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AN ANALYSIS OF THE SYSTEM IN THE LARGER LONDIANI

SUB-COUNTY OF KISII COUNTY, KENYA

BY

JOEL KIPYATURA

AGR/PGDDC/007/11

A RESARCH PROPASAL SUBMITTED TO THE SCHOOL OF


AGRICULTURE AND BIOTECHNOLOGY IN PARTIAL
FULFILMENT OF THE REQUIREMENT FOR THE AWARD OF
THE DEGREE OF MASTER OF SCIENCE IN AGRICULTURAL
ECONOMICS AND RESOURCE MANAGEMENT OF

UNIVERSITY OF NAIROBI

SEPTEMBER, 2013.
ABSTRACT

In a market, price signals guide and regulate production, consumption and marketing
decisions over time. Therefore, identifying the causes of price differences in spatial
markets has become an important analytical tool to understand markets better. If
markets are not well integrated, price signals are distorted, which leads to an
inefficient allocation of resources. Further, it may constrain sustainable agricultural
development and aggravate inequitable patterns of income distribution. The dry maize
grain marketing system in the larger Kipkelion sub County of Kericho County, Kenya
deserves to be developed into a strong network of efficiently functioning markets, as
more than 85% of the dry maize grain production is channelized countywide.
However, due to price differences in the markets, there may be a problem in the
markets i.e. the markets may be segmented. The study therefore, aims to analyze
marketing system in the larger Kipkelion sub County of Kericho County, with a view
of making recommendations for improving the marketing system in the county. The
objectives of the study are to determine whether dry maize grain markets in the larger
Kipkelion sub county markets are integrated and to determine the marketing costs
associated with the dry maize grain markets. It is hypothesized that dry maize grain
markets in the Kericho County are not integrated and dry maize grain price variations
across markets do not reflect marketing costs. The study will focus on the larger
Kipkelion sub county of Kericho county, Kenya. Purposive sampling will be used to
select four markets in the sub county, with Forternan, londiani and Kamasian being
the rural markets and urban market is Chepseon. Random sampling procedure will be
used to select traders from each market. Forty five traders from each market will be
interviewed to come up with a sample size of 180 respondents. Structured
questionnaires will be employed to collect primary data, which are designed to solicit
information on traders socioeconomic characteristics, marketing characteristics,
operating costs and returns. In addition, secondary data will be collected from the
Ministry of Agriculture of average monthly retail dry maize grain prices for a two
year period from January 2011 to December 2012.Co-integration model will be used
to analyze market integration. The statistical package for social scientists (SPSS) will
be used to generate descriptive statistics while time series data will be analyzed using
Excel and Eviews. The study is expected to provide guidance for policy
recommendation, add to the existing knowledge on analysis of the dry maize grain
marketing systems in the Kericho county of Kenya and to form a basis for future
research.

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TABLE OF CONTENTS
ABSTRACT ...................................................................................................................ii
CHAPTER ONE ............................................................................................................ 1
INTRODUCTION ......................................................................................................... 1
1.1 Background of the study ...................................................................................... 1
1.2 Statement of the Problem ..................................................................................... 4
1.3 General Objective ................................................................................................. 4
1.4 Specific Objectives ............................................................................................... 4
1.5 Hypotheses of the Study ....................................................................................... 5
1.6 Justification of the study ...................................................................................... 5
1.7 Significance of the Study ..................................................................................... 6
1.8 Scope of Study ..................................................................................................... 6
1.9 Limitation of the Study ...................................................................................... 6
CHAPTER TWO ........................................................................................................... 7
2.0 LITERATURE REVIEW ........................................................................................ 7
2.1 Introduction .......................................................................................................... 7
2.1.1 Dry Maize grain sector ...................................................................................... 7
2.2. Market Integration Analysis ................................................................................ 8
2.3. Marketing Cost Analysis ................................................................................... 11
2.4. Price Differential Analysis ................................................................................ 12
2.5. Co integration Analysis Model ......................................................................... 12
2.6. Literature on relevant empirical studies ............................................................ 14
2.7. Theoretical Framework ..................................................................................... 17
2.8. Conceptual Framework ..................................................................................... 18
CHAPTER THREE ..................................................................................................... 19
RESEARCH METHODOLOGY................................................................................. 19
3.1. Introduction ....................................................................................................... 19
3.2. Research Design ................................................................................................ 19
3.3. Location of the Study ........................................................................................ 19
3.4. Types and sources of data ................................................................................. 19
3.5. Target Population .............................................................................................. 20
3.6. Sample and Sampling procedures ..................................................................... 20
3.7. Data collection instruments ............................................................................... 20
3.6.1. Validity ........................................................................................................... 20
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3.6.2. Reliability ....................................................................................................... 20
3.8. Data collection procedures ................................................................................ 20
3.9. Data Analysis .................................................................................................... 21
REFERENCES ............................................................................................................ 26
WORK PLAN .............................................................................................................. 31
BUDGET ..................................................................................................................... 32
APPENDIX 1 : QUESTIONNAIRE ........................................................................... 33

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CHAPTER ONE

INTRODUCTION

1.1 Background of the study

The agricultural sector in Kenya is a major contributor to the economy and provides
livelihood for the majority of the population. Primary production plays an important
part in maintaining the countrys food security, while the industrial and horticultural
crops subsectors are important foreign exchange earners. Agricultural marketing on
the other hand has been overlooked and production given a lot of attention due to the
traditional belief that only production is crucial and agricultural marketing has been
passively considered to adapts to the stages of economic development. However,
Economists and planners have re-examined this traditional belief to ensure
agricultural marketing is given priority in terms of economic development. The
emphasis for an efficient marketing system for sustaining and accelerating agricultural
production and thereby promoting economic growth in both developing and
developed countries is currently being accorded broad recognition (Mafimesebi
2001).
Maize is currently the third most traded cereal, after wheat and rice, with a total
estimated production of 828 million tonnes (GOK, 2011). This crop is used as a staple
food source especially in Latin America and Africa however, because of its low prices
and worldwide distribution; it has become the most important raw material for animal
feed and for several industrial processes. Maize (Zea mays, L., Poaceae family), also
known as corn, is a very versatile crop, growing in all sorts of edaphic, altitudinal and
fertility conditions, which explains its global adaptability and its many types of
varieties.
The international maize market continues to be dominated by a few exporting
countries on one side and by numerous importers from all regions of the world on the
other. Although the United States maintains its position as the most dominant player,
given that it is the worlds largest producer, consumer and exporter of maize, other
countries such as Argentina, Brazil and China have also gained ground and become
important actors in world markets (GoK 2012). Underlying these developments,
however, the structure of the global maize sector has become even more concentrated
with currently only a handful of large private firms in control of storage and

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transportation operations across the supply chain with an extensive worldwide
presence.
Agriculture plays a dominant role in Kenyas economy despite the fact that upwards
of 85 percent of Kenya is classified as arid or semi-arid (leaving arable land at a mere
15 percent of the total land area) and over-dependence on rain-fed agriculture sector
leaves the country vulnerable to the vagaries of weather. Agriculture contributes 65%
of total exports (KSHS 194 billion). Coffee and tea are the principal exports;
however, flowers and horticulture are playing increasingly important roles as foreign
exchange earners. Agriculture also accounts for 18% of the total formal employment
of 1.8 million (GoK, 2030), with 75 percent of the population directly or indirectly
employed in this sector.
The key players in Kenyas agricultural production are the small farmers; those
cultivating less than 1 hectare of land to produce food mainly for home consumption
with their surplus sold for badly needed cash. 75% of the overall production is
produce by these farmers and other 25% is grown by large scale farmers. These
farmers are particularly vulnerable to unpredictable rainfall and seasonal rivers,
streams and wells. Therefore crop failure is common, leading to food shortages and
even to famine.
Kenyas economic growth has averaged around 3 percent per annum over the last
couple of years with an estimated Gross Domestic Product (GDP) of US$ 31.4 billion
in 2008. The Kenyan economy is heavily dependent on agriculture (24% of the GDP),
but other key industry sectors are manufacturing, tourism, fisheries, mining, energy,
telecommunications and finance (GoK, 2008)
According to Kenya Maize Development Programme (KMDP) maize is the primary
staple food crop in the Kenyan diet with an annual per capita consumption rate of 98
kilograms contributing about 35% of the daily dietary energy consumption (FAO
STAT,).
There are over six categories of marketing agents in the maize marketing chain. These
are assemblers, wholesalers, retailers, and disassemblers, posho millers and large-
scale millers. In addition, a smaller category of traders using bicycles purchase and
bulk maize at the farm level and deliver to the assemblers, retailers, or posho millers.
A historical perspective of maize marketing in Kenya is important in understanding
the price setting mechanisms. Maize marketing in Kenya for many years had been
under the Maize Produce and Marketing Board and later under the NCPB which was
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formed to cater for all the product marketing boards. Before liberalization of the
sector in 1993, NCPB set the price of maize in the country. Despite the liberalization,
NCPB still plays a major role in price setting as it buys maize on behalf of the
government for countrys strategic grain reserves. NCPB is the single major buyer of
maize with a capacity of over 4 million (90kg /bag) bags. The price that NCPB sets
scales down to other marketing channels. This price is also influenced by imports
from neighboring countries. A farmer sells maize to a consumer directly. The price
setting here is dictated by the reason why the farmer wants to sell the maize. If it is for
an urgent cause (pay hospital bills, school fees etc) the farmer may be forced to accept
what the consumer is offering though low, because other channels may not offer cash
at the time of need. For instance, most of the large maize traders pay by cheque and
the processing may take few days. Therefore, the farmer may not opt for this client
because he needs to obtain the required liquid cash immediately. A producer also sells
maize to a middleman who assembles small quantities from different producers and
sells in bulk to millers or NCPB after sorting and grading. The middlemen capitalize
on their market intelligence to pay a lower prize to farmers in order to make profits
countries.
However, in Kipkelion Sub - County maize one of the main income generating crop
to entire population of which majority are small scale farmers (GoK, 2012).
Market integration as an important aspect of market research provides the basic data
for understanding how specific markets work. The usefulness of such information
lies in its application to policy formulation and decisions, on the extent to which
market development may be promoted. Market integration also helps in understanding
the movement of equilibrium paths of demand and supply for a particular produce or
group of commodities. The degree of proximity of the price movements, the speed
and accuracy of diffusion of price information, or the efficiency of price transmission
or information spread are prerequisites for achieving efficient allocation of resources
across space and time (Jayara, 1992).
However If markets are efficient and interlinked, then the chances of price co-
movement in different markets to exists is high, little has been established in the
maize markets. In addition, little is known on the factors that may cause differences in
market prices, the price transmission mechanisms between the different markets and
whether the spatially separated maize markets are integrated and if so; to what degree.

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1.2 Statement of the Problem

There is an increasing concern by both traders and researchers over the improvement
of rural incomes in the developing countries which calls upon the role of agricultural
marketing .Existence of income variations between the rural and urban areas
discourages people from engaging in agricultural activities and places great stress
upon infrastructure and social services in the cities (Dixie, 1989).
Therefore, it appears the marketing system for dry maize grains is imperfect. Over
the years, maize grain shortages combined with high prices in some parts of the
country have shown that the domestic output has not been able to provide it at an
affordable price. However, it is of great concern to determine the factors (particularly
transportation and marketing information) that are responsible for the price variations.
The price variation indicates that there may be a problem in the markets and they may
be segmented. The study therefore aims to answer the following questions: Does price
variation between markets reflect marketing costs? Could the rural and urban maize
markets be integrated? And, if so to what extent? Are traders making unreasonable
profits on transactions? Are they able to adjust to changes in supply and demand
conditions due to deficiencies in the flow of information, transportation and marketing
facilities?
Research on dry maize grain marketing has focused on such variables as storage
losses, moisture content However variables like integration and cost analysis have not
been systematically investigated and documented fully.

1.3 General Objective

The general objective of the study is to analyze the marketing system of dry maize
grains in Kipkelion sub-county of Kenya.

1.4 Specific Objectives

The following objectives will guide the study:


i. To determine the influence of market integration on the performance on dry
maize grains marketing in Kipkelion Sub - County
ii. To determine the influence of cost analysis on dry maize grains marketing in
Kipkelion sub County.
iii. To determine the influence of price differential on dry maize grains marketing
in Kipkelion sub - County

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1.5 Hypotheses of the Study

The following hypotheses will be tested at 0.05 alpha levels:


Ho1: There is no statistically significant influence of market integration on
performance of dry maize grains marketing in Kipkelion Sub-County
Ho2: There is no statistically significant influence of marketing cost analysis on
performance of dry maize grains marketing in Kipkelion Sub-County
Ho3: There is no statistically significant influence of price differential on performance
of dry maize grains marketing in Kipkelion Sub-County.

1.6 Justification of the study

According to Kenya Maize Development Programme (KMDP) maize is the primary


staple food crop in the Kenyan diet with an annual per capita consumption rate of 98
kilograms contributing about 35% of the daily dietary energy consumption
(FAOSTAT).In the larger Kipkelion sub-county maize growing is a major staple food
as well as source of income to many farmers. The total hacterage under maize in the
sub-county 30,000ha and an average annual production of 960,000 bags(90kg) which
translates to more than Kshs 2.7 billion annually (GoK, 2012) which is sold to several
parts of the county and neighboring counties. The choice of study area is based on the
current improved production and the poor marketing patterns in the area.Despite wide
adoption of high yielding and improved maize varieties released by various country
research institutions, there is still existence of pricing policies and marketing
challenges that has not been improved. After liberalization of commodity markets in
east Africa, there exists a need to assess the maize marketing system in the region.
The benefit of improvement of production can be achieved effectively if the level of
performance is known. If an enabling environment for the operation of an efficient
maize marketing system can be designed then self-accelerating effect on productivity
will arise. Higher productivity contributes to increased inter counties trade, and thus
the demand for market facilities. An integrated market gives advantages for both
consumers and producers. For the producer, information of spatial market integration
enables them to arrange resources more efficiently. Producers can also increase
product specialization and scale economies of production, thus giving the producer
the ability to reduce the marketing costs especially in information and transportation

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cost. For consumers, market integration gives access to new varieties of product and
off-season of products with potentially lower price. In the other side, the market that
is not integrated may convey inaccurate price information that might twist production
decision and contribute to inefficiencies of product movement in markets (Susanto,
Rosson et al. 2007; Abey P. Philip 2008). An efficient marketing system is an
important means of raising the income for both farmers and traders. This enables
them to allocate resources according to their comparative advantage.

1.7 Significance of the Study

A greater understanding on how the dry maize grains markets operate will enhance
the development of a policy framework that will contribute towards the growth of the
agriculture sector.

1.8 Scope of Study

The study will mainly dwell on dry maize grain marketing within the specified
markets and variables stated this is due to the main reason being the areas cited are the
major maize producers in Kericho county and the variables under investigation are
perceived to be the major influences of dry maize grain marketing performance.

1.9 Limitation of the Study

The study will heavily rely on the respondent answers which may limit the study since
some respondents may not give honest responses. Lack of adequate time which may
limit the number of respondents to be interviewed hence limiting the study, resources
such as funds will influence the outcome of the study since the markets to be studied
are wide diverge from each other hence involving a lot of expenses in travelling from
one market to another, which may limit the number of visits to such markets.

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CHAPTER TWO

2.0 LITERATURE REVIEW

2.1 Introduction

The chapter entails the literature review on the dry maize grain sector, market
integration concept, marketing cost concept, price differential analysis, conceptual
framework, theoretical frameworks of co-integration model and a review of marketing
studies that have employed the use of the stated model.

2.1.1 Dry Maize grain sector

Agriculture plays a dominant role in Kenyas economy despite the fact that upwards
of 85 percent of Kenya is classified as arid or semi-arid (leaving arable land at a mere
15 percent of the total land area) and over-dependence on rain-fed agriculture sector
leaves the country vulnerable to the vagaries of weather. Agriculture contributes 65%
of total exports (KSHS 194 billion). Coffee and tea are the principal exports;
however, flowers and horticulture are playing increasingly important roles as foreign
exchange earners. Agriculture also accounts for 18% of the total formal employment
of 1.8 million (Kenya Vision 2030), with 75 percent of the population directly or
indirectly employed in this sector.
The key players in Kenyas agricultural production are the small farmers; those
cultivating less than 1 hectare of land to produce food mainly for home consumption
with their surplus sold for badly needed cash. 75% of the overall production is
produce by these farmers and other 25% is grown by large scale farmers.
The dry maize grain supply chain consists of participants such as dry maize grain
producers, assemblers/collectors, local brokers, wholesalers, retailers and farmer-
traders. All these participants help move the product in a certain chain called a market
channel, which in turn develops to form a market. Participants in the channels
perform different activities and thus different channels seem to offer different service
outputs depending on the intended consumer needs.

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Figure 1: Marketing channels for dry maize grain in Kenya

Dry maize grain producers

Collectors in or near
producing markets

Local brokers in or near producing markets

Urban wholesalers in urban consuming markets


Rural retailer Urban retailers Iterant Suppliers to
retailers
institution

Rural consumers Urban consumers


Institutional consumers

Source: Own source

2.2. Market Integration Analysis

Market integration refers to a situation in which a) the prices in different markets


move together, b) there is trade between the markets, or c) both. In practice, most of
the studies have used price data, so in most cases, market integration is said to exist
when price changes in one market are reflected in price changes in other markets
(Barrett, 2001).

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In making inferences about market efficiency from data on prices the concept of
integration has been central. Market integration can be vertical, spatial or inter-
temporal. Spatial market integration refers to a situation in which prices of a
commodity in spatially separated markets move together and price signals and
information are transmitted smoothly across the markets (Ghosh, 2000). If two
markets are integrated, a shock to the price in one market should be manifested in the
other market's price as well. Spatial market integration can thus be seen to be
synonymous to co-movement of prices in different spatially separated markets. An
integrated market is synonymous with pricing efficiency, i.e., prices as defined by
Fama and Eugene (1970), "should always reflect all information.
Spatial price behavior in regional markets is an important indicator of overall market
performance. Markets that are not integrated may convey inaccurate price information
distorting the marketing decisions of producers and contributing to inefficient product
movements. Therefore, an important part of market performance analysis focuses
regional price analysis and market integration between different market places.
Several methods for measuring price integration have been used beginning with
simple bivariate correlation coefficients. This is the simplest way to measure the
spatial price relationships between two markets. However, this method clearly has
some limitations.
Harris (1979; as quoted by Barrett 1996) argues that simple bivariate correlation
coefficients require filtering to eliminate bias toward spurious integration due to
common exogenous trends (e.g., general inflation), common periodicity (e.g.
agricultural seasonality), or autocorrelation. This makes price spread observations
unreliable indicators of market integration or competition, since those spreads vary
seasonally. In addition, these simple statistics fail to recognize the heterostedasticity
common in price data of reasonably high frequency (Barret, 1996). Other methods
include Variance Decomposition Approach (Delgado, 1986) and Radial Market
Integration Approach (Ravallion, 1986). However, these methods have over the time
been criticized for one reason or another.

One method for measuring the degree of price integration, and which takes the above
mentioned critique into account is the co-integration procedure. This econometric
technique provides more information than the correlation procedure, as it allows for
the identification of both the integration process and its direction between two
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markets. The concept of co-integration was developed and applied by Engle and
Granger (1987). It is an alternative procedure for evaluating spatial market linkage in
the presence of stochastic trends in the price series. Its underlying importance is that it
ensures deviations from equilibrium conditions between two economic variables,
(which are individually non-stationary in the short-run) are stationary in the long- run.
Regional prices move over time because of various shocks. If in the long- run they
exhibit a constant linear relation, then we say that they are co-integrated. The
presence of co-integration between two series is indicative of inter-dependence. In
other words, co-integration indicates non-segmentation between the two series. Co-
integration analysis is a useful tool to give an answer about the existence of a relation
between two economic time series (Goodwin and Schroeder, 1999).
Spatial market integration includes long-run market integration and short-run market
integration. The former refers to such cases in which there exists a long-run and stable
price relationship between two markets. Even if this long-run relationship balance is
broken in the short run, eventually the balance will be renewed. Short-run integration
shows that the price change in one market in some period will bring in the next
period (i.e., immediately) the price change in another market. This reflects the
sensitivity of the spread of product prices between markets.
Integration across marketing stages reflects the effects of price change in one
marketing stage on the price change in next stage. If the prices in different marketing
stages meet the condition of next stage price = this stage price + market charge,
there exists integration between market stages. The integration between wholesale and
retail markets is one example of integration across marketing stages (Susanto, Rosson
et al. 2007).

Temporal market integration reflects the effect of present price change on future
prices. When prices meet the condition of future price = present price + storage
cost, it is called temporal market integration. Studies of temporal market integration
are still in the theoretical research stage, so this paper will not cover this case.
An integrated market gives advantages for both consumers and producers. For the
producer, information of spatial market integration enables them to arrange resources
more efficiently. Producers can also increase product specialization and scale
economies of production, thus giving the producer the ability to reduce the marketing
costs especially in information and transportation cost. For consumers, market
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integration gives access to new varieties of product and off-season of products with
potentially lower price. In the other side, the market that is not integrated may convey
inaccurate price information that might twist production decision and contribute to
inefficiencies of product movement in markets (Susanto, Rosson et al. 2007; Abey P.
2008).
Is it possible for efficient markets not to be integrated? Yes. Recall that exchange
efficiency is defined as a situation in which there are no unexploited possibilities for
mutually beneficial exchange, while integration between markets is defined in terms
of market flows, co-movement of prices, or both. If the transfer cost between the two
markets is greater than the difference in prices between them, then trade between the
two markets is not profitable. In this case, the markets may be efficient in the sense of
there being no unexploited opportunities for trade; in this case, trade would cost more
than the benefits, so there is no mutually beneficial trade. Since there is no trade,
changes in the price in one market will have no effect on prices in the other market, so
the two markets are not integrated (Barrett, 2001).
Conversely, it is also possible to have market integration without market efficiency.
For example, suppose that transfer costs are twice as high as they could be, either
because of collusion among traders, regulated transportation rates, or a large number
of checkpoints where informal payments must be made. If the price difference
between the two markets is large enough, there will be trade between the markets, co-
movement of prices, and perhaps even rapid adjustment to changes in the other
market, even though the market is not efficient. Market integration reflects price
linkages when there is trade between two markets, so studies of market integration
usually use the prices of two markets to test and measure its extent. Transportation is
an important factor affecting market integration. In addition, the spread of price
information, seasonal factors, inflation and intervention of governments are also
factors affecting market integration.

2.3. Marketing Cost Analysis

The cost of marketing includes all the costs involved in the creation of place, time,
and form utilities. Marketing costs include handling, transfer cost and marketing
charges in any transaction performed. In an efficient marketing system, such costs
should be recovered plus a reasonable return to investment (Pomeroy and Trinidad,
1995). Costs vary depending upon the services rendered. The marketing costs usually

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include wages as return to labor; interest as return to borrowed capital; rent as return
to land and buildings; and profit as return to entrepreneurship and risk capital. An
analysis of marketing costs would estimate how much expenses are incurred for each
marketing activity. It would also compare marketing costs incurred by different actors
in the channel of distribution.

2.4. Price Differential Analysis

Mauyo w. (2004), in his study of cross-border beans marketing patterns in the border
districts of Kenya and Uganda defines differential analysis as a process of calculating
the actual price differences between the primary markets surveyed and the selected
urban markets and interpreting them as price efficiency. The price structure of price
is a function of the pattern of trade and transfer cost per unit of a product between
regions that participates arbitrage.
In absence of trade, the structure of prices cannot be determined solely based on trade
cost. The transfer costs determine the parity bounds within which the prices of a
commodity in two markets can vary independently on one another (Baulch, 1997). In
atomistic (very competitive) market structure, it is expected that price differences
between two markets cannot exceed transfer cost assuming that there are no barriers
to entry. This is because, if the difference is greater than the transfer cost, traders will
buy goods from markets where the market price, less transfer cost is lower. If all
suppliers ship homogenous products to a single central market, the price which each
supplier receives under perfectly competitive conditions, is the central price less the
cost of transferring that commodity to a central market.
The site price functions will be used to establish whether the price differentials
between any markets reflect transfer costs (Bressler and King, 1978). Site price refers
to the price of a product at a particular location or site. A product site price is derived
from a particular base market price; that is, it is the market price less transfer cost
from the particular site and the transfer cost is a function of distance.

2.5. Co integration Analysis Model

If two prices in spatially separated markets (or different levels of the supply chain) p1t
and p2t contain stochastic trends and are integrated of the same order, say I(d), the
prices are said to be co integrated if:
p1t - b p2t = ut (3)

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is I(0).
b is referred to as the cointegrating vector (in the case of two variables a scalar),
whilst equation (3) is said to be the cointegrating regression. The above relationship
can be estimated utilizing inter alia Ordinary Least Squares OLS (Engle and Granger,
1987), or a Full Information Maximum Likelihood method developed by Johansen
(1988, 1991). More specifically, p1t and p2t are cointegrated, if there is a linear
combination between them that does not have a stochastic trend even though the
individual series contain stochastic trends ( Stock and Watson, 1988). Cointegration
implies that these prices move closely together in the long run, although in the short
run they may drift apart, and thus is consistent with the concept of market integration.
It involves testing of stationarity, the order of integration of variables, co-integration
and causality tests between variables. A series is said to be stationary if the mean and
variance are constant, finite and independent of the time subscript, as are the
variances of autocorrelations (Tambi, 1997).
The tests applied to the co-integrating regressions are the same as those used in
determining the order of integration of the variables, but here, it is the regression
residuals that are tested. This is done by use of Augmented Dickey- Fuller (ADF) test.
The null hypothesis is that the variables are not co-integrated (Schimmelpfenning and
Thirtle, 1994).
According toTambi (1997), co-integration has become an essential tool for applied
economists aiming at estimating time series models. The estimation presents
difficulties arising when unit roots are present in the data. Ignoring this fact and
proceeding to estimate a regression model containing non- stationary variables at best
ignores important information about the underlying (statistical and economic)
processes generating the data and worst leads to spurious results.
The model has widely been used to assess market integration of agricultural products.
For example, Asche et. al (1999), Goletti et. al. (1995), Dercon (1995), Alexander and
Wyeth (1994), Dahlgram and Blank (1992), Sexton et. al (1991) and Ghosh,2000 .
A significant body of literature has evolved attempting to measure market integration
in order to answer the broad policy reform and market performance question. The
empirical methods have evolved from simple price correlation between market
locations in the 1970s to early 1980s, to lagged regression methods in the late 1980s
and 1990s (Ravallion, 1986), to co-integration methods in the 1990s (Alderman,
1992; Goletti and Babu, 1994). Co-integration methods take into account the fact that
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prices be non-stationary, which causes standard regression analysis to give misleading
results. It also provides information on the long-run relationship between prices and
the speed of adjustment toward that long-run relationship. However, standard co-
integration methods do not take into account the fact that prices may not move
together because the transfer cost is too high to justify trade.
A potential shortcoming of co integration in testing for market integration is the
implicit assumption that transfer costs are stationary (Fackler and Goodwin, 2001;
Barret and Li, 2002). Non stationary transfer costs will result in cointegration tests
suggesting the absence of market integration, as the international and domestic prices
drift apart, in spite of the fact that price signals are transmitted from one market to
another. Nevertheless, non stationary transfer costs cause domestic prices to move
independently from international prices, thus limiting the information that is available
to producers.

2.6. Literature on relevant empirical studies

An early study of grain markets in Ghana used both the Ravallion model and co-
integration methods to examine the relationships between maize, sorghum, and millet
prices in three markets (Alderman, 1992). The study used monthly wholesale prices
over the period 1970-1990 in two markets: Techiman, a maize zone in the center, and
Bolgatanga, a sorghum-millet zone in the north. The author found that maize markets
are relatively well integrated and that there are links between the markets for maize,
sorghum, and millet. On the other hand, the speed of transmission was rather slow,
with full adjustment taking three months.
Badiane and Shively (1998), examined the degree of integration and the speed of
adjustment in Ghanaian maize prices. The study used monthly wholesale maize price
data over the period 1980-1993 for three markets: Techiman, a surplus zone in the
center, Accra, a deficit market in the south, and Bolangtanga, a maize-deficit market
in the extreme north of the country. The analysis was carried out with an
autoregressive model in price levels, as well as a model of price variability. The
authors found that maize prices in both deficit markets were highly integrated with
maize prices in Techiman, the surplus market. However, the relationship was closer
between Techiman and Accra than between Techiman and Bolangtanga, presumably
due to the shorter distance between them. Furthermore, they found that the economic

14
reforms introduced in 1983, including agricultural market liberalization, reduced the
level and volatility in maize prices in wholesale markets, though the degree of
seasonality was still high.
Abdulai (2000) used a threshold co-integration model to examine the relationships
among maize prices in the same three markets in Ghana. The analysis used monthly
wholesale maize data over 1980-1997 for Accra, Techiman, and Bolgatanga. The
study found that prices in Accra responded more quickly to changes in Techiman than
prices in Bolgatanga, reflecting the fact that Accra is closer and a more active market.
Half of the full adjustment in prices back to the long-run relationship occurred in 4-7
weeks. In addition, the results indicated that an increase in the maize price in
Techiman was transmitted faster to the two deficit markets than a decrease; in other
words, the marketing margin was more when it was compressed than when it
expands. This could have occurred because of collusion among traders, changes in
inventory, and search costs. Overall, the study found that maize prices in different
markets were highly integrated.

Jaleta and Gebremedhin (2009) considered the relationship between wheat and teff
prices in six market towns in Tigray region of northeast Ethiopia. The analyses were
carried out using semi-monthly prices from May 2006 to October 2008. The authors
tested the co-integration of wheat and teff prices for each of the 15 pairs of markets.
Wheat prices were co-integrated in 13 of the 15 market pairs, indicating that they
followed common trends. Similarly, teff prices were co integrated in 12 of the 15
market pairs. The town of Adi was the least integrated of the six towns, appearing in
three of the six market pairs that were not cointegrated. This was not surprising given
that it was located more than 50 km from the nearest paved road; in contrast, four of
the others are located on a paved road and the fifth is within 20 km.
In a study of market integration in Uganda, Rashid (2004) examined the effect of
market liberalization on maize price movement. The study compared the behavior of
maize prices before and after market liberalization, which occurred in the mid-1990s.
The analysis was based on weekly maize price data for eight districts over 1993-94
and 1999-2001. The analysis examined how many of the markets were co-integrated
(that is, followed a common trend) in the two periods, as well as the direction of
causality in pairs of markets. The results indicated that market integration had
improved markedly between the early 1990s and the end of the decade. In 1993-94,
15
only four of the eight markets were co-integrated, meaning that they followed a
common trend. In contrast, seven of the eight markets were following a common
trend in the 1999-2001 periods. At the same time, the maize markets in the northern
districts of Gulu and Arua remained relatively disconnected from the other maize
markets in the country. This was explained by the insurgency in the north making
trade with the rest of the country both risky and costly. In addition, there was cross-
border trade between the northern districts of Uganda and southern Sudan, so that
prices in the north reflect, to some degree, market conditions over the border.
Van Campenhout (2007), analyzed the relationship between maize prices in seven
markets in Tanzania using weekly price data over the period 1989-2000. He used a
threshold auto-regressive (TAR) model, which allows pairs of prices to be linked only
when the difference between them exceeds a threshold. The study found that the
implied marketing cost is 2-11% of the mean of the two prices, depended on the
market pair being analyzed. Generally, the markets that were close to each other, such
as Iringa and Mbeya had a small threshold, while those that were farther such as
Iringa and Dar es Salaam had a larger threshold. The study measured the half-life of
the adjustment process, that was, the number of weeks it took for half of the full
adjustment to take place. Across the six pairs of markets analyzed, the half-life of
adjustment was between 4 and 12 weeks. The analysis also showed that the speed of
adjustment had decreased over the 11-year period, the decline being statistically
significant in four of the six market pairs.
Tostao and Brorsen (2005), examined market integration in Mozambique using
monthly retail prices of maize over 1994-2001 and estimates of transfer costs. They
used the parity bounds method (PBM) which distinguishes among three regimes:
competitive trade (when the price difference is equal to the transfer cost), non-trading
markets (when the price differences is smaller than the transfer cost), and
disequilibrium (when the price difference exceeds transfer cost). A measure of the
level of the integration of a market pair is the proportion of the time they are in the
first two regimes. The results suggested that markets within southern Mozambique
were efficient (by this definition) 55% of the time, while those in central Mozambique
were efficient 84% of the time. Southern and central Mozambique was well
integrated, but the transfer costs between northern Mozambique and the rest of the
country were too high to justify maize trade.

16
2.7. Theoretical Framework

The capability of the market system to efficiently perform its development functions
heavily rely on the ease at which the price changes and responses are transmitted both
spatially and temporally. Therefore, the co-movement over time among prices in
varied markets becomes the key indicator of market efficiency. However, market
integration concept entails application in either spatial or temporal and the product
form interrelatedness. Hence, the study will lay emphasis on spatial market
integration that calls on study of price relationships of dry maize grain in spatially
differentiated markets.
Co integration approach will be applied in this research as a measure of market
integration. According to Barret and Li (2002) market integration is tradability or
contestability between markets. On the other hand Goodwin and Piggot (2001)
defined Market integration as the extent to which price shocks are transmitted
between spatially separate markets.
The key objective of studying price integration in a marketing system is to be able to
identify sets of markets that lead other markets in the price transmission process. On
the event that price signals can be identified, then the marketing system will be
performing efficiently. In the marketing integration, if two markets, say A and B, are
cointegrated, then there must be some sort of causality running from one market to
the other. Theoretically, according to Rapsomanik, Hallam and Conforti, 2003, if the
two markets designated as A and B are linked by trade in a free market regime, excess
demand or supply shocks in one market will have an equal impact on price in both
markets.
The goal of market integration analysis is to determine marketing efficiency, which is
the extent, and speed of price transmission between spatially separated markets
(Goleti et al., 1995). It is built on the premise that if a pair of markets is integrated, a
price change in one of them will be reflected in a price change in the other. The
demand for and price of a given unit of plantain in a market would have a dominant
effect on the plantain trade and by extension, price formulation in other trading
markets. This would be an indicator for marketing efficiency since price differences
between the given markets would reflect only transportation costs including normal
profit. The more integrated a market is the more efficient it is.

17
2.8. Conceptual Framework

Dry maize grain supply chain comprise of various participants. These participants
assists in the movement of the product in the market channel, hence forming a market.
All these participants in the channel are task with varied activities and thus varied
channels, therefore offering different service output in line with the intended
consumer needs. However, the performance of these channels can be evaluated using
performance indicators such as efficiency and effectiveness, which entails measures
such as quantity, quality, cost, price delivery time and of course market integration.

Independent Variables Dependent


Variables
Dry maize grain Activities performed
producers and services provided Performance
indicator
Assembling
(efficiency &
Local l collectors effectiveness)
/Assemblers
cost
Retailers/ wholesalers Sorting
delivery

time

Urban traders

Source: own source Distribution price

quality
Consumers (institutional
Storage Market
Rural & urban)

integration

Transportation

18
CHAPTER THREE

RESEARCH METHODOLOGY

3.1. Introduction

This chapter outlines the research methodology of this study, the location of study,
target population, the type of data to be collected, sample and sampling procedures to
be used, the data collection instrument to be used, data collection procedures and
methods to be used in analyzing the data.

3.2. Research Design

Quantitative research design will be used for the study. The design will make use of
numerical data from the questionnaire to examine relationships among variables that
is market integration , price and cost.

3.3. Location of the Study

The study will cover the larger Kipkelion sub county in Kericho County. The area of
research has been chosen because Kipkelion Sub County is the major dry maize grain
producing area in the Kericho County.

3.4. Types and sources of data

The study will embrace the use of both primary and secondary data. The secondary
data will be time series data collected from the Ministry of Agriculture that is the dry
maize grain retail prices. Average monthly retail price data for a two-year period from
January 2011 to December 2012 from the four markets will be used. Other sources are
published and unpublished works from the library e.g. books, journals, academic
research findings, internet and different publications and documentations including
annual reports from the Ministry of Agriculture and other government publications.
Primary data will be collected with the aid of structured questionnaire that will be
distributed to various rural and urban markets, which designed to capture the dry
maize grain buying and selling prices, transportation costs, mode of transport, and
other costs incurred during the marketing process. Other techniques such as
observations and oral personal interviews will also be used.

19
3.5. Target Population

The target population will be 500 dry maize grain traders in the four markets of
Kipkelion sub county of Kericho county of Kenya. The source / rural markets will be
fort-tenan, Barsiele, and Kamasian, while the urban or destination market will be
Chepseon.

3.6. Sample and Sampling procedures

A sample of 100 respondents will be used in data collection. Twenty five traders from
each market will be interviewed that is the rural markets (Kamasian, Fort-tenan and
Barsiele) and urban market (Chepseon) to come up with the desired sample size.
The study will make use of purposive and random sampling. Purposive sampling will
be used in selection of the four markets since Chepseon is the destination market and
the main source markets are fort-tenan, Barsiele and Kamasian.

3.7. Data collection instruments

The data for the study will be collected by use of Questionnaires and Surveys.

3.6.1. Validity

The questions /statements in the questionnaire should addressed the objectives of the
study in order to give valid results, for this to be achieved, the prepared questionnaire
will require approval from the school and conducting a field test using traders not in
the sample.

3.6.2. Reliability

A pilot test will be carried out to ascertain reliability of the research study
questionnaire. Pilot test will ensure that the questionnaire will consistently measure
the objectives of the study. the data collected will be analyzed.

3.8. Data collection procedures

A structured questionnaire capturing all the variables stated in the objectives of the
study will be administered to the random selected 100 traders from the four markets
under the study.

20
3.9. Data Analysis

The traders survey data will be coded and analyzed using statistical package for
social scientists (SPSS) software to generate descriptive statistics, while time series
dry maize grain price data will be entered in Ms-Excel and analyzed in Econometric
Views (E Views software).
Co-integration Approach to Market Integration
According to Korir (2003), its evidence that a number of studies have examined price
integration in different markets, in relation to this the most common measure of
spatial market integration between time series of commodity prices is the bivariate
correlation coefficient. This test uses the pearsons correlation coefficient, a scale-
free measure of the covariance between two price series, giving values between -1.00
and 1.00. (Steffen, 1994), statistically significant and positive correlation coefficients
indicate a spatial integration between the respective pair of markets; while negative
signs indicate that there is no market integration. A coefficient of 1.00 implies that
prices in the markets are perfectly correlated with each other, hence perfectly
integrated markets. The use of price correlation coefficient as a measure of market
integration, however, has some weakness. There are chances that the correlations
could be spurious, rather than resulting from the integrated nature of markets ( Barret,
1996).

One method for measuring the degree of price integration, and which considers the
above-mentioned critique is the co-integration procedure. This econometric technique
provides more information than the correlation procedure, as it allows for the
identification of both the integration process and its direction between two markets.
The concept of co-integration was developed and applied by Engle and Granger
(1987), and further extended by Engle and Yoo (1987). It is an alternative procedure
for evaluating spatial market linkage in the presence of stochastic trends in the price
series. Its underlying importance is that it ensures deviations from equilibrium
conditions between two economic variables, (which are individually non-stationary in
the short-run) are stationary in the long run.
The concept of co-integration and the method for estimating a co-integrated relation
or system provide a framework for estimating the long run equilibrium relationship

21
(Rapsomanik, Hallam and Conforti, 2003). The co-integration method is an iterative
process, which follows these steps:
a) Plotting the price data to observe the trend
b) Testing for stationarity by searching for unit roots through the use of ADF
(Augmented Dickey Fuller)
c) Carry out a co-integration test using Engel and Granger causality test or
Johansen method. It helps in understanding the direction of causality in price
changes.
d) ECM (Error Correction Model) estimation.
Co-integration analysis will be used to check for the relationship among prices in
different markets. When a long-run linear relation exists among different price series,
these series are said to be co-integrated. If geographically separated markets are
integrated, then there exists an equilibrium relationship amongst them [Goodwin and
Schroeder (1991), Sexton et al., (1991)]. The long run equilibrium relationship for
analyzing market integration as used in the previous studies, e.g. Goodwin and
Schroeder (1991), was specified as:
Yt = + Xt . (1)

Where; Yt and Xt = are equal prices of a commodity in two spatially differentiated


markets, rural and urban respectively and and are parameters to be estimated. If
= 0, then the two prices are equal. This is the strict version of the LOP.
A typical regression model to test for market integration between two markets under
the traditional static method is specified as follows:
Yt = + Xt + ut (2)
Where
Xt = price for a central (urban) market in time t
Yt = price series for a peripheral (rural) market in time t
= the intercept term
= a parameter of the slope
ut = error term
If two markets are perfectly spatially integrated, then =1. If this holds, then price
changes in one market are fully reflected in alternative market. When 1 (i.e. < 1
or > 1), then the degree of integration may be evaluated by investigating how far the
deviation of 1 is from unity, (equation2).
22
Test for Stationarity (Unit root tests).
Since price, time series are usually non-stationary and because standard statistical
models do not allow explicit determination of and , a 2- step model by Engle and
Granger (1987) will be used. The first step is to determine the order of integration
of each price series by checking for stationarity. A time series (say Yt) is stationary if
the joint distribution of Yt and Yt + 1 is independent of time (t). This will be
guaranteed by ensuring that the time series is integrated of order zero I (0). Since most
price series have trends in them if only because of inflation, they are usually I (1) and
thus they need differencing once to obtain I (0) process.
Augmented Dickey-Fuller test will be used to determine the order of integration. This
will be achieved by regressing Yt on Yt-1 and several lags of Yt (enough to avoid
auto correlated disturbances).
The model is specified as:
Yt = 0+ 1 Yt-1 + k+t Yt+k + t (3)
Where: Yt is the first difference of prices in market Y, Yt-1 is the lagged price of dry
maize grain in market Y, 0 and 1 are parameters to be estimated, t is the error
term.

The t-statistic on the estimated coefficient of Yt-1 is then used to test the hypothesis
that:
Ho: Yt ~ I(1) Vs H1: Yt ~ I(0)
If the null (Ho) above cannot be rejected then Yt cannot be stationary, it can be
integrated of order one or even higher. To find out the order of integration the test will
be repeated with Yt in place of Yt thus regressing Yt on a constant Yt-1 and
several lags of Yt. ADF test is then used to test the hypothesis that:
Ho: Yt ~ I(1) Vs; H1: Yt ~ I(0)
This process is repeated until the order of integration is established. The second step
then involves testing for co-integration based on the idea that if two time series (eg. Yt
and Xt) are each ~ I (1), then their residual (say Ut) will be integrated of order zero
(stationary). Where Ut = Yt Xt. The residual (Ut) will then be tested for
stationarity. The ADF tests is then applied to these residuals to yield statistics which

23
are large and negative so as to reject the null hypothesis of I (1) in favor of
stationarity.
If the first step shows that each time series is integrated of order one, and if the second
step results to a stationary residual, then the two time series are said to be co-
integrated. This implies that long run (or equilibrium) relationship exists between the
two sets of prices. In addition, to make a clear distinction between short-run and long-
run integration an Error Correction Model (ECM) will be used. This allows for
derivation of the speed of price transmission from one location/market to another.
Within the context of market integration, it is important to consider the speed of
adjustment as one dimension of integration.

The error term in the co-integration regression will be treated as the equilibrium error
The Error Correction Model (ECM) is specified as:

Yt = 0+ 1 Xt+ 2Ut-1 + t (4)

Where; = first difference operator, t = random error term and Ut-1 = (Yt-1 Xt-
1)

ECM states that Yt depends on Xt and also on equilibrium error term, while
absolute values of 2 decide how quickly equilibrium will be restored (speed of
adjustment).

Estimation of Marketing Costs


Marketing cost determines the marketing services offered by the marketing system.
Different types of marketing costs will be calculated (including transport, levies, cess,
loading and off loading costs) relating to dry maize grain transactions of dry maize
grain traders.
The weighted average method will be used to obtain the average marketing costs for
each different kind of trader; where average marketing costs will be computed as:
AMCi =XiQi / Qi . (5)
Where;
AMC = Average marketing cost
Qi = quantity handled during the transaction for each dry maize grain trader; used as a
weighing coefficient.
24
Xi = Different types of marketing costs that will be incurred by each dry maize grain
trader during transaction.
Price Variation Analysis
The site price function will be used to show whether the price variation between two
markets (rural and urban) reflects the marketing costs. The site price function is
mathematically presented as below (Bressler and King 1978)
Pmi = Pm - (Hcim + Tcim + Mc) .. (6)
Where,
Pmi = Calculated site price at a selected urban market
Pm = Retail price at a selected urban price
Hcim = Handling cost involved in moving 90kg dry maize grain from rural to urban
market
Tcim = Transport cost for moving 90kg dry maize grain from rural to urban market
which is a function of distance
Mc = Market charges
If the site price at the urban market is equal or lower than the rural market price, no
shipment occurs between the two markets. If the urban market site price is higher than
the rural market price, which is an indication that the actual shipment from the rural
markets are not enough to clear the markets. Hence there is need to determine whether
such a situation is as a result of factor beyond the control of traders (Bressler and
King, 1978).
If Pmi= rural market price or Pmi< rural market price we reject the null hypothesis
and accept the alternative hypothesis which states that price variation across markets
reflect the marketing cost.

25
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30
WORK PLAN

ACTIVITIES AUG JAN FEB JULY AUG AUG SEPT SEPT


2016-
DEC
2016
Literature Review
Development of proposal
Presentation of the proposal
at the school and piloting
Data collection
Data analysis and
interpretation
Typing, editing and printing
Final presentation and
submission of the thesis to
Board of Graduate Studies.

31
BUDGET

ACTIVITY/PARTICULARS UNIT TOTAL


COST COST
(i)Literature Review and proposal development
Photocopy paper 4 reams 450 1800
Ruled paper 2 reams 200 400
Internet 1000 1000

1 flash disk 1000 1000

Transport to library and back 1000 2000

Subsistence for 2 days 5 600

Printing of questionnaire 120 pcs @ 5Ksh.

Data collection (transport and accommodation) for 10days 1200 12000


Data analysis and interpretation
Stationery 2000 2000
Typing, editing, printing, photocopying and Binding of the 6,500 6500
report
Presentation and submission of thesis to Board of Graduate
Studies 400 800
Transport to university and back 500 1000
Subsistence for 2 days
Contingences (10% of total) 2910 2910
Total
Kshs.32010.00

32
APPENDIX 1 : QUESTIONNAIRE

Dear respondent,

The major objective of this questionnaire is to collect primary data that will be used
for analyzing marketing integration of dry maize grain in Kipkelion sub county of
Kericho County, Kenya, being undertaken by a student in University of Kabianga in
the school of Agriculture and Biotechnology, Department of Agricultural Economics
and Resource Management. Therefore, you are asked kindly to assist in the attainment
of the students objectives. All the responses will be treated with high confidentiality
and mainly used for the purpose of the above mentioned study.
Yours faithfully,
Sang K. Isaac

Name of the trader.


Sub county
Male. Female..
Age ..
Level of education attained: primary ( ) secondary ( ) college ( ) university (
)
Others (specify)
Name of market

Type of market rural ( ) urban ( )

Type of marketing agent wholesaler ( ) Retailer ( ) Agent ( )

1. How long have you been in the business?...........................years

2. What is the source of the dry maize grains you sell? Farmer ( ) Agent ( )
Wholesalers ( )

3. Where do most of the dry maize grains you buy come from? Region/area

4. What do you consider when deciding on where to buy dry maize grains?

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5. How much do you pay per 90kg of dry maize grains?

6. What mode of transport do you use and what is the cost?

7. How is the transport cost determined? Per volume transported ( ) ,per


distance ( ) ; others (specify)

8. How long does it take you to get dry maize grain from the source/rural to the
markets?

9. Do you obtain adequate supplies?

10. Which time of the year do you buy and sell dry maize grain?

11. Who sets prices when you are buying dry maize grain?
Sellers [ ]
Buyer (self) [ ]
Through negotiation [ ]
12. Who sets prices when you are selling dry maize grain?
13. How do you set the market prices?

14. What are some of the factors that you consider when setting the prices?

15. How do you transport your dry maize grain to the market and what is the
distance covered?

16. What cost do you incur from the source to the market and how much?

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TYPE OF COSTS TOTAL COST PER TRIP
Cost of dry maize grain
Volume per trip
Labour for loading
Transport cost
Labour for off-loading
Transportation charges
Market charges
Packaging
Others (specify)

17. Do you buy and sell dry maize grain individually or through association?

18. Do you experience dry maize grain losses before selling?

19. Do you incur any storage costs, if yes how much?

20. How long do you store your dry maize grain?

21. How do you get marketing information on dry maize grain?

22. What problems do you experience during marketing?

23. What are the key things one has to have before starting this business?

24. What are the barriers to entry in the dry maize grain market?

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