Spatial price transmission and market integration in Senegal’s groundnut market

The groundnut sector is the largest of Senegal’s agricultural sectors. It has been subject to various degrees of intervention since the country’s independence. Some, including the determination of farm prices by the government have survived the wave of reforms of the 1980s. Groundnut pricing policies have been the source of major transfers from farmers to the groundnut milling industry, which until 2007, was dominated by SONACOS, a publicly owned parastatal. The state was thus a major beneficiary of the transfers. In 2007, the company was privatized and is now privately owned, raising even greater concerns about the distribution of implications of pricing policies for groundnuts. The paper examines the potential ramifications of liberalizing groundnut prices in terms of its impact on prices received by producers and paid by the milling industry. One fundamental question in the analysis is the extent to which local markets would respond to such a move. To answer this question, the paper presents a dynamic model of price formation that uses estimates of spatial integration across local markets to measure the response of local agricultural prices to policy changes. We then apply this model to simulate the impact of liberalizing groundnut prices to allow domestic prices to reflect their international levels. We find that doing so would change prices in the border city of Dakar, which happens to be the central market that determines prices in the local markets of the producing regions of Kaolack and Fatick. We also find that if markets had been fully liberalized when SONACOS was privatized in January 2007, then groundnut prices would have been higher and that the increase in prices would have been passed on almost entirely to producers in Kaolack and, to a lesser extent, to producers in Fatick. Such reforms would have reversed the longstanding discrimination of groundnut farmers. Prices received by farmers in Kaolack over a period of one year would have increased from 352 FCFA/kg to 494 FCFA/kg of shelled groundnuts. For farmers in the Fatick region, prices would increase from 389 FCFA/kg to 474 FCFA/kg.