How consumers use their buying patterns to signal priorities

As buying patterns signify ordinary people’s priorities, developing countries should invest more in finding pockets of opportunity from micro-markets than pursuing mega deals. In most African countries, much of the overlooked growth is within open food markets from which the majority get food and income. An outside observer may see open markets as chaotic economic but these environments are characterized by order and a distinct buying pattern.  For instance, when food vendors get into the market with their baskets early in the morning, they first go for tomatoes, followed by leafy vegetables, then onion. All these are necessities.

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Then the buying pattern swings to wild fruits, followed exotic fruits. By then the baskets are becoming heavy but the buying process is not over until lemon, avocadoes, banana and cooked dried groundnut are picked from one of the two farmers’ markets where apples are also picked. The basket is then taken to the Matatu/Kombi station before buying route goes to oranges and then cabbages. If the budget is still not exhausted, the buyer goes to the dry retail markets to pick Maputi, matemba, soya chunks and Madora to complete the food basket.

Prices are also determined by the buying pattern

Besides communicating buyers’ priorities, the buying pattern also sets prices for most commodities especially when vendors get into the market in huge volumes.  Buyers who come in individually may not know and own the buying price. The buying pattern also shows how the farmers market brings together demand and builds it outside the market before opening. By the time the market is opened, demand will have already been consolidated as people from different areas congregate at the market. At a given day, 400 to 500 vendors flow into the market and, as mentioned above, they start with buying tomatoes before moving to leafy vegetables. The previous day’s prices influence the amount of money or budget brought to the market each day. Impulse buying is kept to a minimum. If the vendor finds a Sandak of tomatoes going for $80 instead of $75, she forgoes other commodities which may not be necessities. To avoid risks associated with introducing a new commodity to permanent consumers, vendors concentrate on what they know to be on demand.

Emerging characteristics of the market

While social class and income also tends to determine pricing of commodities, the evolving customer classification in open markets comprises the following:

  • Walk-in customers who come into the market where there are options to buy straight from the farmers’ market or from wholesale traders.
  • Wholesale markets in which bulk is broken and commodities are properly graded.
  • Vendors from high density residential areas who have market stalls where they live.
  • Road side traders and vendors – some with trucks loaded with fruits and vegetables.
  • Push-cart traders moving around selling vegetables and fruits.
  • Food basket packers – this group is increasing and comprise small food distributors.

Benefits of staying informed about buying patterns

Staying connected with buying patterns is critical in understanding how prices are set when buyers congregate around commodities in ways that influence competition between different commodities. More than 60% of the pricing is set when commodities come together in one big market.  Other benefits of being constantly informed by buying patterns include improved knowledge sharing. For instance, when one buyer asks a question everyone available benefits from the answers provided. Relationships are also built intuitively in the market as buyers move together from one commodity to another, leading to decision for collective purchasing and then sharing, increasing affordability.

Smart decision-making is also cultivated. Buyers learn a lot from the behavior of other buyers through the price negotiation process. On the other hand, it is difficult for a single buyer to benefit from mob or collective price setting techniques. Buying patterns also classify commodities through ways in which markets classify all commodities and determine how they are arranged in the market as well as how measurements are arranged into areas for Sasekas, buckets and numbering (counting). This is critical for minimizing confusion and chaos.  Slow moving commodities also have their buying pattern and often their prices can stay the same for up to a month while horticulture commodity prices change daily, calling for dynamic pricing.

For planners, making sense of buying patterns simplifies decisions on how to set up market spaces according to commodities. Farmers, planners and nutritionists also need to be aware of these critical issues. Although open markets continue to carve a unique identity in the global economy, the demand for exotic high value horticulture commodities continue to be largely influenced by up-market consumers. Others sources of influence include events like weddings, parties and catering as a service.  Catering service providers have been trained in the English way of preparing meals, incorporating exotic vegetables. Very few indigenous vegetables and fruits are finding their way into the catering curricular, thus spreading their nutritional benefits.

 

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

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

Mobile: 0772 137 717/ 0774 430 309/ 0712 737 430

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Who really sets prices in the open market?

No matter how many times this question is answered, it continues to be asked again and again.  One of the reasons is that the answer may be correct but unbelievable. As in all other markets, rules of supply and demand influence pricing of agricultural commodities in open markets that are powerful ecosystems in developing countries.  In fact the major determinant of price is supply with demand only responding to supply. In big urban food markets like Mbare in Harare, when the market opens at 5am in the morning, it takes a few minutes for sellers and buyers to see that today there are more tomatoes than yesterday.

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The farmer or trader whose supply coincides with a shortage starts setting the calling price based on the previous day’s price. Another sign of a shortage is the concentration of many buyers around one consignment or heap of tomatoes or potato and this also influencing the price. Some of the buyers pull away from the crowd and approach the seller independently, offering prices. Through a silent auctioning mechanism by buyers and sellers, the day’s prices are quickly agreed upon and trading gets underway.

From the calling price to the actual final price

In all open mass markets across Africa, there is a distinction between the calling price and the final price. The calling price is what the farmer, trader or seller expects to get while the final price is what the commodity finally fetches. In the marketing process buyers resort to several negotiation dynamics like referring to yesterday’s price trends. They can begin negotiations by saying, “yesterday’s prices were lower for the same quality, why are you demanding a higher price today? Your quality is also lower than yesterday and your crates are not full.”

There is also an element of ganging up among buyers. For instance if a new buyer comes along and finds other buyers standing alongside the commodity but not buying, the new buyer gangs up with those standing in order to push the final price down. This ganging up ends up re-setting the price. Another name for this practice is demand response to supply.  While some buyers just stand near the commodity, others buy a few commodities in protest. In addition to complaining about many things related to the commodity, some buyers use comparisons.  They can say, “This same quality of commodity is going for a lower price in the other market and supermarkets.” Some of the buyers go to an extent of verbally abusing the commodity owner or seller. “You are better off taking my offers and going home early than wait for prices to rise when your commodities at the farm have no one attending them.”

Farmers and sellers use the same technique

On the flip side, farmers and sellers also use the same tactics when they find the market in short supply.  The farmer or seller observes the way buyers stampede for commodities and tap into such levels of desperation by buyers to pretend that s/he does not want to sell. As a result buyers bid and increase their offers.  Ultimately this is also how actual prices are determined and set.  This process can be complete within a minute when a commodity is in short supply but can stretch for 30 minutes to an hour if there is a glut. Loaders, off-loaders and those who carry commodities to waiting trucks also respond to the price of the commodity such that if the price increases they also increase their costs correspondingly.

Additional tactics used by buyers on farmers

Even if they may have struck relationships with farmers, buyers keep a bag of tricks. They send part payment and packaging to the farmer so that the farmer starts harvesting butternuts or other perishables. The buyer makes a point of arriving to collect the consignment with a truck when the farmer is packaging or has already finished packaging. At that point the buyer opens the conversation by undermining the quality of the commodity (“Aaah why is this commodity different from the last one?  You have to lower the price for me this time.”)  After a few uncomfortable exchanges, the buyer ends up getting the commodity at a price he determines.  He knows that the farmer cannot start looking for another new buyer when the perishable commodity is already harvested and packaged.

Need for regulations and policy interventions

Dynamics and processes mentioned above show the extent to which linking farmers to the market is not enough unless the entire processes and hidden behavioral economics tricks are fully understood. Ideally farmers should know distances from where they are farming to the market and the cost of moving commodities to the market. They should also strive to be aware of the margin earned by traders from each commodity and consignment. A pricing index and farmers’ diary comprising information related to distances to the nearest markets as well as all critical cost elements should be developed especially for smallholders who often struggle to find usable market information beyond just price.

Circumstances under which price information is critical for farmers include:

  • When a buyer shows up on-farm and the farmer needs to make a decision to sell at the right price.
  • When the farmer has not done his/her costing and wants to use the market price as a guide. This is very common among many farmers.
  • When the farmer wants to sell locally and has to compare with prices elsewhere.
  • When the farmer wants to conduct barter exchange between different commodities. The farmer has to know the monetary value of the two different commodities being bartered.

A major challenge in most developing countries is that it is difficult to regulate the production and supply of rain-fed agricultural commodities. Regulating production and supply is easy with irrigated production. You cannot tell farmers to grow fewer groundnuts or tubers which may be the only ideal commodities in particular areas and farming seasons. One can regulate the production of cabbages, tomatoes and potatoes whose production can be controlled to some extent in response to the market. It does not make sense for government to set the same prices for commodities whose yields can be very low in some areas due to rainfall patterns, soil types and other factors.

 

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

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

Mobile: 0772 137 717/ 0774 430 309/ 0712 737

How capital determines the structure of agriculture and food systems in Africa

How capital determines the structure of agriculture and food systems in Africa

Although finance will not solve all challenges facing developing countries, the structure of African agriculture is largely shaped by the way capital flows into this fundamental sector. In Zimbabwe, for instance, more than 55% of the entire capital devoted to agriculture goes to tobacco with all other commodities competing for the remainder. That situation is not by chance. High tobacco production is directly linked to financing mechanisms. Contractors release money to individual farmers without considering collateral issues because the finance is secured by the crop itself.

The power of structured markets

Tobacco financing mechanisms are also secured by the way the market is structured.  Side marketing is minimal because tobacco is linked to a grower’s number. Before the planting season each farmer submits estimated production statistics and expected yields. When the marketing season begins, a farmer who delivers more tobacco than initially estimated will have to convince the Tobacco Industry and Marketing Board (TIMB) that all the tobacco is from his farm.  Loan repayment is also guaranteed through an efficient stop order system managed by the TIMB. This is how and why tobacco draws much of the agricultural funding from banks. Viability and profitability to the small scale producer is assured.

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What about other commodities?

Other commodities including indigenous foods do not attract much capital because profitability and loan repayment is not assured due the way they are marketed and where they are marketed. Some of the commodities like maize and wheat are government controlled in ways that standardize cost structures as if farmers in different farming areas and rainfall regions incur the same costs. Farmers in Masvingo and Mhangura have different rainfall patterns but they receive the same payment ($726/ metric ton from the Grain Marketing Board (GMB).

Some of the crops like soya bean and sugar bean are contracted by specific private buyers who tend to dictate prices instead of allowing farmers to negotiate prices in correlation with costs of production in different production zones. This compromises viability. In additional, a big proportion of tubers, pulses and grains are sold through open markets where forces of supply and demand determine prices in ways that are not based on costs of production in different areas.  If sugar bean, onion, groundnut or tomato supply increases, prices drop drastically. The same happens if there are no takers. All these dynamics do not take into account cost structures.

Other commodities depend on big traders whose take up depend on uncontrolled markets and can stop taking in the event of gluts. Another way in which capital flow is affected by lack of clearly outlined markets is where commodities like sugar bean are mostly bought by commodity brokers who cannot be considered a market since some of them either stop buying when their orders are satisfied or have no permanent presence in the market. Consequently capital flow into commodities that pass through commodity brokers is low as financiers do not have guarantees of repayment.

As a result of all these issues, banks are crowding their financing in tobacco at the expense of other commodities which have more important economic, health and nutritional as well as food security significance. The capital market does not think subsistence crops have a definite market. To fill some of these gaps, there is an increase in financial arrangements involving institutional borrowers like processing companies who are expected to hedge risks as off-takers.

Dangers of concentrating finance in one commodity

Besides limiting opportunities, pouring all funding into one agricultural commodity is at odds with intentions by the financial sector to create and support long-term social, economic and ecological well-being. Unless properly deployed, financial inclusion overlooks economic injustice resulting from all banks financing tobacco as if the whole country is suitable for producing the crop. Environmentally-conscious financing should explore new ways of investing in agriculture and rural development without perpetuating monoculture, resource extraction and inequity. At the moment, very few financial institutions in Africa see a clear link between their financial modelling, climate change and economic justice.

 The place of literacy in cultivating a new sense of wealth creation

Low financial literacy levels in most agricultural and rural communities also prevents capital flows into marginal areas and commodities. Agriculture is considered a profession for people who have failed to do sophisticated things in life. Most farmers are not able to prepare a project proposal or complete a loan application form.  As a result, banks are consistently funding the same people. This is worsened by a tendency by development financiers and policy makers to insist on rural development and agricultural financing passing through banks.

Besides the fact that banks are located in cities, bankers are not good at identifying opportunities but identifying risks. Most banks will get interested in you when you have already made your money not when you want to use them to create wealth from scratch. Innovation should see more cases where finance goes straight to the grassroots without passing through banks. Meanwhile, what policy makers and development agencies may think is a financial problem could be about a primitive sense of wealth creation. That is why soft assets like knowledge and skills are increasingly being considered part of development support.

 

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

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

Mobile: 0772 137 717/ 0774 430 309/ 0712 737 430

 

Small consistent incomes are better than random high yields

Rural households that receive regular small incomes tend to have a better standard of living than those earning a once-off payment from a single commodity like cotton, cocoa or tobacco. Levels of malnutrition and poverty are often higher among communities that depend on high yielding monocrops than those surviving on diverse agricultural and non-agricultural activities. For ordinary people, fishermen and farmers in developing countries, it is better to earn $100 per month from diverse income streams than earn $12000 once a year from one commodity. They don’t want to be millionaires.

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Importance of addressing contradictions

One of the contradictions that should be addressed through the right policies is the fact that rural areas continue to produce much of the food but they suffer from malnutrition more than cities. There are more development agencies in agriculture and rural development focusing on rural smallholder farmers but agriculture development remains stubbornly very low. The thrust for modernizing African agriculture continues to marginalize smallholder farmers whose incomes have remained low for decades. In addition,colonial collateral systems conspire against smallholder farming systems.

Instead of basing policies on income diversity, most African countries promote one-size-fits-all agricultural policies which ignore the reality on the ground where orphaned agricultural commodities are more reliable for ordinary people than high yielding commercial commodities that consume a large chunk of the agricultural budget. For instance, commodities that are produced with sophisticated irrigation technologies contribute less to people’s incomes than those produced using rudimentary technologies.

Silent income revolution

While government policies are promoting high yielding and export crops, the majority of farmers and economic actors are not interested in earning foreign currency but generating and managing their own incomes using local currencies. The idea of a market for ordinary people is certainly different from how government people define a market. Whereas government tries to use price as an incentive for farmers to produce, local economic actors including farmers would rather work with local demand and diversity of commodities which ensure resilient incomes and food systems. These economic actors are shifting from focusing on productivity to incomes, especially in the face of a changing climate where high yielding crop varieties are failing to reach their maximum productivity levels.

Income-focused trends at local level are challenging production-centric policies and strategies being promoted by governments and development agencies. When policy makers begin to focus on improving incomes at the grassroots, they will shift from production-centric infrastructure systems to a market-centric infrastructures that ensure smallholder farmers and other grassroots economic actors have full access to reliable markets. This will certainly inspire a new sense of wealth creation where farmers and rural entrepreneurs do not have to sell their commodities through intermediaries all the time.  In order to understand the new thrust, government will move from only collecting crop production data to collecting income data at local level.  That can reveal gaps between production and income. Yield data is meaningless without income data.

Indigenous vegetables as income sources

As communities diversify their income sources, indigenous vegetables are finding a space in most African informal markets. However, while policy makers are directing resources at exotic hybrids, the production of indigenous vegetables has remained largely informal. These vegetables are mainly ground growers and therefore exposed to mud and dust. Highly informal production leads to contamination by many impurities including soil that may not be removed adequately in the cleaning process. Harvesting is merely picking with no basis for grading because they are not produced with commercialization in mind.

Indigenous vegetables also go to informal markets where mass consumers do not often emphasize on traceability and quality. After picking there is not much hygiene in the processing stage.  Since the market and consumption has not been formalized there is no feedback to producers. Whereas in the production of exotics like peas there is emphasis on thorough grading, indigenous vegetables whose sizes are bigger than peas should become a commercial crop so that farmers can be educated properly to, for instance, raise the crop and mulch so that there are minimum impurities from the ground.

A unique selling proposition for indigenous vegetables is that they are very easy to commercialize. They grow on their own during the rainy season with no need for irrigation, fertilizer or chemicals. They can be considered authentically organic, the direction in which the world is going.  Some don’t even need seed, for instance, Nyevhe and Mutsine whose seed like dormant in winter and germinate naturally with the first rains. During the dry season, these vegetables ensure consistent incomes for many households.

 

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

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

Mobile: 0772 137 717/ 0774 430 309/ 0712 737 430