to estimate the price responsiveness of wheat in Zimbabwe. The analysis is carried out for the period 1970-1990. The method most frequently used to analyse price responsiveness is to estimate price elasticities. ^The model most empirical studies apply is the Nerlovian Supply Response Model (Nerlove 1958, Behrman 1968, and Askari and Cummings, 1977; Bond 1983, Janssen and Perthel 1990).  4.1 Explanatory Variables: A study by Longmire et al on wheat policy options in Zimbabwe and SADCC countries (1986)28carried out a survey in which farmers were asked to rank in order of importance the constraints to increased wheat production. The results are summarised as follows: Low Profitability^  56 %  Operation costs of irrigation^ 21 % Variability of rainfall ^  18 %  Availability of certified seed^ 3 % Others (e.g. accessibility to depots and extension services etc)^  2%  28 Longmire J.,P. Ngobese, S. Tembo \"Wheat Policy Options for Zimbabwe and SADCC Countries:\" Working Paper, Department of Agricultural Economics and Extension, University of Zimbabwe (1986) 39  \u000COther studies on Zimbabwe (P. Ngobese) and including studies on wheat production in the tropics, such as CIMMYT publication on \"Wheat in More Tropical Environments\"28also put low profitability as the major constraint to wheat production. This and the data presented earlier in this thesis leads us to assume that the pricing of wheat is a major issue in considering the problems of wheat production in Zimbabwe. The summer crops grown in rotation with wheat are maize, soyabeans and cotton. The study carried out by Longmire et al showed that maize was the principal summer crop grown in rotation to wheat. Although, summer crops are generally rainfed supplementary irrigation is necessary to improve the yields as it allows for more timely plantings and is also used to relieve moisture stress during dry spells which occur quite frequently during the rainy season. Farmers therefore face the choice of whether to irrigate their summer crops and thereby cut back on the acreage planted to wheat in the winter or hold their water in reserve and irrigate wheat. Since maize is the most important alternative to wheat both the price of wheat and the price of maize deflated by the CPI will be included in the model. The use of a CPI deflator which may be of dubious value for subsistence farmers in other developing countries who buy only a very select basket of goods or none at all will be quite valid in the case of wheat in  28  Byerlee D. \"Wheat in Tropical Environments:\" CIMMYT Economics Programme, Mexico (1985) 40  \u000CZimbabwe, since it is mostly grown by commercial farmers who use relatively large amounts of purchased inputs. An important point to note is that current and not lagged prices of wheat and maize will be included, because wheat being a winter crop is the only commodity for which the price is known before planting. The producer prices for all agricultural commodities are announced in April and wheat plantings only begin at the end of May. Another major constraint to increased production is the cost of establishing and operating irrigation schemes. Although the Ministry of Energy and Water Resources has estimated that upto 430 000 ha could be brought under irrigation, only 165 000 ha are currently being irrigated. Both Government and farmers are cutting down on investment in irrigation because of the operational costs. Cost of irrigation per unit of area ($/ha) will therefore be included as one of the explanatory variables. Although the amount of rainfall is an important aspect of the weather conditions which affect agricultural production in Zimbabwe, many other factors such as the timing of the rainfall and the amount of sunshine are also important. Ideally the model should include a weather index to account for all such relevant factors, but the unavailability of data makes the construction of a more inclusive index impractical. The mean annual rainfall alone, is used as a partial index of the weather conditions. Rainfall also serves as a constraint to availability of irrigation water. 41  \u000CA non-market variable to take into account those factors not conveniently quantifiable such as accessibility to delivery depots, availability of certified seed and extension services should have been included but there was no reliable data to show how their effects change from year to year. However it is hoped that all these effects can be captured by the inclusion of a Time trend variable. Wheat is the principal crop planted in winter, occupying about 95% of the winter planted acreage. Other crops grown on a smaller scale are barley, oats and winter legumes. The acreage planted to these crops is so insignificant compared to that planted to wheat, it was not considered necessary to include them in this model. 4.2 Model Specification: The objective of this part of the thesis is to measure the response of total planned production of wheat to various variables such as its own price, the price of substitutes,input costs and rainfall. Because time series estimates of planned output are not available a proxy variable was utilised. Using actual output creates problems since it usually differs considerably from planned output because of factors such as the weather etc, factors beyond the direct control of the producer. Most econometric investigators of agricultural supply response have therefore tended to use the area planted as a proxy for planned output, since area planted to a crop is to a much greater extent under the farmers control than output. Area 42  \u000Cplanted to wheat is therefore the dependent variable in this study. A three equation version of the Nerlovian supply response model was used. The structural model consists of a desired planted area relationship, a planted area adjustment relationship and an expected normal relative price relationship and the expected yield relationship. The following is the general form of the model: Atd = aii cc12PWTte + a13PMZt (41417WTt a15P/Rt ^  (1)  + a16RNFt + a17T + Ul t  A t = a 21 + A t-1 + rot - At-1) + u2t^(2)  PWT:' = PWTt^  Adt^the desired area planted to wheat A t^the actual area planted to wheat PWTet^the expected normal producer price of wheat  PMZt^the price of maize 43  (3)  \u000CYWT t the expected yield per unit planted area PIR t^cost of irrigation per unit planted area. RNF^mean annual rainfall PWT t^current producer price of wheat area adjustment coefficient time trend Uit^disturbance term for the i-th relationship an^the j-th structural parameter in the i-th structural equation The dependent variable (Ad) and the first right hand side variable (PWTet) are unobservable. Equations (2), (3) respectively relate the desired area planted, the expected normal relative price to observable variables. The area planted adjustment equation (2) states that the area actually planted in the current period (t) equals the area planted in the previous period, plus a term  (r)  proportional to the difference between  the desired planted area in the t-th period and the actual planted area in the previous period, plus a constant and a disturbance term. A priori, the values of the area adjustment coefficient  r  should lie between zero and two. The adjustment  may be characterised as an underadjustment, an exact adjustment, or an overadjustment, depending on whether the adjustment coefficient is between zero and one, not significantly different from one or between one and two respectively. The expected normal relative price in production period (t) equation (3) equals the normal relative price in the current 44  \u000Cperiod. At time of planting the price of wheat has already been announced and is therefore known by the farmers. Equations (1, 2, and 3,) are then manipulated by substituting equation 3 into 1 then 1 into 2 to obtain the equation (4) in which the unobservable variables, Ad, and Pet have been eliminated. At  =^raii 411 - r)At-i ra12PWTt rai3PMZt ra14IWTt + raisP/Rt  (4)  ra 16 RNF t + ra 17 T + rult u 2 t  Equation (5) is the reduced form of equation (4) At =  0  +  1A t 1 -  +  71 2 4 PWT t  + 7c3PMZt + ir4YWTt + 7r5P/Re (5) 1t6RNFt n7Tt Ut  where vi's are reduced form parameters. vo = a21 + ran, vi = ( 1^r)^72  ' raiz, 7r3^r a13  V 4 = Fa 14,^= rais, 71-6 = ra16, 77 =  r  a17  and U = U + U a The coefficient on variable A  i,  v 1 is expected to have a  positive sign and to be statistically significant since struc45  \u000Ctural factors such as irrigation limit the ability of farmers to adjust to price changes in the short run. Price of wheat (PWT) is also expected to have a positive and significant coefficient. Price of maize (PMZ) is the price of a substitute and therefore expected to be negative, but significant since the price of maize plays a central role in agricultural price setting in Zimbabwe. The coefficient of the rainfall variable (RNF) is expected to have a positive sign. The coefficient of the irrigation costs variable is expected to be negative since it is inversely related to acreage planted to wheat. Both coefficients are expected to have significant t-ratios, since frequency of rainfall and availability of irrigation are two important factors of wheat production. The yield (YWT) factor is expected to have a positive sign but it may not be very significant, as it is influenced by irrigation and rainfall.  4.3 Estimation Procedures:  Equation (3) was estimated using the SHAZAM Econometric package. A linear functional form was regressed using ordinary least squares (OLS). The simplest measure of model validation is the R2. Four different regressions of the model were run (see Table 3) and in all four cases the R2 were quite high ranging from 0.94-0.98. In all cases the R2 adjusted were very close to the original R2 from 0.92-0.97. Equations 1 and 3 are linear, with acreage planted to wheat as the dependent variable. Equation 1 was 46  \u000Cregressed using ordinary least squares and the coefficients showed correct signs as expected but the yield variable had an insignificant t-ratio. The Durbin h statistic was 1.69 showing that autocorrelation did not exist. The second equation was regressed using ordinary least squares on a double log functional form. The results showed the expected signs, but since yield remained insignificant I decided to test for multicollinearity. An examination of the correlation matrix indicated that the pairwise correlation coefficient between yield and rain was high, and since yield showed a low t-ratio I decided to drop it. Equation 3 is a repeat of equation 1 without the yield variable. The R squared in equations 1 and 3 remained the same showing that dropping the yield variable did not result in specification bias of the model. Likewise equation 4 was a repeat of equation 2 without the yield variable. The R squared remained the same as equation 2 but the price of wheat variable showed an insignificant t-ratio. The Durbin h statistic still showed no evidence of autocorrelation. I therefore decided to use the results of the equation (3) contained in Table IV for my analysis.  47  \u000CTable 3: Summary of Regression Results 1 EQUATION^linear  2^3^4 linear loglog loglog  Constant^0.74 (0.88) #^0.22  2.25 (1.05) 2.25  0.32 (0.38) 0.91  2.22 (0.77) 2.22  T trend^0.29 (1.67) #^1.11  0.61 0.61  0.25 (1.41) 0.94  0.62 (3.18) 0.62  Lag Acre^0.69 (13.5) #^0.94  0.95 (11.44) 0.95  0.53 (5.71) 0.91  0.94 (11.92) 0.94  YWT^0.78 (0.46) 0.34  0.11 (0.56) 0.11  PWT^0.25 (2.34)* 0.16  0.11 (2.40) 0.11  0.58 (2.03) 0.11  0.15 (1.18) 0.15  PMZ^-0.75 -(2.98) -0.53  -0.49 -(3.25) -0.49  -0.12 -(2.07) -0.41  -0.47 -(3.28) -0.47  RNF^1.29 (4.76) 0.21  0.27 (5.11) 0.27  1.47 (2.83) 0.27  0.31 (2.87) 0.31  PIR^-0.15 -(2.48) #^-0.21  -0.15 -(2.51) -0.15  -0.19 -(2.58) -0.25  -0.15 -(1.99) -0.15  R squared^0.98  0.98  0.94  0.98  R sqd adj^0.97  0.97  0.92  0.97  Durbin H^1.69 statistic  1.97  1.57  1.73  Notes:^YWT-Yield of wheat Wheat PWT- Price of wheat PMZ- Price of maize RNF- Rainfall PIR-Irrigation price # elasticity at means *significant t-ratio 48  \u000CTable 4: Model Results (n=22)  Dependent variable Acreage planted to wheat Variables  Estimated Coefficient  t ratio at 5% level  Elasticity at means  At_1  0.53  5.71  0.91  PWTt  0.58  2.03  0.11  PMZt  -  -  0.12  -  2.07  -  0.41  RNFt  1.47  2.83  0.27  PIRt  -0.19  -2.58  -0.25  T  0.25  1.41  0.94  constant  0.32  0.38  0.91  R2 = 0.94  ^  R2 adj = 0.92^* Durbin H statistic =1.57  At_i - lagged acreage PWT - price of wheat PMZ - price of maize PIR - Irrigation costs T^- Time trend variable  Durbin H statistic decision rule:  If h lies between 1.96 and 1.96 do not reject the null hypothesis that there is no first-order autocorrelation.29 -  2  9Gujarati D.N \"Basic Econometrics\" Second Edition (1988) 49  \u000CIn order to further check the accuracy of my model I plotted the observed and predicted acreage and this showed a fairly reasonable correlation between observed and predicted values (Fig 4). A plot of the error terms also showed that they were randomly distributed (Fig 5). By using the root mean squared error we can calculate the deviations of the predicted from the observed values. The smaller the deviation the better the model. The value calculated is 0.05891. In the terms of this model this level of deviation is judged to be acceptable. Given all the results of the tests, the model has proved to be a robust and well specified model. In summary, all the explanatory variables showed significant t-ratios, and the coefficients had the expected signs, the Durbin h statistic was 1.57 showing that there was no autocorrelation. The R 2 was 0.94 and R squared adjusted was 0.92.^Therefore the model can be assumed to be valid as specified.  50  \u000CUtibtil-ilft.0 AND PKEDIGTED  1970-1990  50 454035-0  30252015105  II^it^ III 2 3 4 5 6 7 8 9 10 11 12 13 1415 16 1718 19 20 21' 22 23 Observation Observed values ^ Predicted Values  \u000CFig 4 Plot of Residual Errors 1 0.8 0.6 0.4  -0.4 -0.6 -0.8  2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Observation  \u000C4.5 Assessment of Data used: (Appendix I)  Before discussing the conclusions that can be drawn from the results of this model it is important to give an assessment of the data used. The most important data sources are the Ministry of Lands Agriculture and Rural Resettlement(MLARR), Agricultural Marketing Authority (AMA), The Department of Agricultural Economics, University of Zimbabwe and The Commercial Grain Growers Association of Zimbabwe. Other possible sources are FAO and World Bank publications. CIMMYT, Mexico has commissioned research into the Zimbabwe wheat industry and I have access to their publications. The data on prices is very reliable since most of the agricultural commodity prices are set by the Ministry of Agriculture and I used their publications and consulted with them to confirm the data. I am also confident that the production data I am using is quite reliable since large scale commercial farmers usually give comparatively accurate information. The only data that could not be confirmed was the war period 1974-1979. I did not however, observe any significant divergence in the data to warrant the inclusion of dummy variables to take account of that period.  4.6 Discussion of Regression Results:  1). Lagged Acreage Quite significant with a t-ratio 5.71, the lagged acreage 53  \u000Cvariable had a positive sign showing a positive correlation with the area planted to wheat. The estimated coefficient of the lagged acreage (1-r) was 0.53, therefore the area adjustment coefficient r was 0.47. An area adjustment coefficient between zero and one implies underadjustment of planted acreage30. This variable was very stable throughout the 4 equations, showing high t-ratios in all cases.  2). Price of Wheat:  The t-ratio for this variable was 2.03 and the calculated elasticity at means was 0.11, showing that the price supply elasticity of wheat is very low. The results were also very stable throughout the equations. The low elasticity at means of the price of wheat variable shows that the price of wheat is not highly significant in determining producer response in wheat production. Raising the price of wheat is therefore not sufficient incentive to increase wheat output in Zimbabwe.  3).  Price of Maize  Maize is the major substitute crop to wheat competing for water rather than land since wheat is grown in the winter and maize in the summer. This variable showed a negative sign which is to be expected since the acreage planted to a crop is inversely 30Behrman \"Supply Response in Underdeveloped Agriculture: A Case Study of Four Major Annual Crops in Thailand, 1937-1963\" (1968) 54  \u000Crelated to the price of a substitute. It showed a significant t-ratio -2.07 and a calculated elasticity at means of -0.41. The coefficient sign was correct in all 4 equations. These results imply that the producer price of maize has a more significant influence on the acreage planted to wheat than the price of wheat. This is as true for wheat as it is for other agricultural commodities in Zimbabwe. The price of maize is used as a barometer for setting prices, because of its weight in consumer expenditure and the high proportion of land and other productive resources dedicated to it by producers.  4).  Yield:  Since the yield variable showed a consistently insignificant t-ratio, it was dropped from the final equation. As yield improvement is mostly a result of technological innovations over time, the T trend was expected to pick up the effects of yield on the area planted to wheat. The yield variable also showed high pairwise correlation with the cost of irrigation variable. This was to be expected since yield improvement is constrained by the availability of water.  5).  Rain  Intuitively, I expected the rain to have a high elasticity at means since it is a major factor in agricultural production in a drought prone country like Zimbabwe. One would expect that in a year with good rainfall there would be more water available 55  \u000Cfor irrigation and therefore more land planted. Thus the elasticity 0.27, which implies a 27 percent increase in planted area as a result of a 100 percent increase in rainfall seems reasonable.  6).  Cost of Irrigation:  The cost of irrigation should be inversely related to the acreage planted so we expect the estimated coefficient to be negative. The cost of irrigation variable showed a significant t-ratio at -2.58 and an elasticity at means -0.25.  7).  Time  A priori, it would be hard to predict the sign on the estimated coefficient since the time trend is expected to pick up the trends in all the variables such as the yield factor, input prices, etc. which have not been included in the model. The time trend had a significant t-ratio at 1.41 and the elasticity is 0.91.  4.7 Price Supply Elasticities: One of the objectives of this study is to estimate the price supply elasticity of wheat in Zimbabwe. Using the results of the regression we can calculate the values of the reduced form coefficients, which are then used to calculate the short run and long run supply elasticities. From the estimated coefficient of lagged acreage we calculated 56  r  (p 55).  \u000CThe calculated elasticities were long run elasticity E ft = 0.43, calculated as follows:  Eh_ = (aAt/aPt) * (Pt/At) + a\"( (At -a0/a1) * (1/A) } = (aiAt - aiao) / aiAt = 1 - (a0 / At) = 1 - (18925/32895) =^0.43 where: E lr longrun elasticity crA t - change in acreage^oPt - change in price At - acreage^ P t - price -  and short run elasticity Esr =0.11. To date none of the studies on the wheat industry in Zimbabwe have attempted to estimate the short and long run supply elasticities. Longmire (1986) estimated the demand elasticity, and Bond (1983)31 carried out a study on nine Sub-Saharan African countries and gave the average elasticities of wheat as supply 0.18 and demand 0.21. Table 6 is a comparison of the elasticities from other countries with my own results.  31 Bond M.E. \"Agricultural Responses to Prices in Sub-Saharan African Countries\" International Monetary Fund Vol 30 (1983) 57  \u000CTable 6^Comparison of Supply and Demand Elasticities of Wheat  Author  Longmire et al  Askari &amp; Cummings  _^ It  Bond  _^ _ II  Own results  Country  Es  Zimbabwe  Ed  0.20  Punjab  0.10  0.50  West Pakistan  0.33  0.67  Ghana  0.20  0.42  Kenya  0.10  0.37  Zimbabwe  0.17  \u000C4.8 Conclusions  four equations of the specified model were regressed, and each of these showed consistent estimated coefficients, with expected signs. The R-squared and t-ratios were also stable in all the equations. Graphing the residual errors of the chosen model did not exhibit distinct patterns, thus showing lack of specification bias. A plot of the observed and predicted acreage showed the existence of close correlation between the two. It can be concluded therefore, that the model was valid and robust as specified. The calculated price supply elasticity 0.11 is well within the average elasticities estimated by earlier research on other developing countries (Behrman 1968, Askari and Cummings 1976) and in other Sub-Saharan African countries (Bond 1983).  59  \u000CChapter 5 5.0 POLICY SIMULATION: In this section supply and demand elasticities will be used to model the impact of current policy interventions and three alternative scenarios on the wheat industry. Three important policies relevant to the wheat industry have been identified; the producer price of wheat is consistently kept below import parity while that of export commodities are kept above export parity, and a subsidy on wheat to the millers has been maintained to keep consumer prices of wheat and wheat products low, while rationing of foreign currency limits the amount of wheat that can be imported into the country. Changes in these policies will be simulated in the original model to determine the impact of these changes.  5.1 Price Policy Analysis: Theoretical Perspectives  Government economic policies influence rural urban terms of trade, which are in turn a major factor in determining incentives to increase agricultural output while simultaneously signalling about the relative costs of food. Producer incentives can be raised in two ways: higher output prices or lower input costs. The rural-urban terms of trade are influenced by two sets of policies; i)^macro-economic policies such as foreign exchange rates, interest rates and wage rates 60  \u000Cii) sectoral policies such as subsidies and/or taxes and other trade policies that drive a wedge between the world price of a product and its domestic price. Three forms of policy intervention are used in the wheat sector in Zimbabwe; the producer price of wheat is consistently kept below the world price, and a subsidy on imported wheat is maintained to keep the consumer price of wheat products low, while rationing of foreign currency limits the quantities available in the country. This study is concerned with how these policies affect the wheat industry. The government of Zimbabwe has always used the pricing mechanism to influence the production and consumption patterns in the agricultural industry. Price policy intervention affects the four food policy objectives in the following ways:  1)  it affects economic growth by the extent of efficiency losses;  2)  income distribution by the direction of income transfers;  3)  food security by increases or decreases in quantities traded internationally;  4)  and nutritional status by the income transfers price policies effect to or from consumers.  61  \u000C5.2 Effects of Policy Intervention:  This section will analyse the current situation in the wheat industry in Zimbabwe i.e how current pricing policy affects the industry. This will be followed by an analysis of the industry in a free trade situation which will be used as a base case to highlight the effects of policy intervention. In 1990 the producer price of wheat i.e the price at which the government through the Grain Marketing Board buys from producers was set at $460/tonne while the consumer price i.e the price at which the government again through the Grain Marketing Board sells to the millers was set at $550/tonne. Production and consumption quantities in the same year were 242 166 tonnes and 295 916 tonnes respectively. It is important to note that whereas production output is a result of producer price control, consumption is a result of a combination of two different policies: 1) consumer subsidy 2) government rationing The government imposes a limit on the quantity of wheat imported into the country by restricting the foreign currency allocated32, imposing a limit therefore on the amount of wheat available in the country. This makes wheat products particularly bread affordable but not easily available, a factor which explains the persistent shortages of bread and other wheat  32Agricultural Marketing Authority \"Economic Review of the Agricultural Industry in Zimbabwe\" (1988) 62  \u000Cproducts clearly observable in the urban areas of Zirababwe33. In the same year 53 750 tonnes were imported at a price of $620.37/tonne, the border price. Fig 634 illustrates the combined effects of the policy interventions on the wheat industry in Zimbabwe. We assume that without government intervention the producer price of wheat would equal the border price at $620.37/t. In a free trade situation the domestic supply is domestic demand is  Q2.  The difference between  Q2  and  Q1  Q1  while  represents  the import requirements under free trade i.e in the absence of policy intervention. The control on producer price of wheat results in a reduction of supply to  Q3.  At the subsidised consumer price,  without rationing we assume the demand for wheat should be  Q4  at  which the import requirement would be the difference between Q4 - Q3^Rationing  from  Q4  Q5-Q3,  to  Q5,  effectively reduces consumption of wheat  thereby reducing import requirements from  Q4-Q3  to  respectively. The total subsidy paid by government is: (Pw - Cp) x  (Q5 - Q3)  Relative to free trade, producers lose ACKL which is partly transferred to consumers and to government. The government gains FGKL by paying producers less ($460/t) than the consumer price ($550/t), and ACFH which is transferred to con-  M Longmire  J.,P. Ngobese and S. Tembo if Wheat Policy Options in Zimbabwe and SADCC Countries\" Working Paper Department of Agricultural Economics and Extension, University of Zimbabwe (1988) 34Fig  6 is not drawn to scale 63  \u000Csumers. The total deadweight loss equals triangle GHL, which represents the profits lost by producers through output reduction plus area BCGH, part of the government subsidy which benefits no one. There are other economic costs besides the cost of the budget subsidy. Although consumers clearly benefit by this price subsidy their total gain is less than the sum of the budget subsidy and implicit transfer from farmers. The difference is due to the efficiency losses, caused by the price distortions introduced by the wedge between domestic and international prices, and are experienced by both producers and consumers. On the consumer side, the demand curve represents the price consumers are willing to pay for each quantity, so a lower price produces benefits for consumers who were willing to pay a higher price but no longer have to. The consumer surplus is reflected by the area under the demand curve but above the consumer price. In fig 6 the change in consumer surplus as a result of subsidised imports is measured by the area ADJF. Rationing however, reduces consumer surplus by the triangle MJN to ADMNF.  64  \u000CFig 6^The Effects of Policy Intervention:  B  L  4  I V  G  H  F  , 1/4\u201E,m ,...N.h  i1IN  J  ,4  t_.  i 1 i I I I  03  ^ ^ ^ Qe Q1 Q2^04 '05  65  . k*s  44,4. 44 It  \u000C5.3 Policy Simulation Exercise: The basic model applied shows linear supply and demand curves and how the prices and quantities are related. The general formula for a linear demand curve with quantity as the dependent variable: Q = b + m(P) However, in economics the inverse of this formula is used i.e P = (Q-b)/m Using the calculated supply elasticity 0.11 and the demand elasticity calculated by Longmire et al 0.20 changes in policy will be simulated into this basic model to show their effects on various factors in the industry. Using data from various publications of the Grain Marketing Board, the Agricultural Marketing Authority on producer and consumer prices, production and consumption levels and import requirements, and Ministry of Trade and Commerce on government revenue gains and losses and foreign currency allocations, the effects of policy intervention on the most important factors were considered. Table 7 shows the results of the policy simulation exercise. Base Case - This scenario assumes a free trade situation i.e a situation in which the domestic price of wheat equals the border price. At that price domestic supply equals 255 766 tonnes and consumption is 288 916 tonnes and imports are 33 150 tonnes. The foreign currency spent on wheat imports is about $20.553 million. In this scenario the government does not incur any additional costs in terms 66  \u000Cof efficiency losses or subsidies.  Scenario I -shows the current situation in Zimbabwe. At the controlled producer price domestic production is 242 166 tonnes while consumption at the subsidised consumer price, but restricted foreign currency allocations is 295 916 tonnes increasing import requirements relative to the base case to 53 750 tonnes at a cost of $33.325 million. In the current situation producer loss as a result of the difference between the world price and the domestic set price, in addition to output reduction is $42.010 million while the consumers gain by the amount equivalent to the subsidy and part of the producer loss $26.632 million. The government subsidy equals $3.762 million while the government gains upto $21.794 million, the difference between the set producer price and the consumer price. Current policy intervention in the wheat industry, while creating profit of upto $18.032 million for the government taxes producers and does not create incentives to increase supply. Uncompensated losses i.e part of producer loss GHL and BCGH part of the government subsidy which benefits no one equal $1.088 million.  Scenario II - shows the effect of imposing self-sufficiency on the industry i.e quantity demanded equals the quantity 67  \u000Csupplied, assuming government adopts a policy of no imports. Relative to the base case producer gain is  PePCA  ($46.382 million) while consumer surplus decreases to $2.917 million. The higher price will result in an increase in the production of wheat, while decreasing the domestic demand of wheat. The likely consumer resistance to the high price increases of wheat products make this an unlikely policy.  Scenario III - shows the effects of maintaining producer price control but removing both the consumer subsidy, and the rationing on foreign currency i.e the producer price will remain at $460/t while the consumer price increases to $620/t. Relative to the free trade scenario domestic output decreases to 242 166 tonnes while consumption equals 288 916 tonnes. The import requirements are 46 750 tonnes costing $28.985 million in foreign currency.  There does not seem to be an easy low-cost means to expand wheat production in the short run. Table 6 summarises the welfare effects of policy intervention in Zimbabwe, followed by the effects in the event of policy changes. An immediate transition to self-sufficiency would be desirable from the producers' point of view but this would definitely result in consumer resistance. Moving towards free trade through decontrol of both the producer and consumer prices 68  \u000Cfollowed by a gradual build up towards self sufficiency, through gradual price increases seems the most viable option in the long run.  69  \u000CTable 6^(1)  EFFECTS OF CHANGES IN PRICING POLICY  Variables  Base Case Scenario I^Scenario II Scenario III  Acreage (ha) Producer price ($/t) Import price ($/t) Consumer price ($/t) domestic prod'n (t) domestic cons'n(t) Imports(exports)(t) Cost of imports($mln) Subsidy($eln)  52091^49321 620^460 620^620 620^550 255766^242166 288916^295916 33150^53750 20.553^33.325 0^3.762  49321 460 620 620 242166 288916 46750 28.985 0  55256 796 796 271310 271310 0 0 0  Base case assumes free trade,i.e no policy intervention Scenario I presents current situation: producer and consumer price control and rationing of foreign currency Scenario II imposes self sufficiency i.e demand =supply Scenario III maintains producer price control, but removes consumer subsidy Table 6 (2)^Welfare Effects of Pricing Policy (fen) Base Case Scenario I^Scenario II Scenario III Producer gain (loss) (ACKL)^39.834  (39.834)  88.548  (39.834)  Consumer gain (loss) (AEIF)^(20.224)  20.469  (94.117)  (20.469)  Consumer Subsidy (Pw-Cp)*(05-03)^0  3.762  Govt gains (FUL)^0  21.794  Uncompensated losses (GNI_ + BCH)^0  1.088  Cost of^Imports (Pw*(05-03)^20.553  33.325  38.746  28.985  Pw-Border price Cp- Consumer price 05- Domestic consumption 03- Domestic production  70  \u000C5.3 Sensitivity Analysis Sensitivity analysis was used to test the robustness of results by simulating elasticities from other studies. Various levels of elasticities based on the study by Bond on Sub-Saharan African countries34 were tried on both the demand and supply parameters. In the base case my own calculated supply elasticity of 0.11 and Bond's demand elasticity -0.20 were used. I then proceeded to use higher demand elasticities of -0.54 and  -  1.1 while holding the supply elasticity constant. Higher supply elasticities 0.37, 0.54 and 1.00 were also simulated while holding the demand elasticity constant. These elasticities were chosen because they were the results of studies based on SubSaharan African countries which I perceived to have similar economic and agricultural conditions as those prevailing in Zimbabwe. A priori, higher supply elasticities i.e higher price responsiveness by producers should result in an increase in output as the producer price of wheat increases, while higher demand elasticities should result in a decrease in the demand as prices go up. Table 8 shows the result of the sensitivity analysis. Relative to the base case, changing the demand elasticity from -0.20 to -0.54 while holding the supply elasticity constant decreased the demand for wheat, which in turn reduced import  34  Bond M.E. \"Agricultural Responses to Prices in Sub-Saharan African Countries\" International Monetary Fund Vol 30 Dec (1983) 71  \u000Crequirements from 33 150 tonnes to 21 250. Based on the import price of $620/t for 1990 this cost the government $7.738 million in foreign currency compared to $20.553 million in the base case. A demand elasticity of -1.1 resulted in import requirements of only 1 650 tonnes which would cost only $1.023 million in foreign currency, compared to the base case. Changing the supply elasticity from 0.11 to 0.37 while holding the demand elasticity constant resulted in an increase in output from 255 766 tonnes in the base case to 271 766 tonnes. Import requirements therefore decreased to 17 150 tonnes and a savings of $10.612 million in foreign currency. A supply elasticity of 0.58 almost brings the country to a situation of self-sufficiency, with domestic supply almost satisfying domestic demand. Unitary supply elasticity resulted in surplus of upto 33 250 tonnes. The sensitivity analysis showed that the results of this model were quite sensitive to changes in elasticity assumptions.  72  \u000C^  Table 8 Results of Sensitivity Analysis:  Es=0.11 Ed= -0.20 Variables^B Case^Scen I^Scen II Scen III ^55138^49321 52091 49321 Acreage (ha) Producer price ($/t) 620 460 796^460 0^620 Import price ($/t) 620 620 Consumer price ($/t) 620 796^620 550 domestic prod'n (t) 255766 242166 270726 242166 domestic cons'n(t) 288916 295916 270726^288916 0^46750 Isports(exports)(t) 33150 53750  Ed=-0.20 Es=0.37 Variables^B Case^Scen I^Scen II Acreage (ha)^55349^49321^61981 Producer price ($/t^620^460^796 Import price ($/t)^620^620^0 Consumer price ($/t^620^550^796 domestic prod'n (t) 271766^242166^304326 domestic cons'n(t)^288916^295916^270726 Imports(exports)(t)^17150^53750^(33010)  ^ Ed=-0.20 Es=0.58 Es=0.11 Ed = -0.54 ^ ^ ^ B Case^Scen I^Scen II Variables Variables B Case^Scen I^Scen II Scen III Acreage (ha)^52091^49321^55138^49321 Producer price ($/t)^620^460^796^460 Import price ($/t)^620^620 Consumer price ($/t)^620^550^796^620 domestic prod'n (t)^255766^242166^270726^242166 dosestic cons'n(t)^277016^295916^229496^320216 Isports(exports)(t)^21250^53750^(41230)^78050  Acreage (ha)^58771^49321^69166 Producer price ($/t^620^460^796 Import price ($/t)^620^620^0 Consumer price ($/t^620^550^796 domestic prod'n (t) 288566^242166^339606 domestic cons'n(t)^288916^295916^270726 Imports(exports)(t)^350^53750^(68880)  ^ Es=0.11 Ed = -1.1 Ed=-0.20 Es=1 ^ ^ ^ Variables B Case^Scen I^Scen II Scen III Variables B Case^Scen I^Scen II ^49321^83537 Acreage (ha)^52091^49321^55138^49321 Acreage (ha)^65614 460^796 Producer price ($/t)^620^460^796^460 Producer price ($/t^620 620 Import price ($/t)^620^620 Import price ($/t)^620 550^796 Consumer price ($/t)^620^550^796^460 Consumer price ($/t^620 domestic prod'n (0^255766^242166^270726^242166 domestic prod'n (t) 322166 242166^410166 dosestic cons'n(t)^257416^295916^160616^345416 domestic cons'n(t) 288916 295916 270726 Imports(exports)(t)^1650^53750^(110110)^103250 53750 (139440) Imports(exports)(t) (33250)  73  \u000CCHAPTER 6 6.1 Conclusions:  Agricultural policy makers in Zimbabwe today face the difficult question of what to do about the widening gap between supply and demand of wheat. ^Even though Zimbabwe's wheat industry is well developed by regional standards, domestic production has not kept pace with demand making imports necessary, draining scarce foreign exchange and heightening concerns about national food security. Government policy in Zimbabwe taxes wheat producers while subsidising the consumers, thus current policy acts as a disincentive to increased output supply on the one hand, while it encourages increased demand on the other.^This study quantified the welfare effects and foreign exchange costs of current and alternative policy scenarios. Although studies from other countries show that wheat production is responsive to price incentives, the results of this study however show a very low short run price responsiveness (0.11). Thus raising producer prices, without redressing all the other factors affecting wheat production such as cost and availability of irrigation facilities, prices of substitutes etc, would have limited impact on total production. The calculated elasticity at means for the price of maize variable which was included in the model to account for the price of substitutes was -0.41, showing that for every 10 percent increase in the price of maize the production of wheat 74  \u000Cdecreases by about 4 percent. The question for Zimbabwe is how to create the necessary conditions to increase price responsiveness, i.e what policy changes are necessary to increase total supply of wheat. The overall conclusion is that there is not a simple low cost option to redress the situation in the wheat industry in Zimbabwe. The situation calls for a review of all the policy instruments currently in place, in addition to external factors such as the world price of wheat. Current policy in the wheat industry taxes the producers in excess of $39 million which is partly transferred to consumers and partly to government as revenue. Imports cost the country about $33 million in foreign currency. In essence the government does not really make a profit in the wheat industry because $33 million in foreign currency at current bank exchange rates far outweighs the profit made on the domestic market. The government pays out nearly $4 million as consumer subsidy while losing out $1.08 million in uncompensated losses. The first base case scenario in the last chapter assumes a situation of free trade i.e decontrol of both producer and consumer prices, in addition to removal of the subsidy. This scenario resulted in a decrease in import requirements which in turn results in a decrease of about $13 million in foreign currency. Imposing self sufficiency in scenario II does away with the need to import. The government loses a source of revenue but make saves on the foreign currency in addition to 75  \u000Cthe subsidy. The third scenario, maintaining control on the producer price, while removing the subsidy on consumer prices and selling at the border price would not resolve the problem as there continues to be high import requirements and continued drainage of scarce foreign currency. Policy implications of some of the conclusions drawn from the results of the study are made in the following section.  6.2 Policy Implications:  1)^The Macro Economy and Macro Policies: Comprehending the relationship between the food system and the macro economy helps identify the policy issues and the range of choices available to policy makers. Currently policymakers operate within an atmosphere of distorted macro policies, which typically include rapid inflation, an overvalued exchange rate, minimum wages for an urban working elite, and depressed rural incentives. This set of policies make rapid growth in agricultural output extremely difficult, while it simultaneously skews the distribution of earned income. The only justification for these policies is that they protect the short-run interests of poor people by keeping food prices low35. Schfer describes the effects of these policies as follows: When macro policies are badly distorted, their cumulative M Mlambo  K. \"Exchange Rate Overvaluation and Agricultural Performance in Zimbabwe: 1965-1985\", in Mudimu G.and Bernsten R, eds.,Household and National Food Security in Southern Africa UZ/MSU Food Security Research Project, University of Zimbabwe (1989) 76  \u000Cimpact puts pressure on the economy for major policy reforms. As this pressure builds up, the options open to policymakers are extremely limited: more investment in irrigation, a better agricultural research and extension program, subsidies on fertiliser and certified seed. These contribute to agricultural growth, but in the constraining environment of distorted macro policies, such programs do not provide the basis for long run dynamic growth of rural output and incomes, which is the essential base for a food policy that simultaneously increases food production while reducing hunger.36 A combination of factors, notably sluggish growth in Zimbabwe's major agricultural and mineral exports along with depressed world prices, has in recent years reduced the nation's export earnings and precipitated a severe foreign exchange shortage. The government has responded to this crisis by instituting a set of foreign exchange controls, including a system of rationing foreign exchange to essential industries37. One effect of this policy has been to allow the government to maintain an overvalued currency. Currently the official exchange rate does not fully reflect the real value of a unit of foreign currency to the Zimbabwean economy38. Economists in government and at the University of Zimbabwe estimate that the Zimbabwean dollar is overvalued by as much as 30 % in relation to the US dollar, based on differential rates of inflation  Schafer, H. \"Real Exchange Rates and Economic Performance:The Case of Sub-Saharan Africa\". Unpublished Ph.D. Dissertation, Department of Economics and Business, North Carolina State University at Raleigh (1989) 36  37  World Bank \"Zimbabwe: An Industrial Sector Memorandum\". Industrial Development and Finance Division, Eastern and Southern Africa Region. Washington D.C: 1987  m Ibid 77  \u000Cbetween Zimbabwe and its major trading partners (O'Driscoll 1987). Consequently if adjustments are not made to correct for domestic currency overvaluation, efficiency will be biased in favour of import-intensive activities.  2) Price Decontrol: The Government of Zimbabwe should review if the reasons for which the policy to control agricultural pricing apply to the wheat industry. Certain agricultural commodities such as tobacco, tea, coffee and sugar are not controlled. Whereas controlling the producer prices of staple foods such as maize, millets, and groundnuts might have been necessary, firstly as a means to ensure income transfers to the peasant sector and secondly to ensure that food remains affordable to the majority of the poor people, both these reasons do not apply in the case of wheat. Wheat is produced by the large scale commercial farmers who have proved to be economically viable, and do not need Government to guarantee their incomes. Furthermore, the policy as it stands currently taxes the farmers and has acted as a disincentive to increased output. The base case scenario, free trade and the self-sufficiency scenario have both shown that an increase in the producer price of wheat would result in increased output, compared to scenario II and four in which producer price control is maintained.  78  \u000C3) Producer Price Increase  Increasing the producer price in the current situation would result in increased income transfers to the large scale farmers, which would be against government desired policy. What seems viable, however is to expand wheat production base by making it possible for small scale and peasant farmers to enter into wheat production through equitable distribution of the fertile granite based light sandy and loam soils which are currently dominated by white commercial farmers as a result of the pre-independence land policies. Since wheat already occupies upto 95 % of the winter irrigated area on wheat farms, there is little potential for further substitution of land to wheat from other winter crops on existing wheat farms. There is scope however for substituting water away from supplementing summer crops to wheat. In addition some farmers currently not growing wheat may be induced to its production if the prices of export crops declined relative to wheat. This however may go against government policy to maintain equitable income distribution within and among the sectors.  4) Expansion of Wheat Production Base:  Presently, wheat is produced by the large scale commercial farmers only because producers in the other sectors do not have the capital to invest in irrigation facilities. With regard to expansion of irrigation water supplies, there appear to be no 79  \u000Ceasy low-cost options. The increasing real cost of dam construc-  tion in the future will mean that irrigation will be increasingly expensive, and other demands for water will tend to reinforce this. In addition to the high cost of irrigation, irrigation equipment costs and pumping costs are very high in Zimbabwe. The government has two possible options, 1)  set the producer price of wheat very high to get farmers to invest in irrigation facilities.  2)  Maintain current producer price control, but invest in irrigation facilities  The results of my study showed that the difference between the producer and consumer price on the domestic market represents a source of revenue for the government. After paying the consumer subsidy the government still made a profit of upto $16 million. (see Table 6) This profit could be invested in irrigation facilities in the rural areas to enable peasant farmers to grow wheat. Although the model cannot directly evaluate the effectiveness of investing in irrigation facilities relative to producer transfers it is assumed that this would have the added advantage of increasing the viability of rural farmers by lessening their dependence on rainfall, even for summer crops.  5) Irrigation Fund Policy: Irrigation costs can be broadly divided into two categories: the cost of water storage (e.g dam construction)and the 80  \u000Ccost of installing an irrigation system (pipes, fittings and system assembly). The cost to farmers of irrigation is directly affected by several government policies. Although most irrigation pumps are locally manufactured, those that are imported are assessed a tariff of 20 percent. In addition all pumps, locally manufactured or imported are subject to a 20 percent sales tax39 Since 1965 the government has put in place a subsidised government credit program targeted specifically at wheat producers to cover irrigation investment costs. First established in 1965 then reintroduced in 1985 after having been suspended for several years, the National Farm Irrigation Fund (NFIF) extends low cost finance to finance irrigation development, with the condition that any area developed using NFIF funds be used for wheat production for the duration of the loan. This condition was set to ensure that farmers would not use NFIF loans at subsidised interest rates to plant crops other than wheat. The NFIF loan rate currently stands at 9.7% per annum compared to commercial lending rates at 16-18 percent. Investment in irrigation might increase if farmers could use the area irrigated with NFIF loans to grow other crops, especially high value export crops such as tobacco and cotton. Farmers are then able to rotate summer and winter crops thereby increasing the returns per dollar invested in irrigation. The  39  National Planning Agency, Ministry of Finance, Economic Planning and Development, Government of Zimbabwe \"Minute on Economic Appraisal of Irrigation Projects\" Government Printers (1988) 81  \u000Cfarmers then could base their ability to pay back loans on the performance of two or three alternative crops, rather than on wheat only.  6) Increased Imports: Increasing wheat imports may be a viable option to increase availability of wheat. Irrigation could be used to increase the production of export crops such as maize, cotton and tobacco. The foreign currency earned through export commodities could be used to pay for commercial wheat imports. To date most of the wheat imports have been arranged as barter deals especially for maize exports sent to Mozambique by international organisations as food aid. The general decline in commodity prices on the international market has made this option less attractive, and this is exacerbated by the high costs of transport and the dependency on neighbouring countries (South Africa, Mozambique) for inland transportation. The recurrent droughts also make this a risky option as there is not enough maize to use for barter during the drought. 6.3 Issues for Future Research:  The prices of many agricultural inputs in Zimbabwe are influenced directly or indirectly by government policies, such as taxes, subsidies, import tariffs, export controls, quotas, marketing regulations, minimum wage legislation and exchange rate controls. The following section reviews selected government 82  \u000Cpolicies on the fertiliser and crop chemical industries in addition to varietal and yield improvement of wheat.  Fertiliser:  The fertiliser industry in Zimbabwe consists of four private companies (two importer/manufacturers and two distributors). Because fertiliser is classified as an \"essential commodity\", its pricing structure is subject to government regulation. Pricing of fertiliser is determined at cabinet level, based on recommendations developed through negotiations involving government ministries and industry representatives. The policy of cross-subsidising fertilisers was removed in 1975, resulting in a substantial increase in the prices of fertiliser. Fertiliser prices have risen more rapidly than crop prices. The nitrogen:wheat price ratios has since been maintained at 4:140. Since 1986 retail fertiliser sales were exempted from sales tax, however fertiliser imports and imports of materials used in manufacturing fertilisers are subject to an import tariff of 20 96.41  Crop Chemicals  Crop chemicals (such as herbicides, fungicides, and insecticides) are imported into Zimbabwe by one of several  \" Reserve Bank of Zimbabwe Quarterly Economic and Statistical Review 9(4) December 1988 41 Ibid 83  \u000Cauthorised chemical distributors, who distribute them to farmers at government regulated prices. The official pricing structure for chemicals is quite similar to that for fertilisers. Retail sales are exempted from sales tax, while all imports are subjected to a 20 percent import tariff42. The price controls, on the prices of fertilisers and crop chemicals coupled with the import tariff make it unprofitable for manufacturers with the result that there are very few operators in these two industries. A lot of times there are shortages of fertilisers and chemicals at a time when farmers need them, because of the limit on the foreign currency made available to fertiliser companies to import chemicals.  Varietal Improvements  On-going varietal improvement is probably one of the least expensive methods of expanding wheat production. The estimated increase associated with varietal improvement and related crop management has been sizable, close to 100 kg/ha per year. With regard to research on new varieties the criterion should be water efficiency and for summer varieties resistance to diseases.  Yield Improvement  The scope for yield increase through additional fertilisers and chemicals or through further adoption of new crop management 42 Ibid 84  \u000Cmethods seems limited since farmers are already applying close to the economically optimal levels of these inputs.\u00B0 Given that water is the principal limiting factor, a high priority area for research is analysing the response of wheat to different amounts of water applied, and to different timings of irrigation. Related research should be undertaken to evaluate alternative irrigation technologies and how they affect the yields. It is quite common in Zimbabwe to have on average 13 irrigations which seems excessive compared to countries like Mexico, Pakistan and India with irrigations\"  Product Development:  Present trends such as increased urbanisation indicate that the demand for wheat will continue to grow in Zimbabwe. There is need therefore to control the rate of growth of the demand for wheat products particularly for bread through correct pricing policies and food product development. By eliminating the subsidy on wheat, and increasing its price to the same level as maize products or other staples, it may be possible to slow the growth in consumption of bread in the long run. Similarly, new maize product development and further blending of flour, e.g with maize and\\or sorghum, would help  o Whingwiri E.E. \"A Survey of Commercial Wheat Production Practices in 4 Provinces of Zimbabwe\". Zimbabwe Agricultural Journal Vol 82 (4)(1985) Longmire J., P. Ngobese and S. Tembo \"Wheat Policy Options in Zimbabwe and SADCC Countries\" (1988)  44  85  \u000Cslow down the demand for wheat. Research on new maize and sorghum products which might substitute for wheat should be undertaken. A number of maize products in the Americas have convenience properties and offer attractive alternatives to wheat products. Research into production of other cereals such as triticale45 which is more disease-tolerant than wheat, and its flour can readily be blended with wheat flour should be given priority.  45 Anfrae G., B. Beckman \"The Wheat Trap: Bread and Underdevelopment in Nigeria\" London, Zed Press (1986) 86  \u000CAppendix I Statistics on Wheat in Zimbabwe  Area Year^(ha) 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990  11361 14788 21322 21151 23680 26745 31250 36138 37881 41599 41834 41872 44132 37904 36042 32707 32878 44808 43067 46298 49321  WPN (t)  YWT^WCN (t/ha(t)  41695 54716 72068 80374 79328 106713 134063 141300 161752 182620 207915 228202 251111 204682 207242 176618 189049 241963 245482 262510 242166  3.67 3.70 3.38 3.80 3.35 3.99 4.29 3.91 4.27 4.39 4.97 5.45 5.69 5.40 5.75 5.40 5.75 5.40 5.70 5.67 4.91  41695 85985 100827 124252 130402 122545 161228 191701 221655 189657 221681 250031 272111 307432 328737 219134 210702 333319 309514 300267 295916  Notes: Area- Acreage planted to wheat YWT- Yield of wheat WCN- Wheat consumption IMP- Wheat import PWT- Producer price of wheat  IMP (t) 0 31269 28759 43878 51074 15832 27165 50401 59903 7037 13766 21829 21000 102750 121495 42516 21653 91356 64032 37757 53750  PWT ($/t) 63 69 69 69 80 110 121 123 110 115 135 165 190 220 250 285 300 330 365 400 460  CPW ($/t) 80 80 80 80 100 100 112 113 113 121 134 157 169 239 285 323 358 378 426 480 550  PIR^PMZ CPI^RNF 80=100 (mm) $/ha^($/t) 0.484 0.499 0.513 0.529 0.564 0.621 0.689 0.76 0.803 0.949 1 1.131 1.252 1.541 1.852 2.009 2.241 2.344 2.609 2.944 3.004  403 600 765 480 540 500 510 498 476 560 678 650 403 464 746 695 422 744 460 600 685  CPW- Consumer price of wheat CPI- Consumer price index RNF- Mean annual rainfall P1R-Price of irrigation PMZ- Price of maize  Source: Agricultural Marketing Authority (various isues) Central Statistical Office (various issues)  87  115 204 235 200 120 2000 540 414 643 989 1222 1289 1380 1369 1598 2200 1660 1660 1750 1864 3600  20 30 26 36 40 37 44 52 53 61 85 120 120 120 140 180 180 180 195 215 225  \u000CAppendix II^Statistics on Maize in Zisbabwe  Year  1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990  Maize Prod'n (t)  Maize Cons'n (t)  980000 1809148 2266523 967395 2124774 1746683 1786123 1655222 1618395 1149842 2813150 2728640 1785800 844000 1283000 2952000 1828000 1677600 402537 1959870 2115657  610686 1113709 1420725 550363 1336856 1006922 958532 941065 877026 802465 969965 1538168 1525545 860000 845000 1130000 1480393 990327 933073 933073 1062500  Producer Selling CPI Price^Price (Sit)^(Sit) 80=100 20 30.05 25.88 36.37 40.11 37 44 52 53 60.5 85 120 120 120 140 180 180 180 195 215 225  4.1 4.17 4.19 4.19 43.24 51.54 51.54 51.54 57.07 63.89 89 137 137 157 177 222 222 222 245 285 305  0.484 0.499 0.513 0.529 0.564 0.621 0.689 0.76 0.803 0.949 1 1.131 1.252 1.541 1.852 2.009 2.241 2.344 2.609 2.944 3.004  Source: Agricultural Marketing Authority Report and Accounts Year Ending 31 March (various issues)  88  \u000CBIBLIOGRAPHY Anfrae, G. and B. 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