A balancing act between saving and restocking in a fluid market
For the majority of traders in agriculture markets, understanding the convening power of the market includes balancing a decision to save money or restock commodities. Since most of the commodities are perishable and always on demand, restocking happens on a daily basis. This means a decision to save money in a bank has both opportunity costs and opportunity benefits.
Traders weigh a decision to save money in a bank against the opportunity cost incurred if one does not restock commodities that are high on demand. For example, if one saves $100 in a bank over a week and earns an interest of $5, the question in the trader’s mind is how much return would the same $100 earn from restocking agriculture commodities on a daily basis and putting a mark -up? On a low scale, $100 used to restock commodities would earn a return of 5% per day and if you multiply that by five days = $25 on top of $100 within five days. This implies, a trader who saves $100 in a bank and earns $5 in five days has an opportunity cost of $20 if the trader had decided to restock and put a mark -up on a daily basis.
In a fast moving market, traders have to balance the benefits of saving money and restocking commodities
The above scenario applies where a trader is taking maximum risk by re-investing all the capital on a daily basis. The worst scenario would come where $100 invested in agricultural commodities incurs negative returns due to price suppression, resulting in the trader ending up with commodities worth $75 by end of the week. This means the trader was losing $5 worth of commodities/stocks per day. It would have been better if the trader had saved $100 in a bank and earned $5 ( 5% interest). Now with $75, the opportunity cost of not saving is $20. There is therefore need to strike a balance between saving and restocking – ensuring moderate risk is taken either side of saving opportunity costs and restocking opportunity costs.
How a financial institution and a trader can strike a balance
Where a trader was looking forward to taking high risk and earn $25 per week or lose $25 within the same week, an option is for the trader to save and get $10 extra and, also for the bank to incentivise the trader to invest thus reversing the risk of losing $25 in worst case scenarios. The bank should increase interest from 5 to 10%. As a balanced equation, there is a trade-off of a trader not losing $25 in worst case scenarios and getting an assurance of $10 as interest from saving or the bank not receiving any savings as the trader is involved in high risk investment tied to restocking every day. By giving 10% interest, the bank is assured of savings of $100.
There is a trade-off between a trader either saving or re-investing on a daily basis and earning $25 and the bank trying to attract savings. The selling point for the bank is that the trader needs a fall – back position related to saving and getting $10 more instead of losing $25 in situations where the market performs badly. Financial institutions should understand the opportunity cost of saving by traders especially in the food market. Traders should also understand the risk of not saving and be without a fall-back position in the event of poor market performance.
Lack of a saving culture negatively affects business growth. In most informal agriculture markets, there is always a trade-off between good and low prices, especially due to uncoordinated production and supply. Where prices are good, a trader should be able to save and be cushioned against a fall in prices. Savings create a growth paths and a sense of progress. If a trader saves 5% of his/her sales on a monthly basis, it means if the trader saves $100 on the first month, the interest is $5. The next month if the saves $200, with the same percentage interest, the saving will be $10. Percentage savings show a growth paths and pattern. A fall-back position provides a sense of business expansion.
Savings in other products
Financial institutions should come up with other products like housing stands and vehicle/truck loans as other ways traders can spread their savings into tangible assets which support their businesses. Besides helping traders to expand their businesses, these options can be a strong fall-back position. If something happens to his/her business, a trader can simply sell his/her truck to boost his/her business. Savings should be one way of investing. However, if one saves s/he needs advice on how to re-invest. Traders can’t just accumulate savings without financial institutions articulating the advantages of saving. Incentives should be clearly explained. During the saving period there should be some short-term investments that generate returns to top up changes in prices for targeted long-term investments such as housing stands. There is also need for different interest rates for different clients, amounts and saving periods. If one saves $100 per month s/he should earn a 5% interest while the one saving $200 should earn at least more interest (e.g.,7%). Differentiation in interest rates can be between the amount saved per given period or same amount saved over different periods.
Traders are aware of many loopholes in the formal banking system and spend significant amounts of time trying to understand these loopholes. Many bank employees spend more time controlling the movement of money outside the bank than cultivating relationships with traders.
Highfield – Lusaka Farmer’s Market as a small but fluid agriculture market
37 produce types were supplied to the market during January to June 2015 as shown below:
Table 1: commodities supplied to Highfield – Lusaka Market (Harare) Jan to June 2015
|GREEN BEANS||GREEN MEALIES||GREEN PEPPER||GROUNDNUTS|
|GUAVA||HORNED CUCUMBER||LEAF VEGETABLES||LEMONS|
|RAPOKO||ROUNDNUTS||SUGAR BEANS||SUGAR CANE|
|SWEET POTATOES||SWEET REED||TOMATOES||TSUBVU|
Commodities supplied consistently included tomatoes, leaf vegetables, onions and unshelled groundnuts. One of the reasons is that some of the crops are seasonal.
Graphic 1: Total estimated revenue share per produce class
Graphic 2: Expected Revenue (ER) by month
Table 2: Farmer visits by gender – January to June 2015
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