Economies of scale and efficiency of small- and medium-scale maize milling enterprises in South Africa

Abstract

Prior to 1997, South Africa’s maize marketing was organised as a single-channel fixed price system that gave privileged rights of entry to buyers and hindered the development of a more decentralized and lower-cost system. This system encouraged concentration in maize milling and gave sheltered oligopolies to licensed traders which prohibited entry by potential competitors, thereby suppressing competition at the milling stage. Following agricultural market deregulation in 1997 it was expected that a proliferation of small and medium-scale maize mills and better competition in the maize milling sector would result ultimately in a reduction in maize meal prices given the moderately developed economy of South Africa. These expectations were founded on evidence from elsewhere where deregulation resulted in effective resource allocation, improved market conditions, increased competition and higher levels of efficiency and lower prices. In the case of South Africa however, maize milling and retail margins in the formal market increased in the years following deregulation notwithstanding the number of small and medium-scale maize millers reported to have entered the maize milling industry. This apparent failure may be indicative of insufficient competitive pressure at the maize milling and retailing stages. Thus, the possibility of improving the competitiveness of small and medium-scale maize milling enterprises in South Africa could lie in their ability to use existing resources efficiently. The main objective of this study is to examine economies of scale and efficiency of small and medium-scale maize milling enterprises in the South Africa in order to assess their competitiveness. The study employed Data Envelopment Analysis and a Stochastic Frontier Approach to estimate scale, cost and profit efficiencies of small and medium-scale maize milling enterprises. The results indicated considerable scale, cost and profit inefficiencies in both categories of maize mills, implying that there exist significant potentials for improvement in the efficiency of these maize mills if they are to compete favourably in the maize milling industry. Overall, small and medium-scale maize mills have the potential of reducing input usage by about 22 and 11 percent respectively from what obtains presently. Without decreasing the total output of maize meal produced, this would translate to about 62 and 41 percent reduction in their current operational costs and lead to a profit increase of about 21.5 and 11.8 percent for small and medium scale maize mill categories respectively. By operating at an optimal scale, the efficiency and competitiveness of these maize mills could be further boosted by the provision of relevant subsidies for mill upgrading by the relevant Government bodies in the short and long-run respectively. Furthermore, by organising data from small and medium-scale maize mills and applying them to efficiency models, the thesis was able to extend the literature on efficiency analysis to measure the relative efficiency and profitability of maize milling enterprises in South Africa. This study, being the first, makes an important contribution to empirical research in this field.