(Summary: the value chain break in the maize food process is identified as being connected to negative incentives for traders.)
We’re on a mission to solve an important puzzle: unlocking the mysteries of hunger in Africa. There’s not a shortage of food but people are hungry. To understand, we’re drilling into one part of the value chain of maize in one region of Tanzania.
So we’ve looked briefly at the maize farmers, traders, and mills. We see that nobody
trusts anybody. That’s very counterproductive to making a value chain work and clearly part of the problem. We also see that the farmers can’t sell their product and the mill can’t buy enough.
(Pictured: the shelling of maize by beating it with a stick on a table of open branches.)
There is enough dysfunction that everyone has some blame in the problem. But notice that the farmers are growing enough and would like to sell more. Also notice that the factories are big enough to buy more and have excess demand. So the farmers and the factories are doing their job at least beyond the capacity of the current system. Therefore, at least for the moment the heaviest part of the blame needs to be placed at the feet of the traders. So let’s take a more careful look at traders.
Traders fill valuable links in value chains in nearly every industry. It’s kind of neat that as a factory you can open your doors and not worry about sourcing your inputs or distributing your products. Hundreds of traders will show up with baskets, bicycles and trucks filled with the inputs you need and ready to distribute your product. The factory doesn’t have to lift a finger and invest in these solutions.
There are thousands of traders and they are often operating in the informal sector of the economy as unregistered businesses not paying any taxes. Many people want to be traders because many traders are wealthy.
Without traders, the economy wouldn’t work at all. They are a vital part of how things get done.
On the other hand, we see that trader model doesn’t work to meet the needs of the value chain, at least in the case of this maize value chain in the Iringa area.
It isn’t that the traders aren’t doing their job, even though I implied that. Actually, they are doing their job very well. They are responding to the incentives that are at work in the system.
It turns out that the trader is maximizing their profit. As good capitalists, they want to buy at the lowest price and sell at the highest possible. Here’s some of their strategy:
#1: Buying Low
The trader can buy at the lowest price if the farmer is also a borrower. As we have discussed elsewhere in this blog, these money lending schemes are common across the developing world. In this maize example, the trader loans to the farmer either the seeds or the capital to purchase seeds. The terms of the loan require the farmer to sell their crop to the trader – at a very low price. The trader wins three ways: they have a pre-negotiated right-to-purchase, they have a lower price, and they make money on interest on the loan.
And they win a fourth way: they keep the borrower poor enough that they never break the cycle and so they are trapped indefinitely.
Clearly the trader benefits substantially from such an arrangement. Why would a farmer ever agree to such an arrangement?
Easy answer: they don’t have a choice.
Life in the developing world is much more precarious than in the developed world. For example, even a small illness can wipe out one’s life savings to buy medicine. One’s saving includes next year’s seeds. And illness and death are not uncommon.
(Pictured: a maize farm in front of the mountains.)
All a trader need do is find someone who has suffered a setback and requires a loan to continue. As you can imagine, needy people are common in the poorest nations on earth.
(This is one of the reasons why microfinance is so needed in the developing world. Microfinance can help to prevent these endless cycles of poverty.)
There are important things to notice about this situation:
· The trader has an added incentive to buy low – extra low. Farmers that are well off are much less likely to be caught in such a cycle of money lending.
· In more helpful value chains, buyers want their sellers to be productive and healthy. This gives them a supply side that they can count on. This is not true in this value chain.
· It is not surprising that there is strong distrust between traders and farmers. Indeed, many farmers hate traders because they have been caught in a money lending cycle or their neighbors have.
· Since the trader is buying at such a low price, the farmer has added incentive NOT to sell. Of course the negotiations are long. Of course the farmer doesn’t like the buyer – doesn’t even want to sell to them. How can there be a successful negotiation when the parties dislike and distrust each other?
#2: Selling High
How does a trader sell at a high price? Another easy answer: supply and demand. If the factories had all (or close to all) the input they needed then the price would fall. Traders keep the factories desperate for input because that keeps the price at its highest. This explains why factories are operating consistently at 20-40% of capacity. This is the line of desperation where the price will be highest. They are still in business and can buy the product. Any lower and they fail (many do). Any higher and they become more independent, more profitable, and the price falls.
There is no need to have a conspiracy to set prices among traders. The numbers will speak for themselves.
Why are maize mills unable to source their maize from the nearby farmers? Puzzle solved!
This is an example of a broken value chain. It isn’t a lack of food that is causing hunger; it is broken value chains.
Next: The Invisible Hand
To continue this series go here: http://cheetahdevelopment.blogspot.com/2009/07/food-part-11-the-invisible-%20hand.html
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