1271 African Crop Science Conference Proceedings Vol. 8. pp. 1271-1275 Printed in El-Minia, Egypt ISSN 1023-070X/2007$ 4.00 © 2007, African Crop Science Society Aggregate supply response to price incentives: the case of smallholder maize production in Kenya LAWRENCE O. MOSE 1 , KEES BURGER 2 & ARIE KUVYENHOVEN 2 1 Kenya Agricultural Research Institute, P.O. Box 450-30200 Kitale, Keny, lawrencemose@yahoo.co.uk 2 Wageningen University, Development Economics Group. P.O. Box 8130 Wageningen, The Netherlands Abstract: Increased aggregate supply response has been one of the food policy objectives of the government of Kenya. Increased supply response enhances food security and household incomes. The government expected households individually and on the aggregate to respond to producer and input price incentives the government provided and liberalized markets provide in the pre- and post-liberalisation eras, respectively. But has this objective been achieved? To answer this question, we estimated aggregate supply response for maize using data for Trans Nzoia District covering the period 1980 to 2003, using cointegration and error correction modeling approaches. Results show that high maize and low fertiliser price positively influence aggregate maize supply response. However, the maize price increases do not lead to similar supply response to price decreases. Past prices estimate better the observed supply response than contemporaneous prices both in the pre- and post-liberalisation marketing era. There is no significant difference between supply response before and after market liberalization. It could be concluded that besides price incentives, other complementary interventions such as good infrastructure, household access to information, extension and credit in addition to improved production technology are necessary for supply response. Key words: aggregate supply response, cointegration analysis, market liberalization, supply response asymmetry Introduction The Kenyan agricultural sector performed poorly over the period 1980-1990. In an attempt to improve its performance, agricultural commodity-based markets were liberalised. Thus one rationale of market liberalization in the early 1990s was to introduce price incentives and efficient marketing that would encourage farmers to increase production. Implicitly, it was assumed that farmers would respond to price incentives by increasing output as the central focus of the adjustment reforms in agriculture is to increase agricultural production. Price incentives mean higher returns to farming (farm profits) in the short run, which will attract more capital both physical and human into agriculture and encourage farmers to adopt new technologies in the long run. Thus, the efficacy of adjustment reforms in agriculture depends on their short run and long run effects on economic incentives. The extent to which farm decisions respond to economic incentives should therefore be of central concern to policy makers. Debate on the policy responsiveness of agriculture concentrates on the relative importance of price and non- price factors (Binswanger, 1990). Some researchers (World Bank, 1990) attach a pivotal role to price policies while others (Delgado and Mellor, 1984; Askari and Cummings, 1976; McKay et al., 1997) argue that publicly provided inputs are more effective than prices in raising output. Others still maintain that prices and the provision of inputs and public support are co-requisites (Schiff and Montenegro, 1997; Evenson, 1988; Binswanger, 1989). Numerous supply response studies conducted in various regions across many commodities show positive but low short-run price elasticities almost in every case. Long-run price elasticities have been found to be higher than short run elasticities. For detailed summary of findings, see for example, Askari and Cummings (1976), Scandizzo and Bruce (1980), Bond (1983), and Beynon (1989). Existing estimates for African countries suggest low, even negligible, short- and long-run price elasticities of aggregate agricultural supply (Bond, 1983; Schiff and Montenegro, 1997; Thiele, 2000). Low prices for farmers partly explain the low supply responses. Most of the empirical estimates of aggregate agricultural supply response have been largely based on variants of Nerlove’s (1958) formulation (see, for example, Reca, 1980; Bapna, 1981; Chhibber, 1982; Bond, 1983). These studies produced broadly similar results with short-run aggregate supply elasticities around 0.2 and long-run elasticities of about 0.4. Over time, attempts have been made to take into account other factors that affect production decisions such as weather, size of farm, credit, etc. Supply response studies, however, have been plagued with numerous methodological problems and data limitations that limit the reliability of supply elasticity estimates. As noted by Binswanger (1989), the common problems related to the aggregate agricultural supply response models are the neglect of non-price factors, simultaneity and other problems associated with econometric estimation. Past empirical estimates of supply response of individual crops in Kenya have shown mixed results. Findings differ in terms of the magnitude of response to prices, but there is consensus that individual crops respond positively to price changes (Kenyanito, 1990; Mairura, 2003; Nyangweso, 1991). There are a few studies on the impact of prices on aggregate agricultural output, particularly after markets were liberalised. The market liberalisation programmes in Kenya have been implemented with the implicit assumption that individual crop output as well as aggregate agricultural output will