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The Role of Market Information

Recent years have seen an increased interest in the provision of market information. In part, this reflects the movement away from state-sponsored marketing in many countries and especially those which have been undergoing structural adjustment. This has been accompanied by a recognition that if marketing activities formerly carried out by the state are to be taken over by the private sector then some government support needs to be provided to promote the creation of a competitive market. Even countries in which the private sector has always played a thriving role in agricultural marketing are increasingly coming to recognise the need for a greater measure of official assistance in areas such as legislation, infrastructure provision, marketing extension and Market Information Services (MIS).

Efficient market information provision can be shown to have positive benefits for farmers, traders and policymakers. Up-to-date, or current, market information enables farmers to negotiate with traders from a position of greater strength. It also facilitates spatial distribution of products from rural areas to urban areas and between urban markets by sending clear price signals from urban consumers to rural producers regarding quantities and varieties required.

Well-analysed historical market information enables farmers to make planting decisions in line with urban consumer demand, including those related to new crops. It also permits traders to make better decisions regarding the viability of intra and, perhaps, inter-seasonal storage. Moreover, information of this type assists agricultural planners and researchers and can make an important contribution to our knowledge of urban food marketing systems.

Market information can be regarded as a public good, particularly where there are numerous small farmers who are unable to pay for information. The availability of timely and accurate information to all interested parties is therefore essential, whether it be provided by the government itself or by the private sector. Many countries have attempted to provide market information but their success rate has been poor. Market Information Services have repeatedly proven to be unsustainable and where they have endured they have often failed to provide commercially useful advice, confining themselves to the gathering of, frequently unused, data.

FAO recently conducted a survey of MIS in all FAO member countries. This indicated that, while a large number of countries do operate some type of MIS, the vast majority of services cannot be considered to provide commercially useful information for farmers and traders. A large percentage of MIS are primarily data-gathering exercises, and even this is done inadequately. MIS suffer because they are frequently operated by government officials who lack a commercial approach. More importantly, the majority face significant resource constraints. Often set up by donors, they have proven to be unsustainable once donor support has been withdrawn. MIS planners have tended to “overdesign” services, paying little attention to the capacity of the organisation providing the service to continue to do so on a reliable basis.

FAO has developed a working definition of a Market Information Service, as follows:

A service, usually operated by the public sector, which involves the collection on a regular basis of information on prices and, in some cases, quantities of widely traded agricultural products, from rural assembly markets, wholesale and retail markets, as appropriate, and dissemination of this information on a timely and regular basis through various media to farmers, traders, government officials, policymakers and others, including consumers.
There are varying names given to activities that broadly fit in with the above definition. FAO has settled on the use of “Market Information Services” in order to differentiate “market” information from “marketing” information, the latter being a much wider concept which is likely to include details on potential market channels, payment requirements, packaging, quality and a whole host of information required by a producer to make a successful sale, including market information. We have also avoided the word “system” as this conveys a rather abstract data gathering exercise which is not necessarily oriented to providing a “service” to farmers and traders.

The Role of Current Information

We can differentiate between “current” market information, which meets the immediate commercial needs of farmers and traders and “historical” information which, when analysed, can be used for planning purposes by farmers and policy makers.

Access to timely information on prices and quantities plays a crucial role in reducing the risk of losing money on a market transaction. High risks lead to high marketing costs, as high margins are necessary to compensate for possible losses. In the extreme case, farmers with information can decide whether or not to harvest, so avoiding sending produce to market in times of glut only to discover that the price received does not cover harvest, packaging and transport costs.

All exchange relationships tend to have elements of market power on one side of the exchange or the other. In agricultural marketing transactions the party with more knowledge usually, but not always, sets the initial price. The other party then decides whether to accept or reject the offered price. If only limited competition exists, there will be little pressure to set the offered price close to the actual costs. Competition, however, can increase the weaker party’s knowledge of market conditions and trigger an adjustment in the price, either by direct negotiation or by the patronising of alternative dealers. In such a framework of price formation, market knowledge implies market power. One of the main steps governments can take to improve the fairness of market price formation is thus to ensure that timely and accurate information about actual market conditions is available to all.

It is important that the farmer should be able to sell his or her produce at a convenient stage of the marketing channel. For example, some farmers have the option of selling at farm gate, of delivering to a local assembly market, of supplying a wholesale market direct or of selling directly to retailers or even to consumers. However, a maximum value added for the farmer is not always an optimal solution. This depends on the costs (e.g. transport, risk bearing and time) involved when the farmer decides to sell in a market segment closer to the final consumer. Availability of information on market conditions at different locations or different points in the marketing chain is necessary for choosing where to market.

Current Market Information and Spatial Arbitrage by Traders

Market performance is related to the functioning of arbitrage.[2] Spatial arbitrage should equalise supply and demand at different market places until price differences are reduced to the level of transport costs. The higher the level of transaction costs between markets, the smaller the probability that exchange will take place between them.[3] Links between markets thus become more likely as transaction costs decrease.

When risk or the cost of identifying market outlets is reduced because of the availability of market information, transaction costs will go down. Lower transaction costs thus influence quantities and prices in the market. For example, when transaction costs go down, supply to urban areas will increase and prices decrease. As a consequence, demand will increase. In rural areas, prices and quantities traded will also tend to increase. Urban consumers and rural producers will thus benefit from reduced transaction costs, while rural consumers will experience higher prices. Where there are producers closer to urban areas, these will obtain lower prices than hitherto.

The above considers the case when information promotes the flow of produce from rural to urban areas. Availability of market information will also encourage spatial arbitrage between two markets, especially in cases where information and transport costs are relatively low. If no trade exists between two markets, both will clear supply and demand at their respective equilibrium prices. When price differences between the two are larger than the transaction costs, trade relations will be developed if there are no controls to inhibit exchange. A new equilibrium price will be determined for the combined market for the two regions.[4] The availability of correct price information will lower the traders’ cost of information gathering, as well as the risk of sudden unfavourable price changes. Consequently, they will have more opportunities to prevent unprofitable transfers and this should ultimately lead to a reduction in their gross margins.

Current Market Information and Farmers

Farmers often have limited outlets for their produce and are often bound by traditional trading relationships, which may include an element of credit provision by the trader. Opportunities for farmers to take advantage of spatial arbitrage possibilities are therefore restricted. Such opportunities are further hindered by the small quantities produced by most.

While there may be few spatial arbitrage opportunities for small farmers, it cannot be concluded that market information is of little value to them. Indeed, while the opportunities for arbitrage may provide much of the theoretical justification for the provision of market information, the reality is that traders often already have accurate and widespread information networks and the introduction of an official MIS may add little to arbitrage possibilities. However, the practical benefits to farmers are often much greater than the theoretical arbitrage possibilities for traders. At the simplest level, the availability of market information can enable farmers to check on the prices they receive, vis-à-vis the prevailing market prices. If farmers receive prices lower than those broadcast they may, for example, conclude that they should seek out other traders in future, negotiate more forcefully or try to improve the quality and presentation of their produce. Information on market conditions may also change farmers’ marketing strategies. While, individually, farmers may be unable to take advantage of spatial arbitrage possibilities, collectively they may be able to organise transport to more distant and profitable markets.

Current Market Information and Small Traders

When the market is imperfect, market information may encourage market entry and make the market more competitive and more efficient. Current market information can be expected to be of greatest value to relatively small traders. Unlike larger traders, small traders lack the resources to monitor markets on a regular basis (see Box 1).

Box 1: Costs of Information

In Benin there was until recently no Market Information Service, so farmers who wanted to sell their surpluses had to search for information about market conditions. It is easy to gather information on local markets as these are visited regularly to buy consumer goods. Information on conditions in markets further away was more difficult to obtain. These markets were visited less regularly by members of the household or other inhabitants of the village. The costs of a journey to visit these outlets and gather information constituted an entry barrier, as the quantities handled were often small (less than a few hundred kilograms).

Small traders, quite numerous on the Benin maize market, faced the same type of problem. Traders collected small quantities in the villages (often less than 100 kilograms) and sold these at the nearby regional market centre, the only market for which information was available. Even wholesalers had a small area of intervention as quantities handled were limited (less than 1000 kg. per market day). They often operated in a network of a few market places. Information on market conditions was collected by personal contacts in the market place. Generally, traders visited the market in person and decided whether it was profitable to buy or sell. Information costs consisted mainly of transport costs (taxi) of the trader and the opportunity cost of labour. Transport costs could be significant, especially when only small quantities were traded daily. Moreover, in case of changed prices that precluded profitable exchange, information costs became a loss that had to be recovered from future transactions. For most traders, gathering information on alternative outlets was costly, because of limited turnover and because of the risk of such a loss.

Historical Market Information and Temporal Arbitrage (storage)

Storage plays a central role in expanding the availability of different foods to consumers over a longer period. Storage costs, such as labour for maintenance, chemicals, depreciation of storage facilities and costs of invested capital, can be considerable. However, price changes over time depend not so much on storage costs as on how much of a product is stored for subsequent release onto the market and on seasonal production levels. The highest prices during a year do not necessarily correspond with the end of the lean season, as prices in other regions or countries also influence market conditions. As Box 2 describes, spatial and temporal arbitrage can often interact.

Box 2: Spatial and Temporal Arbitrage Interaction

There are times when spatial and temporal arbitrage interact. An example comes from Benin where harvests depend to a large extent on the level of rainfall. In the south of the country, two maize harvests are possible (July-August and December-January), while in the north there is only one harvest (September-November). The fact that harvest periods do not coincide, while distances between markets are a maximum of 500 kilometers, makes interacting spatial and temporal arbitrage possible.

However, rainfall is unreliable. It may arrive early or late, and harvests may be mediocre or abundant. Generally, surpluses in the north are transported to the south at the end of the lean season in April/June. When harvests in the south are abundant and early (due to early rains), prices may reach their highest levels in April as stocks are liquidated during a relatively short period before the start of the new harvest. When harvests in the south are mediocre and late, then prices can rise to very high levels up to July, and this attracts surpluses from the north or even further away from Nigeria. After the beginning of the harvest period, prices will decrease in the south, while prices in the north will stay at a relatively high level since the harvest will start later in this region. These conditions make storage risky and consequently the value of correct information all the more important.

Historical Market Information and Farmers

Information about prices over a season or more can provide valuable information for farmers. It has been shown that market information has led to farmers diversifying into new crops, for example. An upward trend in prices for a crop can indicate profitable production opportunities and may lead to some farmers ceasing to grow a crop where prices are declining. All of this should, over time, contribute to a more equitable balance between urban demand and farmer supply. Market information can be particularly valuable where countries are changing over from a state-controlled marketing system to one of private enterprise. Box 3 discusses the MIS in Zambia, which has played an important role in highlighting marketing possibilities for farmers who, until a few years ago, had a guaranteed outlet for their maize through the Government parastatal and cooperative movement. Under the liberalised marketing system, farmers not only now have to seek market outlets but also have to carry out storage for longer than in the past. In most rainfed production systems, the cropping calendar limits the cultivation and harvesting period to several months during a year. The question “when to produce” is thereby limited to a fixed period. However, this makes the question “when to sell” more important. Availability of information about seasonal price movements should, in time, facilitate decisions about when to sell the crop and also mean that urban consumers will not be faced with alternating gluts and shortages.

Historical Market Information and Policymakers

Traders are often accused by policymakers of exploitative behaviour because large differences between farm-gate and urban retail prices are observed. It is assumed that the unbalanced relationship between farmers and traders, or between traders and consumers, based on better market and price knowledge of traders, together with imperfect competition, results in abnormally high profits for traders. Often, it is very difficult to substantiate these accusations because of the lack of clear information. Reliable price information is absent and estimates about the costs and risks traders have to bear are difficult to obtain. Moreover, the risk premiums necessary to deal with price fluctuations are hardly taken into account by policymakers making the accusations. Market information offers the opportunity to judge the performance of markets for agricultural products and to determine micro-economic constraints, although additional information on, say, marketing costs will be necessary to form a reliable opinion regarding the efficiency of the market.[5]

[2] Arbitrage is the process of exchange of commodities with the objective of taking advantage of price differences that exceed transaction costs.
[3] “Transaction costs” are sometimes used to refer just to the costs of doing business or making the transaction, i.e. costs of obtaining information, financing trade and organising necessary documentation. In this publication, however, the term is used synonymously with “marketing costs.”
[4] It is possible to show that trade will have positive welfare effects for the regions of both markets. The rationale behind this is that some of the resources in one region are no longer needed to produce the ´imported’ commodity and can be allocated to alternative economic activities for which the region has a comparative advantage.
[5] For advice on marketing cost calculation see Shepherd, Andrew W., “A Guide to Marketing Costs and How to Calculate Them” AGSM, FAO, Rome, 1993

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