Dealing with a market Collapse Fertilizer in Zimbabwe

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This is a classic case of unregulated government intervention in market that may causes numerous unintended consequences (mainly triggered by, demand - supply gap) endangering the existence of marginalized population.

Situation Analysis:

The well functioning fertilizer market in Zimbabwe with a strong value chain structure started trembling when in year 2000 government started intervening with a notion of providing the farmers a better deal (controlled price) as an attempt to fight against massive inflation, rising costs and exchange rate fluctuation. But in reality, unplanned price control over the final product caused reduced supply and emergence of an illegal market that made the fertilizer "unreachable" for most of the marginalized and unorganized farmers. These interventions not only made the fertilizer scarce and costly but also created a crowding out effect [1] on several fertilizer whole-sellers and retailers.

Problem Analysis:

The failure of Zimbabwe fertilizer market was primarily caused by government intervention that has impacted both demand side and supply side variables. As a result the market clearing equilibrium got twisted. In this section, we will try to see different demand side and supply side variables that got impacted due to government interventions.

Problem related to "Supply" side of the equation:

Single point price control:

In an attempt to keep the price affordable for the marginalized farmers, govt. put a price ceiling (maximum price) on fertilizer retailing. But, as there was no control on the input (raw materials for fertilizers) markets, this intervention reduced the operational viability for the manufacturer. As the manufacturers were forced to sell fertilizer at a price below their cost of production, to minimize the operational loss the only option they were left with is supply reduction.

Crowding out of intermediate value chain actors:

As a consequence of reduced supply, whole-sellers were put in a position where they had almost nothing to sell. The expected return of their investment (considering acquisition, transportation, maintenance and distribution cost) made it more justified to close the operation. For the retailers who used to offer credit sales to the farmers, became more vulnerable due to the over inflationary effect. These forced a lot of intermediate actors quit the value chain.

Figure 1 : Interaction of Demand and Supply variables

Unregulated rise of illegal market (supplier)

After the govt. procurement for state run programs, the residual fertilizer which was well below the market demand, were being purchased by the powerful, well-connected people who then channel it to illegal market for selling at exorbitant price. Also the farmers in land reform areas who had more allotment than what they actually needed could sell their extra fertilizer to this illegal market. This rise of unregulated illegal market caused the minimally available supply becoming unaffordable for the marginalized farmers.

Problem related to "Demand" of Fertilizers:

Government purchase for land reform program

Without ensuring the additional supply required for the market, government using its stake (share holding) in the manufacturing companies, started direct buying for its land reform program. This additional demand from government project, made the fertilizer scarcer.

Proposed Interventions:

For devising the solution of this problem, strategic interventions from the regulatory side (government), demand side (fertilizer users) and supply side (fertilizer manufacturer) would be required. A mixed approach of demand side stimulation and supply side stimulation and intervening simultaneously can only help the situation to get improved.

Strategic Focus: Demand Side Stimulation

Creating and Strengthening Business Member Organizations (BMO) for farmers

With the exemplary result from FACHIG presented in the case, we can conclude collective bargaining power is always more effective in terms of trouble shooting. So, throughout Zimbabwe, this type of BMO needs to be established. But, only creating the BMOs will not help, unless their lobbying and advocacy strength is enhanced.

Strategic Focus: Regulatory Intervention

Demand rationalization for state run program

In the case, it is clearly mentioned that farmers under land reform programs were getting more than their required amount of fertilizers. That finally ended up going to the illegal market. So, government needs to be more cautious and selective while providing fertilizer allotment to the farmers under state run programs.

Figure 2: Result Chain (expected) of the proposed interventions

Enabling environment for intermediate value chain actors (traders)

Traders play a crucial role in distributing fertilizers to the remote areas. They not only make the fertilizers physically available to the farmers, through innovative mechanisms (e.g. credit sales) they also make sure that everyone gets a chance to use it. So, controlling the "illegal market" stringently, government needs to create space for these intermediate actors to return to their businesses.

Macro Economic stability (holistic price ceiling)

The main triggering factor of the discussed market failure was uncontrolled and accelerated inflation which can be attributed (at least partially) to government failure. So, to eliminate the root cause, government needs to work on stabilizing the macroeconomic indicators (e.g. inflation rate, exchange rate) from fluctuating this rapidly. But, as an intermediate intervention, government needs to take up on a holistic approach of price control. No government can set a ceiling for final products without considering the flow and price of the raw materials. Without making it rational (profitable) for the manufacturer to operate, government can't ever be successful in maintaining the required supply from private sectors.

Strategic Focus: Supply Side Stimulation

Increased supply to meet the additional demand

Assuming everything remained unchanged (cetris peribus), the fertilizer demand in Zimbabwe market already got increased due to the additional demand from government procurement for land reform initiative. To offset the effect of this additional demand from raising the price, market needs to adjust its supply. So, the capacity of the existing producer needs to be maximized (along with incentivize their rational for production) and if required new plants/manufacturer need to be established.

Conclusion:

The basic equation of demand-supply interaction in market is too delicate to intervene into. If not adequately analyzed and considered, it always carries the risk of sprouting unintended crisises. Even if government has the right intention of serving the marginalized population, a holistic consideration of every aspect should be exercised before manipulating the market forces artificially.

(Number of Words: 1024)

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