Monopsony and the Elephants in the Room: How will Agricultural Markets Empower Rural Malawi?

Updated: Jan 15, 2020

The majority of the world's rural population depends on natural resources and agriculture for its livelihood, according to the World Bank’s Gender and Governance Rural Services report of 2010. In developing countries as Malawi, where the 2014 World Urbanization Prospects (WUP) estimates that the rural population makes 83% of the total population, the rural occupation is agriculture-oriented, comprising the cultivation of produce, processing, and consumption of much of the food available.

But rural populations are also engaged in production of cash crops as tobacco, cotton and sugar, which have made up the lifeline for rural people and profits for the large corporations that monopolize control of the value addition and export processes. Bearing in mind that 76 percent of the extreme poor, globally, live in rural areas, according to the World Bank and IMF Global Monitoring Report of 2013 (Malawi fares better at 56%, again as per the 2014 WUP), we suggest that ensuring access to appropriate markets for rural Malawians will inevitably impact decreasing hunger and poverty.

The structure of many rural commodity markets in Malawi is one of the key factors being proposed in this article as a fundamental factor perpetuating poverty. Like the main cash crops cited above, it is very clear that even international maize markets play a role in determining access of the staple for many Malawians, but also in shaping it as a tradeable on the regional market. Growers and traders of commodity maize are thus driven by the comparison between the regional maize price per ton, measured by the Southern Africa Futures Exchange (SAFEX) price, and the local ‘farm gate’ maize price comparator usually set by the government. Higher relative SAFEX prices incentivize the selling of maize surpluses on markets other than the local one.

The common feature of the commodity market structure is one that tends to be dominated by a consolidated few large buyers sourcing from large farms or consolidating from many small rural farmers via middlemen. Economically speaking, in markets with potentially too many suppliers of commodity produce and only a handful of buyers—in other words, monopsonistic markets—the negotiating power of rural farmers, many of whom are also women, weakens. Without the ability to aggregate produce, and negotiate better contracts and prices, rural smallholder farmers are particularly disadvantaged. Moreover, as more land is drawn into contract farming and sourcing single and large buyers, ecosystem resilience may be compromised and indigenous crop varieties lost. The twin concerns of livelihood security and environmental sustainability become apparent if the country is to address the transformation of agricultural markets to work for rural people and their communities in Malawi.

The policy mechanism needs to provide the necessary conditions in which rural farmers can flourish. Among key economic policies are: enforcement of aspects of the Competition and Fair Trade Act (1998) at the level of produce buyers will create free and competitive markets for buyers of rural produce while guaranteeing the protection of the numerous small scale farmers; rural infrastructure development; and enforcement of pricing controls that protect farmers from unfair trade practices. The caveat for pricing controls, however, needs to lie in the appreciation of how effective these price controls can be, as one working paper from the International Food Policy Research Institute (IFPRI, July 2016) cautions against the unnecessary public investments in policing unbinding farm gate price controls in the maize market in particular.

Such micro- and macro-economic policies at the national level provide direct incentives for rural farmers to enter and, most importantly, persist in the market. With the right mix of collective bargaining, international buyers might eventually pay the right buck for the ton. Furthermore, some local agricultural policies that promote investments in rural commercial farming as well as adoption of initiatives for value chain development would also go a long way to foster sustainable livelihoods for Malawi’s rural populations.

Working with the Big Elephants in the Room

The success of the rural farm economy in the face of a globalized world requires that global trade negotiations translate into proper local actions that promote the productivity of the farmer, but also into their protection from international shocks so they can more predictably get a fair deal. To this end, it is somewhat (we will soon explain our despair) comforting that the sustainable development framework for the first time addresses the issue of the functioning of the World Trade Organization. For Malawi, and many developing agricultural countries, the seventeenth goal of the 2030 Agenda for Sustainable Development will enable a more candid platform where international commodity trade can be negotiated through a ‘fairness lens’.

Whether this internationally agreed target will guarantee that this happens is another issue. But is goes without saying that there is dire need for deliberate actions that will benefit the poor rural farmer through its redress of the world trading system. This, however, would be an achievable end if there were no political hurdles in play.

Also, an enabling legal environment in the international and national domains is necessary to facilitate fairness for rural farmers in accessing resources and incentives for effective participation in the market.

Finally, despite the enormous value added through their heavy workload and significant production, rural farmers tend to be highly economically and socially vulnerable as well as perpetually resource and time poor. Consequently, local policies that interact with the notions of social and economic discrimination of the almost 8 million of rural poor Malawians as they lack access to markets, finance, social protections and services, adequate sanitation, skills and technological know-how and equipment (e.g. seed, fertilizer, time-saving machinery) could not be overemphasized.