Analysis of social profitabiity and comparative advantage of domestic wheat production in Kenya

Abstract

Kenya imports over 50% of its domestic wheat requirements. The potential import bill for wheat is projected to reach US $ 545 million over the 1991-2000 period. Further, wheat imports denominated in Kenya shilling, constitute more than 50% of the grain imported into Kenya every year (table 1.3) . Given this background, it lS seen that Kenya makes a large outlay on wheat imports. This has prompted reactions from the government aimed at trying to close the gap between domestic wheat production and consumption. The present effort is to expand wheat acreage. However, since the competition for land has become very stiff, it has a very high opportunity cost. Putting extra land under wheat will mean removing land from another crop or livestock enterprise. Therefore, Kenya has to have comparative advantage in wheat production to make further expansion in wheat acreage economically optimal. This study used the domestic resource cost methodology to estimate comparative advantage of wheat production in Kenya. This methodology allows the researcher to find out which among a set of alternative production acti vi ties is relatively most efficient, ignoring the effects of distortions in the economy resulting from government policies and market failures. The DRC methods generates several measures of relative economic efficiency of production alternatives. One of these measures, net social profitability (NSP), indicates the contribution of each production alternative to national income, measured in terms of social net returns to land. A second measure, the resource cost ratio (RCR) r indicates the efficiency of each production alternative in using domestic resources to earn (or save) foreign exchange. Comparison of social profitability and lor resource cost ratios provide an empirical measure of the underlying pattern of comparative advantage because both measures capture the ability of production alternatives to contribute to national income. Domestic resource cost analysis show that given the 1993 production technology and price environment, wheat production in the high potential areas is inefficient. However, Kenya has comparative advantage in wheat production in the low potential areas. Results of sensitivity analysis showed that if yield in the recommended wheat technology rose by 11% or alternatively, if the world price exceeded 168. 45$/t at the current yield level, the recommended wheat tecbnology will become efficient in the high potential areas. The fact that wheat is still grown in the high potential areas points to other motivating factors. For instance, wheat production is less labor intensive and wheat takes shorter time to mature than maize. In some places like Mau Narok, the one year required for maize to reach maturity dissuades farmers from putting their land under maize despite its relative profitability. In addition, recent observations show that domestic price of wheat is firmer than that of maize. Availability of cheap maize imports has brought pressure to bear on maize price and the disparity between the recommended price and the actual prices has been substantial. Analysis showed that past policies taxed maize farmers by pricing maize below its import parity price. On the other hand, policy transfers on wheat has been minimal because wheat has been priced at its import parity. There was an implicit tax on dairy production because the 1993 market prices of agro-chemicals were higher than the estimated long-term social prices. Since it has been found that there is greater potential for wheat production in the low potential areas, there has to be concomitant efforts to protect this fragile agricultural land. Longer lease periods are necessary to give incentives to the leasers to invest in land conservation measures. In future, more research efforts should be focused on increasing wheat productivity than has been the case presently. Growth in productivity of wheat is essential in making wheat production competitive. The current average wheat yield of 1.8 tones per hectare ip low compared to international average yield level of 3 tones per hectare.