Derivation of the Price Relationships in the Conceptual Framework

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Historical Background and Overview

This chapter provides historical background on the Senegalese groundnut sector and past Lomé Conventions, and a detailed overview of the Senegalese groundnut market(s) and New Partnership Agreement. Section one takes a brief look at the world groundnut market and pertinent developments in the international arena that could affect Senegal’s decision, in 2004. Section two then focuses on the Senegalese groundnut sector specifically, providing a historical and structural overview of the sector. In addition, this section identifies pertinent issues that could affect Senegal’s decision to move to either a REPA or an enhanced form of the GSP. These issues include structural adjustment policies, aflatoxins, the informal sector, and STABEX funding. The third section provides a historical analysis of the past Lomé Conventions and unresolved issues arising from them, such as STABEX and preferential access for the ACP states. Finally, section four of the paper gives an in-depth analysis and description of the NPA, including a detailed analysis of the REPA and enhanced GSP options.

Overview of the World Groundnut Market

Groundnuts are a staple, as well as, a cash crop in primarily tropical and sub-tropical developing countries around the world. World groundnut production in the crop year, 1997-1998, was twenty-seven million tons, China and India being the two largest producers in the world (Provance, 1998). The next largest producers in 1997-1998 were the United States, Nigeria, Indonesia, Senegal, and Argentina, (Provance, 1999) in order of importance. African countries accounted for less than eight percent of world production, never exceeding this amount in the last decade due to unreliable rains, lack of irrigation, small scale farming, lack of capital, outbreaks of pests, diseases, low yielding seed varieties, and high-density seeding on marginal lands. For these reasons, African production has been sporadic, fluctuating greatly from year to year (Business News, 1999). To help combat these problems, improved groundnut varieties developed for specific purposes and growing conditions are being adopted in a number of countries. This research is ongoing for confectionery varieties in the Senegalese groundnut sector. Different groundnut varieties are being produced that are more resistant to aflatoxins and are of higher quality for consumption purposes. In other areas of the world, edible groundnut varieties are being produced specifically for the production of a particular product, such as peanut butter, groundnut oil, candies, salted nuts, roasted nuts in-shell, and cocktail. Furthermore, other types of groundnut varieties are being produced that have characteristics to help combat problems encountered while growing the groundnut crop. These characteristics include: higher yields, early maturation, resistance to drought, disease and pest resistances, suitability for mechanized harvesting, adaptation to specific soil types, and others (Business Star, 1999). The EU is the largest importer of groundnut products in the world, provides import data on groundnuts (in-shell and shelled) and groundnut oil for the EU from 1995 to1998. EU imports account for 42% of the world groundnut trade, followed by Indonesia (13%),Canada (8%), Singapore (5%), Malaysia (3%) and the Philippines (3%). The seven largest exporters of groundnut products are Argentina, then India, the United States, China, Vietnam, South Africa, and the Gambia. Eighty percent of the world groundnut trade is in edible groundnuts, with the remaining 20% in other products, such as meal or oil (Business Star, 1999). Exports of groundnuts only account for about six percent of total groundnut production, with export sales less then one billion dollars per year. This suggests there is room for export growth. To increase exports of groundnuts, two major challenges need to be addressed. The first is the issue of aflatoxins, which has become a growing concern, especially in the EU. The second is the adaptation of groundnut supplies to the demand for groundnut varieties suited to specific end – uses (Business Star, 1999). Consumption and production patterns for groundnut products vary from country to country. Forty-eight percent of groundnut products are for food uses, and the remaining 52% is crushed for use in oil and meal production. The United States primarily produces groundnuts for food uses (60 %) and exports one fifth of their groundnut crop. Argentina and South Africa chiefly export their crop in the form of edible products, oil or cake. In contrast, Vietnam produces groundnuts to replenish soil fertility and as a cash crop, providing income for farmers. Asian countries consume their groundnuts largely in the form of gravies and sauces and in Europe groundnuts are mainly consumed as edible products, such as dry-roasted or specialty nuts, peanut butter, etc (Business Star, 1999). In Africa, domestic demand for groundnut products has increased, but by less than expected, due to the import and increased production of substitutes, such as soybean and palm oil. In the past, groundnuts were primarily produced for export revenue and provided rural employment in African countries. Today, the production of groundnuts in African countries, such as Nigeria, is also a significant contributor to the domestic food supply (Badiane and Kinteh, 1994). To increase exports of groundnut products in the future these consumption patterns need to be recognized. New varieties need to address quality issues that have arisen in the international market, such as concerns over aflatoxins levels. Appendix A provides statistics and data on the major exporters of groundnut products to the EU: Argentina, China, India, Nigeria, Senegal, Sudan, and the United States. The data in Appendix A is for three primary groundnut product groups: groundnuts (in-shell and shelled), groundnut oil, and groundnut meal. Data provided consists of elasticities, production and consumption statistics, prices, transportation costs, and inter-country trade data.

Senegal

The groundnut sector in Senegal is vital to the well-being of the Senegalese economy. The bulk of the groundnut crop is farmed in the Senegalese groundnut basin, which accounts for thirty-five percent of Senegal’s land mass. The basin provides 80% of groundnut export production, as well as sustenance for sixty-five percent of the population (Kelly, et al., 1996). Furthermore, about seventy percent of the population is involved in some facet of groundnut production (Kelly, et al., 1996). Up to one million, out of a population of 8.2 million, are involved just in the farming of groundnuts (Akobundu 1998; U.S. Department of State, 1999). This high percentage of people involved in the groundnut sector is due to the fact that groundnuts are Senegal’s main agricultural cash crop. Groundnut production and export provide household income, government revenue, and foreign exchange (Kelly, et al., 1996). Rural households and the government have “cashed in” on groundnuts by shifting agricultural production away from sustenance crops to cash crops, primarily groundnuts (Kelly, et al., 1996). This shift has occurred over the past few decades, since Senegal’s independence in 1960.

Historical Background

Since Senegal’s independence in 1960, the government of Senegal (GOS) has had significant control over many aspects of the groundnut market. During French colonial rule prior to the 1960s, Senegal was transformed into a groundnut-producing machine. Upon Senegal’s independence, the groundnut industry was nationalized and came under public control. This sudden spark of nationalization arose from the view that the groundnut sector was going to “save the country” (Akobundu, 1998). From 1960 to 1965 much of the groundnut industry was nationalized, i.e. research and development, extension services, peanut marketing and input distribution practices, credit programs, and price-setting were all activities now controlled by the GOS.  Peanut marketing by anyone except the state was made illegal. During this period, groundnut prospects seemed good as output increased due to increased planting, and productivity rose due to increased access to credit and price subsidies instituted by the government. Government involvement introduced a relative certainty to groundnut production, while at the same time causing a relative uncertainty in the production of cereals and other crops (Kelly, et al., 1996). From 1965 to 1974 the situation changed in the groundnut sector. Lower peanut prices and recurring droughts cut into gains made in the early 1960s. The price decline was primarily due to France’s decision to remove its preferential pricing agreement for Senegalese groundnut products. The decline in the price of groundnuts from 1960/61 to 1970/71 is illustrated. These difficulties in the peanut sector led to debt defaults by farmers that worsened as 1980 approached, providing evidence that government involvement in the groundnut sector was not efficient. It was believed, however, lower prices and the droughts were to blame for the worsening situation. Thus, up until the late 1970s, the marketing parastatals controlled by the government escaped blame (Kelly, et al., 1996). By the late 1970s, the inefficiencies in the groundnut sector were evident, and the focus turned to the effects of government involvement in the sector. After a brief improvement in the groundnut sector from 1975-6, credit defaults began anew and grew worse as the decade progressed (Kelly, et al., 1996). During the period from 1977 to 1980 debt defaults increased. During the latter period, it was thought that the rural sector did not have the ability to make profitable economic decisions, providing justification for continued Producer Price for Groundnuts in Senegal 1960 – 2000 (CFA Francs/KG) government involvement. Prior to 1978, the Senegalese government had been taxing the agricultural sector, but by 1978 the government was subsidizing the sector due to the high rates of debt default. These high rates of default, coupled with the difficulties mentioned above, led to severe public finance and balance of payment problems and an institutional crisis (Kelly, et al., 1996; Martin and Crawford, 1991). The New Agricultural Policy was enacted in 1984, attempting to liberalize and privatize output and input markets, but was only partially successful. Société Nationale Commercialisation des Oléagineaux du Sénégal (SONACOS), the largest government entity in the groundnut sector and the primary producer of groundnut oil is yet to be privatized (Kelly, et al., 1996; Zanin and Ba, 1999a). However, most of the credit and subsidy programs provided by the government prior to 1980 were either eliminated or drastically altered. The elimination/alteration of these programs changed the face of the groundnut market, reducing the amount of inputs used by farmers (Akobundu, 1998). The reduction in input use was especially evident in the decreased use of seed, fertilizer and sustainable agricultural techniques during the 1980s (Kelly, et al., 1996). Thus, changes in input use made reforms under the New Agricultural Policy detrimental to the Senegalese groundnut sector. The only part of the sector that saw an expansion during this time was in the area of confectionery groundnuts due to increased research and extension efforts. As will be discussed below, the continuation of research and development in the confectionery groundnut market is vital to the competitiveness of Senegalese groundnut in the international market.

1. Introduction
1.1 Introduction
1.2 Purpose Statement
1.3 Research Objectives
1.4 Methods of Examination
2. Historical Background and Overview
2.1 Overview of the World Groundnut Market
2.2 Senegal
2.3 The Lomé Conventions
2.4 The New Partnership Agreement (Cotonou Convention)
2.5 Concluding Remarks
3. Theoretical Foundations
3.1 Conceptual Framework
3.2 Derivation of the Price Relationships in the Conceptual Framework
3.3 Evaluation of the Status Quo Under the Fourth Lomé Convention
3.4 Evaluation of the Regional Economic Partnership Agreement option
3.5 Evaluation of an Enhanced Generalized System of Preferences
3.6 Welfare Analysis of the REPA and Enhanced GSP Options in the Senegalese Groundnut Sector
3.7 Concluding Remarks
4. The Empirical Model
4.1 Model Assumptions
4.2 The Empirical Model
4.3 Benchmark Parameters
4.4 Scenarios and Cases
4.5 Concluding Remarks
5. Model Results
5.1 Baseline Replication
5.3 Changes in Trade and Tariff Regimes under the Enhanced GSP Scenario
5.4 Increases in Development Funding
5.5 Decreases in Transportation Costs from Senegal to the EU
5.6 Domestic Market Liberalization in the Senegalese Groundnut Sec
5.7 Conclusions
6. Conclusion
6.1 Summary of Results
6.2 Policy Recommendations
6.3 Avenues for Future Research
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Projected Economic Impacts of the New Partnership Agreement Between the EU and ACP States on the Senegalese Groundnut Sector