Agricultural economies should develop farmer-responsive pricing models

Agricultural economies should develop farmer-responsive pricing models

The past few years have seen climate change-induced droughts constraining the capacity of African countries such as Zimbabwe to predict future harvests. Consequently, when a bumper harvest happens governments are compelled to lead agricultural value chain actors in building buffer food stocks against future shocks.

Developing responsive pricing models

One of the key interventions badly needed is coming up with appropriate pricing models that ensure better Return on Investment (ROI) for farmers and other supply chain actors. That will better respond to the current scenario where, on one side we have independent players like farmers injecting their own resources to facilitate production. On the other hand, once farmers have produced, corporates, middlemen and government come in to set prices.  While government price-setting mechanisms may be well-intentioned, farmers are often short-changed.

The situation is more complex in Zimbabwe due to a multi-currency system. For instance, while most input suppliers peg their prices in foreign currency, commercial and institutional buyers like the GMB, processors, wholesalers and supermarkets pay farmers in local currency whose stability remains unpredictable. This makes it difficult for farmers to save for the next planting season because by the time farmers buy inputs, the local currency will have lost a big portion of its value.

Apart from significant bumper harvests on the supply side, surplus commodities are outweighing demand especially during the harvesting months.  On the other hand, evidence of how long surplus from the bumper harvest will last is sketchy. COVID19-related disruptions have also caused low demand as the economies are still on a recovery path, especially for SMEs that have become key economic actors. Low demand suppresses prices in ways that constrain farmers’ ability to prepare for the next production season due to huge losses incurred during bumper harvest-induced gluts.

What can be done to addresses challenges and minimize damage?

It has become very important and urgent for policy makers to come up with strategies that can regulate the supply of produce to the market so that farmers get their Return on Investment (ROI). That way, farmers will be able to sustain production in the coming season.  Such policies can include:

A. Accelerating Community Warehouse Receipt System

Community warehouses should be set up for different commodities and financiers brought in to support particular commodities. Policy makers can also come up with a pricing model appropriate for community warehouses to ensure farmers earn Return on Investment (ROI).  For example, if a ton of groundnuts is currently going for USD400 but can reach USD700-800 at peak, groundnuts can be warehoused at USD600/ton. That becomes the basis for farmers to offer their commodities in the community warehouse. As part of enabling farmers to meet their urgent financial needs, the ministry of finance through the Reserve Bank should work with banks in developing a special warehousing fund that ensures farmers get their expected income from the warehoused commodities.  That facility is not really a loan but an advance payment for farmers’ commodities.

It is important for the government or Reserve Bank to participate in this arrangement so that it controls money in circulation. As the commodities are sold, the Reserve Bank will withdraw the equivalent amount of money from the warehousing fund. For example, if a farmer is paid USD600/ton upon delivering groundnuts to the community warehouse and at the time of selling a processor pays USD700/ton, RBZ will withdraw USD600 from the warehousing fund, leaving USD100 or less as a bonus to the farmer or for meeting other costs. This will control money in circulation unlike paying the farmer USD600 upon delivery and letting the processor pay another USD600 when s/he purchases the commodity, which will be more like doubling the value of the commodity.

The model being proposed is different from the Gran Marketing Board (GMB) where farmers are paid the current price without taking into account the possibility of price increases in the coming months or peak selling periods.  The profit-sharing model being suggested her in the community warehouse system is a very important incentive for farmers. The USD100 mentioned in the above is a value accumulation due to price increases.  In the current GMB model, millers and processors are the major beneficiaries because they buy at USD320 from GMB and stock commodities for reaping benefits when the price of maize increases as demand for maize meal rises but such benefits are not transferred back to the farmer.

B. Commodity exchange model

The community warehouse model will also safeguard community food security. By setting these structures, government will give communities the first priority to buy back their commodities as household food stocks become depleted. Commodities to be sold outside the community will be monitored to ensure the community is food secure first before outsiders get commodities.  A commodity exchange model will also be another complementary marketing avenue. Due to cash shortages, it makes sense to promote alternative marketing routes like barter trading or commodity exchanges.  Instead of a farmer selling maize to GMB, getting cash and going to buy cattle, the cash stage can be skipped by linking communities that have maize with communities that gave cattle. For instance, Shamva district can have abundant maize which farmers are keen to exchange for cattle with livestock farmers in Gwanda district. Such deals can be facilitated through community warehouses.

Agreements can be reached so that the processor pays for the farmer’s inputs directly to the input provider. For example, if maize farmers need fertilizer and seed, National Foods can pay directly to ZFC and Seed Co using RTGS which the formal companies insist on using as part of abiding by financial policies. The farmers get their inputs even if their maize held in the community warehouse end up going to GMB from where National Foods can get it.

Such an arrangement is a very quick recovery path for the agriculture sector. Where farmers have other commitments like school fees, payment can be made directly from processors and other potential buyers on the strengths of maize held in the community warehouse. This will reduce the demand for foreign currency.  A major reason why the foreign currency black market rate is always higher than the official rate is because farmers and ordinary people lack operating systems for financial inclusion.

C. Reverse contracting

For a very long time, the contract model has seen contractors/buyers contracting farmers but the reverse should happen when community warehouses are established. Farmers should be the ones contracting buyers using their maize in the community warehouses. “We will give you maize and you bring us inputs,” farmers will say to processors and other buyers. A community warehouse will be a pathway for buyers to come and be contracted by farmers. 

One major challenge faced by farmers is that at harvesting they get low prices or delayed payment but they are expected to buy inputs or equipment. Normally, farmers prefer buying towards the planting season but due to high demand prices of inputs will have gone up. Delayed payment also means farmers buy inputs later even if they want to buy now.  The local warehouse will contract the inputs suppliers now and whether the inputs suppliers supplies now or later, it’s the decision of the supplier. Farmers will have calculated their maize at the projected price 3-4 months later while inputs are calculated now. This way, commodities empower farmers to make good decisions.

Coordinating nutrition baskets

More importantly, community warehouses will coordinate nutrition baskets for the population. Currently, the government is concerned with 3 – 4 crops which only benefit less than 10% of high production zones. The same way GMB is seen buying maize for distributing should see similar efforts buying fruits from Honde Valley and small grains from Mwenezi as well as indigenous fruits like masawu from Dande for distribution to areas of deficit.  / /

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