II. THE MALAWI ECONOMY, TRANSPORT BY RAIL AND DOMESTIC TRADE IN AGRICULTURAL COMMODITIES

# _The Malawi Economy_

Malawi is a small landlocked country in the south of Africa, measuring approximately 800 km from north to south and 150 km from east to west, in area size around 40% of the UK, bordering in the northwest with Zambia, in the northeast with Tanzania, and in the south with Mozambique. A large lake, Lake Malawi, part of the Great Rift Valley, stretches from north to south, along the east border of the country (see figure 1). During the study period (1998-2006), the population increased from close to ten million to 13 million and is mostly rural: only a small fraction (11% to 15%) lives in the cities Lilongwe, Blantyre, Mzuzu, and Zomba. More than 80% of the Malawi population depends for food and income on subsistence farming. The incidence of poverty is high: more than 50% of the population in Malawi is poor (Integrated Household Survey 2005 [IHS-2], National Statistical Office), poverty is extremely high in remote rural districts (e.g., Chitipa 67.2%, Nsanje 76.0%, and Chikwawa 65.8%), and in the southern region at least ten percentage points higher relative to other regions. Malawi suffers from occasional food shortages due to drought and poor harvests (see Zant 2012, 2013). The key food crop is maize, followed by cassava, rice, groundnuts, and beans, all with considerably smaller shares. Nearly every city, town, or larger village has one or more markets for agricultural food crops on a regular basis, often daily or weekly. Both local farmers and traders operate on these markets.

Tobacco is by far the most important cash crop. Just like the other major cash crops, sugar and tea, tobacco cultivation dates back to the colonial period. Tobacco, however, has become nearly completely smallholder-based in the course of the 1990s (see Zant 2016), while tea and sugar production is (still) mainly on account of estates. The major export crops are marketed in a different way relative to food crops: through auctions in the case of tobacco and tea, and through a large processing company (Llovo) in the case of sugar. Tobacco and sugar exports are also transported by rail.

# _Malawi Markets for Agricultural Commodities: Production, Prices, Domestic Trade and Demand_

In the empirical analyses, we consider prices of a few food crops, notably maize, rice, groundnuts, and beans. These food crops are important crops in the Malawi context where maize takes an outstanding position, produced by nearly all farm households and accounting for 50 to 60% of the diet of most people in Malawi. Production of maize, rice, and beans is entirely consumed domestically, although, in case of bumper crops, small quantities are exported. Groundnuts are partly exported, but, again, the bulk of production is consumed domestically. With the exception of rice, these crops are cultivated in all Malawi districts (see supplemental appendix). Cultivation of groundnuts is concentrated in the central region and less common in the southern region, and pulses is concentrated in the southern region and less common in the north and central region.

Seasonality in production combined with a constant demand translates into strong seasonality in prices: prices tend to be low in the months after harvesting (April to June), and subsequently increase continuously to reach high levels just before the next harvest is available. Differences between highs and lows are often larger than 100% (see supplemental appendix), and this has major implications for food security (see, for example, Kaminski et al. 2016). Since price differences across markets are an important driver of trade in agricultural commodities, variations in price seasonality across markets are likely to trigger trade. Seasonality in prices is more pronounced in urban areas, due to higher income, larger population, and lower local supply. Price seasonality is, on average, largest in maize, smallest in rice, and groundnuts and beans are in between.<sup>2</sup> Maize is also an exception in terms of (relative) value: rice, beans, and groundnuts are high value crops with prices of, on average, four to

> 2. We calculate seasonality in prices by dividing monthly prices with average price. The average price is a centered 12-months average with a moving window. The resulting number that measures the extent to which monthly prices diverge from the season average is dimensionless and automatically takes account of price changes over time.

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