The effect of market liberalization on maize milling/retail margins in South Africa

Maize meal is the most important consumer staple food in South Africa. Studies of Southern Africa have shown that South African maize-meal milling/retail margins tended to be high when compared to other countries within the region. In particular, the milling/retail margin in South Africa was found to be more than twice that of neighboring Zimbabwe, although both industries faced comparative cost structures and Zimbabwe's milling industry was concentrated among fewer millers. The objective of the research, reported in this paper, is to determine, econometrically, the effect of market liberalization on the maize milling/retail margins within South Africa. Economic theory of market liberalization would predict a reduction in the real price margins between processed and raw agricultural products due to entrance into previously closed markets by the informal sector, thereby increasing competition among industry players. Feasible General Least Squares method of estimation is applied to two reduced form linear models of the milling/retail margins in which a binary explanatory variable has been included to capture the effect of market liberalization. The period of study covers the marketing years from 1976/77 through 2000/2001. From this study we find that despite market liberalization the maize milling/retailing margin continues to grow in real terms within South Africa, indicating a need for further investigation into the concentration of the market and the possible entry barriers at this stage of the maize marketing system.