**The 2011 decline in overall supply was very large relative to what we would have expected from previous years.** The right hand panel of Figure 4 shows the overall supply picture (local production and imports), as well as a naïve prediction of what supply would have looked like had the average seasonal and overall trends since 2009 persisted<sup>39</sup> .  At the peak of the price surge, total supply was at close to 50 percent of that which might have been expected under ‘normal’ seasonal conditions. Note that looking at the price series we do not typically observe seasonal differences in prices.  It is only when seasonal fluctuations in production are exceptional and/or imported supply is sufficiently disrupted (as in 2011) that we would expect to see big price changes.

**The evidence available does not suggest that** **_anti-competitive_ conduct within the local industry was a major cause of the sugar crisis.** There are clear indications that there were real production and import shocks to supply that merited a price increase. Anecdotal reports mention that there were _shortages_ on the market, and both wholesalers and retailers undertook quantity rationing<sup>40</sup> .  This suggests that retail prices could actually have increased further, to the point where the market cleared – not something that is consistent with the view that price increases were _caused_ by collusion. In addition those reports assert that in August 2011 Mumias - Kenya’s largest sugar company – announced a recommended retail price to curb price rises by retailers (such a move might be problematic in some contexts, as it may be a tool for anticompetitive practices, although that does not appear to be the case here). At the time there were even stories that some sugar mills might close due to the acute lack of cane<sup>41</sup> - again suggesting that the production shock was genuine.  Nonetheless, longer-term anticompetitive practices in the industry cannot be ruled out.

**Prices spiked throughout the value chain during the crisis, driven by ex-factory prices and wholesale margins, but this does not necessarily represent anticompetitive behavior.** The left hand panel of Figure 5<sup>42</sup> shows ex-factory, wholesale and retail sugar prices. One can see that these prices are quite tightly linked together. A large portion of the price spike in 2011 came from the ex-factory price, but there was quite a dramatic change in wholesale and retail margins (right hand panel of Figure 5).  Retail margins actually _fell_ while wholesale margins increased sharply<sup>43</sup> . However, even though wholesale margins increased over the period, additional evidence would be needed to assess potential _anticompetitive_ conduct at the wholesale level. The price change may simply reflect the need to recover fixed costs in the face of lower volumes due to the shock to cane supplies.  As noted in the previous paragraph, the fact that shortages persisted suggests that these prices could have been increased even further to clear the market.

> 39 The predicted supply is estimated from regressing the total supply (production plus imports) between January 2009 and May 2011 on monthly dummies and a time trend.  This is not intended as any reasonable forecast of the counterfactual, merely an illustration of what might have occurred had previous seasonal and overall patterns continued.

> 40 See for example: <u>http://agritrade.cta.int/Agriculture/Commodities/Sugar/Uncertain-future-for-Kenyan-sugarsector-and-wider-EAC-developments</u> and FAS (2013).

> 41 See for example: <u>http://allafrica.com/stories/201107290072.html</u>

> 42 Retail prices reported by FAS here are very slightly higher than the retail prices recorded under CPI.  This is likely due to differences in sampling/weighting.

> 43 Kenya Sugar Board quarterly data available online gives a confusing picture of this period, due to what is certainly a typo in the third quarter of 2011.  In these data the mean value for the third quarter of 2011 is outside of the high-low range reported for the same period.

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