Liquidity constraints for variable inputs at planting time and the maize production and marketing decisions of smallholder farmers in Zambia

Abstract

Increasing smallholders market participation is acknowledged as an important step towards greater rural prosperity in developing countries. While existing literature identifies high transaction costs and market imperfections as challenges faced by smallholders in accessing agricultural markets, less attention has been paid to the role of constraints to the production of a marketable surplus. Specifically, there is a dearth of empirical evidence about how liquidity constraints during the production period that limit smallholders’ investments in agricultural inputs can affect agricultural production and subsequently their market participation and choice of marketing channel. We explore this issue in the context of the Zambian maize market during a period when the country's parastatal marketing board – the Food Reserve Agency (FRA) – operated alongside private buyers and purchased large volumes of maize at a pan-territorial price that exceeded average market prices. Although we cannot definitively identify causal effects, we find strong and robust associations indicating that smallholder maize-growing households who were liquidity-constrained during the production period harvested less maize, were less likely to sell maize, and were less likely to sell to the FRA, as compared to those who were unconstrained. Liquidity constraints during the production period likely exacerbate the already disproportionate capture of FRA benefits by wealthier farmers.