What can agricultural markets teach us about the true meaning of money?

What can agricultural markets teach us about the true meaning of money?

This question was triggered by the recent devaluation of the South African Rand (ZAR) against the US dollar and how this phenomenon was interpreted in Zimbabwe’s agriculture markets. It is possible that the majority of people in both developed and developing countries struggle with the true meaning of money. To say money is a medium of exchange is an inadequate definition for most people because the answer raises more questions. For instance, in informal agriculture markets a commodity that cost one dollar today can fetch 50c tomorrow, goes to two dollars the day after tomorrow and back to one dollar the next day, same commodity and same quality. Very few institutions have taken it upon themselves to build the capacity of farmers and other actors to appreciate the authentic value and meaning of money. This knowledge gap often strains relationships between farmers and buyers. It becomes worse when prices are fixed through a policy instrument yet the market will be saying something different.

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A recent survey in Harare by eMKambo showed that no one could explain why the value of the South African Rand (ZAR) decreased from around US$1 = ZAR8 to US$1 = ZAR14. In Mbare, Zimbabwe’s biggest agricultural market, traders, farmers and consumers suddenly stopped accepting South African Rand in the form of coins preferring Zimbabwean bond coins. In the absence of a sensible explanation, actors in the market adopted a band wagon effect where someone just stops accepting the South African Rand because someone else has just stopped accepting it as currency.

Currency devaluation and agriculture markets

From our findings, agricultural commodities are more influential than money. If today US$1 can buy four cabbages and tomorrow the same dollar can only buy two cabbages, it doesn’t mean money is more expensive but rather commodities are the ones dictating the value of the dollar.  The impact of currency devaluation is visible in markets where the velocity of money is very high, for example in agricultural markets where there is a high rate of money changing hands.  This means, for example, where one currency has depreciated by 5%, for every unit of a stable currency value is lost to the stable currency.  If US$10 was equivalent to ZAR 100 (hundred South African Rand) and the Rand devalues by 5% to the US$, for every transaction you will be losing ZAR 5 (five Rand) if paid in Rand.

For slow moving businesses, for example where 20 transactions happen per day, you lose about ZAR100.  But in a much dynamic market like Mbare agriculture market where a trader can conduct at least 500 transactions worth ZAR 100 each, by end of day the trader would have lost ZAR500.  That is why informal agriculture markets provided quick signals to the depreciation of the Rand in Zimbabwe. The informal economy was able to predict disaster before it happened. If farmers understand the true role of money in a multi-currency environment like what Zimbabwe finds itself in, they will see how uncoordinated production results in losses. Cotton and tobacco farmers in Zimbabwe have for many seasons been crying foul against buyers because they can’t see how trends on the international market and its dynamics account for their misery. There is need for simplified knowledge on these issues.

How money comes second to barter trade

Where barter trade is easy you don’t need money. You can only use money to buy a different commodity from the one available in a local market.  If one farmer has tomatoes and the other has potatoes and each wants what the other has, they can simply swap without money exchanging hands. If commodity exchange markets are well developed and supported, developing countries can overcome the role of cash – creating a powerful commodity exchange from rural markets to national levels. The only knowledge to be filled will be on who wants what, when and where?

At the moment some African processors based cities drive kilometres into farming areas looking for commodities like maize grain. After farmers are handed money from their maize they start incurring costs looking for fertilizer and other inputs. Yet if there was a local commodity exchange platform where diverse commodities are actually brought together, processors and other commodity buyers would simply bring inputs like seed, fertilizer and agricultural equipment to the local market.  These inputs would be exchanged with maize.

The term money would only be used for pricing not purchasing.  For instance, where an item costs $100 and it is known that a ton of maize costs $300, this would mean three items worth $100 each are exchanged with a ton of maize. Money can only come in where one of the commodities has more value than the one in which case money would be used as a top-up.  Such a practice is now common in Zimbabwe’s phone and car trading business.  A vibrant agricultural commodity exchange would see buyers and sellers placing orders through the market with buyers and sellers interacting all the time. For example if such a market is at Mutoko Business Centre, a farmer can bring 100 crates of tomatoes for exchanging with five bags of fertilizer.

Maize and tobacco exchange

An interesting version of a commodity exchange occurred during this year’s tobacco marketing season in Zimbabwe.  In a rather self-organizing manner, maize farmers and traders brought maize to one of the tobacco auction floors where it was exchanged with tobacco outside the auction floor. Depending on the price of tobacco on the auction floor on a given day and maize on the open market, two kilogrammes of tobacco were exchanged with a bucket of maize. Traditionally tobacco farmers would look for maize after getting their money from tobacco auction floors.  This season maize farmers and traders decided to simplify it for tobacco farmers by bringing maize right at tobacco auction floors.  The whole process showed how people can creatively deal with a liquidity crisis by resorting to barter deals. Detailed analyses could have shown that bringing maize to the tobacco auction floor reduced the demand for cash since tobacco farmers would require less cash given that some bales of tobacco were exchanged with maize outside the market.

Most people in rural areas also exchange their labour with maize.  One can weed an acre for a bucket of maize rather than get the money and start looking for maize.  This is a resilience mechanism where people try to cope with uncertainties in their market and environment.  Some millers also accept farmers to use a portion of their grain as payment for milling services.  This is how the millers build up their stock for later use.

Charles@knowledgetransafrica.com / charles@emkambo.co.zw / info@knowledgetransafrica.com

Website: www.emkambo.co.zw / www.knowledgetransafrica.com

eMkambo Call Centre: 0771 859000-5/ 0716 331140-5 / 0739 866 343-6.

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2 thoughts on “What can agricultural markets teach us about the true meaning of money?

  1. Let me begin with handling the issue of value of any currency, whether local or international. When the USD was introduced in 2009, there were no efforts to educate people and make them aware of the true value of the dollar, This lead to the traders just imagining what the cost of their product could be against the USD. That is why now l cannot use the Liberty USD coins l have because traders don’t know that these coins are part of the USD. They were taught to use the Rand coins alongside the USD which is improper to begin with. If one is buying goats or chickens in the rural areas then expect the shock of your life on how these animals fetch their prices. It is because of currency literacy that is lacking, coupled with the Zimbabwean norm of inflating commodities. Every trader appear to do what they want because of the absence of the set parameters for pricing products. The other issue concerns unscrupulous buyers who come and bribe rural farmers of their products by making them think that they are doing them a favour when in the actual fact it would be a rip-off spree. There is need for rural Agri-parks where farmers can just go to do all their services at one go.

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    • Dear Peter,

      Thanks for your valuable feedback. There is certainly an enormous knowledge gap around money issues. I also share your view that Zimbabweans are fond of over-charging when selling but under-cutting when buying.

      Regards,

      Charles

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