input or product marketing chains will also stimulate growth by creating a production response.

Is there market failure in agricultural input and product chains? An analysis of the efficiency of agricultural value chains is presented in later chapters but outline results indicate that several market failures artificially lower smallholder profits. Firstly, prices of fertilizer are higher in Malawi than Zambia or Mozambique. This is partly explained by higher external transport costs, and poor timing in procurement arrangements, but it is also due to higher dealer mark-up – estimated at 16% in Malawi compared to 5% in Zambia and less in Mozambique. Although it is not clear whether this is because of monopoly power or the ex-ante risk of government intervention preventing market entry, the high mark-up inhibits a growth response.

Secondly large efficiency improvements are likely in product marketing chains. The tobacco marketing process, being the dominant export, is a particular example of this. Most tobacco is sold at auction using the floors run by Auction Holdings Ltd (AHL). Smallholders pay transporters to bring their tobacco bails to an auction floor, which on arrival can wait for over three weeks on the back of a lorry before it clears the queue. Alternatively bails are deposited in a TAMA (Tobacco Association of Malawi) depot and transported later. This protracted process results in significant losses to the grower. The transporter charges not only for transport but also for the de-facto warehousing service that the truck provides; those directing the queue have ample opportunities for rent seeking; and bails left in depots are prone to theft (partial or total) or switching of the crop. As a result the shadow price of avoiding the auction queues is high. Producers will often sell tobacco at a huge discount to intermediate traders who take their place in the auction process. Alternatively many growers prefer to export their crop informally to Mozambique or Zambia which have rural markets run by buyers. Many of these operate contract farming, but Malawian growers often prefer to receive immediate payment at contract farming prices (with the cost of inputs deducted) than wait and sell on the auction floor in Malawi.

Thirdly the spatial location of market centers has a strong impact on production response. Tobacco production clusters around the auction outlets of Lilongwe, Kasungu and Limbe, and despite high agronomic potential elsewhere, the IHS data (NSO, 2005) reveals that cropping intensity rapidly trails off with travel time to market centers. The spatial dimensions to growth are discussed in a later chapter, but the clustering of export crop smallholders around market centers is also seen for sugar, tea and cotton.

Because of the demonstrated supply response to farm gate prices, improving efficiencies in the value chain or in reducing travel times to product markets will feed directly into growth. Although more work is required to establish the marketing chains with potential for improvements, there are strong signals that inefficiencies in tobacco marketing results in high additional costs to growers from transporters, traders and risks from rent seeking and theft.

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