Price signals or smoke signals?

IMG_1628
I had an interesting conversation with a large commodity trader/broker in Lusaka the other day. To date, their business – that of buying wheat, maize, and sorghum – has been done primarily through commercial producers. Lately, however, competition for this supply is getting increasingly stiffer.

The demand for agricultural commodities is on the rise, but the commercial supply in Zambia has leveled out – big farms have maxed out their productive potential through on-farm efficiencies, and since the barrier to entry for commercial production is so high, there are no new farms entering the market.

The result: Every trader on the block is chasing a small batch of high quality produce. In order to compete, this trader sends out price signals that are intended to pull other producers in. I was told that a decent price coupled with swift payment (within 2 days of the sale) is enough to attract what they need, including produce from many smallholders and emerging commercial farmers. This seems like a pretty basic way to meet the demands of the market.

When I asked if they are interested in sourcing more from smallholders to gain a competitive advantage, they said they already do, and left it at that.

I’m skeptical. Smallholders lack access to market information, so there’s no way they’re going to hear these signals. “Briefcase buyers” (small-time, independent traders) often hear the signals first, head out into the village, and offer absurdly low prices to unwitting smallholders. This is a very likely scenario, so the assertion that this business “works with lots of smallholders” doesn’t sit well with me.

My hunch is that is takes more than just price signals to kick-start mutually beneficial business transactions with smallholders. Huge investments a la out-growers aren’t necessary, but something like more face time, for example, is very valuable.

There exists a compelling business case for buyers to be more proactive in their engagement with smallholder farmers. “Every person in Zambia is a farmer.” This is true, to a certain extent; there’s a massive untapped market out there, with huge gains to be made with minimal effort.

So, these price signals seemed more like smoke signals to me; a sign for help, for new ideas, for a new business model that will allow this trader to be more competitive and more profitable in the future. Figuring out what this model looks like is an exciting challenge, one worth some serious attention.

Advertisements

3 Responses to “Price signals or smoke signals?”


  1. 1 sbwoodside August 19, 2009 at 6:11 pm

    I’m curious about the use of mobile phones to spread agricultural market information to rural farmers. For example, if a significant proportion of the farmers have a mobile phone or have access to one. Some possibilities spring to mind.

    The idea is that some individual, organization, or agency would collect market information on a regular basis (daily, bi-weekly, weekly, etc.) and then make it available to remote farmers via cell phone.

    This entity would have to know about these “price signals” and other conditions, and then on this basis make a sort of market digest.

    1. Text messaging: if the farmers are literate or have access to someone who is literate, a text message would be a very inexpensive method to “push” market conditions to the farmers.

    2. Call out: if literacy is an issue, then the entity could call out, possibly using an automated recoding/auto-dialing system, to the farmers or their associates, with the information at certain times of day/week.

    3. Call in: possibly better, would be a recorded message, for example as simple as an answering machine, where a message would be recorded with up-to-date information. The farmers/associates would call in to get the information.

    Assuming that there is a mobile network in place with sufficient coverage, the major investments would be:
    (a) mobile phones for the farmers, or access to
    (b) entity that is able to aggregate useful information effectively and send/record it
    (c) answering machine/text messaging system

    Plausible idea????

  2. 2 Hans Hesse August 20, 2009 at 12:22 pm

    Thanks for the comment. Using mobiles to access commodity prices is happening on the ground. The Zambian National Farmers Union (ZNFU) runs this site (http://www.farmprices.co.zm/) and a corresponding text-based system that allows farmers to text a number and a list of buyers+prices for a number of commodities. The prices aren’t always the most up to date, but it’s something.

    Having such a service helps farmers increase their bargaining power with so-called “briefcase buyers” (traders who come to the village with cash to buy on the spot) and locate the best opportunities, but at the end of the day, the bigger problem is an overall lack of market for crops. Improved output marketing is a major hurdle that needs to be crossed. Another major issue is the extreme volatility in prices across seasons. Crop prices vary dramatically, which makes it incredibly difficult for farmers to plan their production, and makes it risky to make long-term investments.

  3. 3 sbwoodside January 10, 2010 at 3:15 am

    Hans:

    I just posted a summary of the information on market-price SMS systems I’ve gathered on my weblog at simonwoodside.com. Click on my name hopefully will take you to the post.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s




About

Working to include smallholder farmers in agricultural markets, we know there are no easy answers. This blog is a place to ask "What does it take to make it work?" and to share what we're seeing and learning.
>> more

Twitter (Hans)

Twitter (Graham)

Twitter (Thulasy)


%d bloggers like this: