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How to Create a Maize Monopoly in Kenya

A monopoly is a situation where a specific person or enterprise is the only supplier of a particular commodity in a given market. Monopolies exist in each and every given market due to shifting dynamics in supply and demand factors. Safaricom, DSTV Kenya, Carbacid Kenya and KPLC are some of the monopolistic companies that exist in the Kenyan market.

There are several characteristics that separate monopolies from other businesses. The following two are the most outstanding ones.

Price maker: monopolies are price makers and they determine the price of goods sold. They do this by altering the demand-supply curve. Since demand is inversely proportional to price, a monopoly would decrease quantity of goods supplied to increase prices of the goods. The vice versa also holds true; a monopoly would increase quantity of goods to lower prices of the goods. The former is normally done when a monopoly wants to maximize profits while the latter is done when monopolies want to fend off competitors.

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Price discrimination: single seller status of a monopoly allows it to be discriminant in price setting. Price discrimination is a situation where customers are charged different prices for the same product or services. The monopoly manipulates quantity and price of goods as demand and supply elasticity of the market shifts hence they are always in tandem with market price expectations. The monopoly sells higher quantities charging a lower price for the product in an elastic market while it can sell lower quantities of products at higher prices in an inelastic market.

To create a maize monopoly in Kenya, you have to shift the demand-supply curve in the local market into your company’s favor. There are several ways of doing this but I will only outline two ways which I think will be the easiest way to achieve monopoly status. The first would require financial muscle while the second would require political and financial muscle.

Creating the monopoly using financial muscle

This theory involves controlling the demand side of the equation. We will consider the period from 2011 to 2014. The following assumptions will be used in the calculation of the monopoly formulation.

  • The investor has an initial investment amount of 10 billion shillings
  • The investor will build five storage facilities in Kitale, Kakamega, Eldoret, Nakuru and Moi’s Bridge
  • The investment period is 4 years
NCPB data

Table 1: Annual Kenya Maize Output in Tonnes; Source: Kenya National Bureau of Statistics (KNBS) and National Cereals and Produce Board (NCPB)

 

Table 1 indicates the annual produce of maize in Kenya per annum. Kenya produces an average of 360,000 tonnes of maize per annum with an average price of 2,000 shillings per 90 kg bag during on season period and 3,500 shillings per 90 kg bag during off season period.

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p&L

Table 2: Income statement for the monopoly; Source: Kenya Brief Research

Table 2 indicates how the investor would create the monopoly. First, the company has to build storage facilities in the main maize producing regions in Kenya. Then the company will acquire dryers and transportation facilities to dry and transport the maize.

The company would now be in a position to buy 250,000 tonnes of maize during on season period and store the maize until off season period to sell it. The estimated cost for the first year would amount to 9.798 billion with a net loss of 75 million shillings. This is due to the one time fixed costs of building the facility.

The next year, 2012, the company would make a net profit of 2.9 billion from an initial investment of 6.08 billion which will be accounted in variable costs only. The return period for the project would be about 5 years and by this time the company would be controlling more than three quarters of the maize produced in Kenya creating a monopoly.

ncpb

Table 3: Cash flow for the monopoly; Source: Kenya Brief Research

Table 3 indicates the cash flow of the company. The company has sufficient liquidity as the profitability of the company is about 30% per annum.

Creating the monopoly using financial and political muscle

Assuming that the investor has an initial investment of 10 billion shillings, the following would be the procedure of how to create a maize monopoly in Kenya.

  • First the company would hire a lobbyist to push for privatization of the national cereals and produce board (NCPB).
  • Once the NCPB privatization has been accepted by the government, the company will pay valuers to under value the NCPB.
  • The company can then acquire NCPB
  • The NCPB has sufficient assets and network coverage of the Kenya region to facilitate the maize project for the company.
  • The company can then monopolize the Kenyan maize market.

The first process of making a maize monopoly is more viable since lobbying for privatization of NCPB would be a bit difficult but not impossible.

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Posted by Timothy II Aperit

True believer in numbers. Statistics never lie. Bsc Financial Engineering MBA Finance ACCA