Economic analysis of cash crop production and marketing' in Tanzania under a liberalised market economy: A case study of tobacco in Songea district.

Dessertation

This study analyses the efficiency of production, degree of distortion in the markets and the pattern of incentives for smallholder tobacco growers in Songea district under liberalization. A survey was conducted on a sample of 120 tobacco growers in the district, and secondary data collected from key organizations in the industry. Because patterns of resource utilization change with shifts in prices of products and inputs whereby producers tend to allocate more resources to enterprises giving higher returns per unit of resource, gross margin analysis was conducted for the two competing crop enterprises in the area, tobacco and maize, so as to establish the relative economic profitability of the crops. Since tobacco is a tradable crop using tradable inputs, a policy analysis matrix for its production system was constructed so as to determine the private and social profitability of the crop, distortions in the markets and efficiency of resource use. Since PAM is a static model, sensitivity analysis was also conducted so as to explore the effect of potential changes in various factors that influence profitability of the enterprise. The analysis revealed that although tobacco production is potentially a profitable enterprise relative to the international market, smallholders are not protected and are paid less than the potential value of their product. The overall effect is a net taxation of tobacco production system at the form level. Thus, the existing marketing arrangements under liberalization have made the enterprise appear uncompetitive with low resource allocation efficiency. There is therefore a net disincentive to produce the crop. Gross margin analysis indicated that tobacco was more profitable compared to maize but considering labour requirements, the former is a highly labour demanding crop with low returns to labour. Sensitivity analysis indicated that an increase in producer prices for tobacco would result into a sharp increase in producer incentives iii and smallholders will be more protected with profits realized in excess of normal returns to domestic resources increasing. With a decrease in the parity price of the product, indicators depict that production of the crop becomes undesirable from the social point of view. However, efficiency indicators were insensitive to an increase in parity prices of tradable inputs implying that tobacco production will still be a desirable enterprise from the social point of view. The study concludes that although liberalization opened up markets by formally allowing private leaf dealers to invest in marketing of tobacco, operational arrangements have not provided adequate incentives to growers in terms of pre-harvest services and marketing efficiency in general. Many problems have been noted which indicated gross inefficiency in the entire production and marketing system. These problems alter costs and revenues in the input/output markets and prevent realization of potential income gains by tobacco growers.