Unleashing the potential of traders in rural development

Traders

 Relations can be strengthened between farmers and traders, with a view to the potential of traders to develop markets and help improve the livelihoods of rural people.

1. Introduction

2. Strategies for trading up

3. Policy implications 

1. Introduction

International and domestic markets offer an enormous potential for pro-poor growth if small-scale farmers, traders, processors, retailers and other agents in the chain become organized and learn how to cooperate more efficiently. There is a need to build good relationships between farmers, traders and other actors in the value chain.

Traders are the main channel through which farmers’ produce reaches markets and the consumers who need it. However, farmers, development practitioners, policy-makers, researchers and consumers all share a distrustful attitude towards traders.
Ask one of them what they think about traders, and the words "manipulation", "exploitation" and "speculation" soon crop up.

These are common opinions raised when discussing the role of food traders in Africa. But to what extent is this perception correct? Are the so-called "middlemen" opportunistic profit-seekers or are they hardworking entrepreneurs who carry out an important function in the economy? Can strategies be devised to support traders to the benefit of small-scale farmers? Can new arrangements be designed to enable traders to extend the reach of markets to the most marginalized communities?

Agricultural trading in Africa is far from easy. Food products are marketed through long, fragmented supply chains in a volatile, high-risk business environment with poor physical infrastructure and little support from formal legal or financial institutions. Yet consumers in the cities are offered daily fresh vegetables, meat, tubers and other foodstuffs which are brought over large distances from the rural hinterlands. While traders do a remarkable job in making this happen, overall market development remains limited. There is little value-addition, investment is low, business practices are rudimentary, and the outcomes for farmers, traders and consumers are far from optimal.

2.  Strategies for trading up 

There are strategies to make agricultural marketing become more beneficial to farmers and traders. Ways to improve trading include: farmers or traders can organize themselves for collective marketing, they can buy cell phones to know the latest prices, banks can provide short-term loans to pre-finance business transactions, traders and farmers can seek to build long-term trust relationships, formal contracts can be used to record business agreements, and many more. Such innovations can be clustered in two basic types of strategies for improved trading:

• Strengthening chain relations: create well-organized business relations between the various actors in the value chain;
• Building strong market institutions: establish standards, regulations, policies and services to coordinate and support trading activities.

Whereas the first type of strategy seeks to improve the conditions for trading within the value chain, the latter seeks to improve the conditions in the business environment around the value chain. The first strategy is about the players of the game, the latter is about the rules of the game.

To accomplish sustainable improvements in trading - what we call “trading up” - there needs to be simultaneous attention for improved chain relations and stronger market institutions.

The following five issues are important to improve relationships in the value chain:

• Farmers and traders organize themselves;
• Farmers and traders develop mutual respect and understanding;
• Farmers and traders specialize in their role in the chain;
• Farmers and traders develop partnerships for mutual growth;
• Farmers and traders seek higher-level coordination of the chain.

The following market institutions are important for improved trading:

• Market information;
• Standardized grades, weights and measures;
• Contract enforcement;
• Financial services;
• Policy leverage.

Combining the two types of strategies - strengthening chain relations and building strong market institutions - can create "chain partnership" interactions that are most beneficial for farmers and traders. Where both market institutions and chain relationships are strong, farmers, traders and buyers engage in long-term business relationships with formal contracts to jointly work on, and invest in, up-scaling, quality improvement, market development, value-adding, service provision, risk reduction, etc. Prices are often negotiated for a longer period and farmers tend to obtain larger profit shares. Farmers and traders develop business alliances in which they acknowledge their specialized roles and together look for synergy. They agree on clear standards and procedures to regulate the business relation. This may result in added value, new markets, innovation, competitiveness, sustainability.

3. Policy implications.

Experience so far has revealed key policy messages for various stakeholder groups – farmers, traders, government, donors etc. - on what they can do to improve trading in Africa.

Farmer organizations

Farmer groups tend to blame traders for exploiting farmers and taking advantage of their lack of market outlets and market information. But farmers who get organized can develop stronger and more beneficial relationships with traders. Traders respond positively to organized farmer groups, offering higher prices, premiums for quality, and a loyal business relationship over the years. So rather than blaming traders, farmers should get their act together and organize themselves. There will always be opportunistic traders who try to take advantage of their suppliers and customers. But most traders are hard-working persons, who do not want to put their business at risk for short-lived profit.

So the key to better trading conditions is that farmers build a well-functioning organization. Well-functioning farmer groups understand that they are part of a value chain – a network of specialized chain actors that collaborate to bring products from the farm to consumers in good condition and at affordable prices. Successful farmer organizations respect the roles of the other chain actors, and build alliances to achieve mutual benefit. Sometimes it is possible to make the value chain more efficient by cutting out a redundant actor. But farmer organizations should not seek to get the entire value chain in their hands. Marketing is best left to the specialists - travelling traders, wholesalers and retailers.

Traders’ associations

Traders often feel misunderstood or even mistreated by farmers, public authorities, financial institutes, donor agencies, and the general public. But traders who organize themselves in a transparent way develop better linkages with the outside world. Public authorities and donor agencies respond positively to organized traders, offering support services and consultation in policy-making. So rather than hiding away from public opinion, traders should get their act together, organize themselves, and maintain open communication and linkages with the outside world.
Traders’ associations can improve their public image by setting clear standards, rules and regulations for their members, which are based on transparency and fair trade ethics. Fraudulent traders should be isolated.

Traders can improve their businesses by taking a more active role in the value chain. They can build long-term relationships with farmers by sharing information on market developments and by setting prices in a transparent way. They can increase the efficiency in the chain by setting quality standards and using calibrated weights and measures. They can actively look for new markets and add value to products through branding and processing.

Local authorities

Local authorities can promote better trading by ensuring good management and facilities in marketplaces. Hygiene, security, space for loading and off-loading, and health facilities are some of the urgent problems to address. Traders work every day in the marketplace, so they should be consulted about issues that affect them. Local authorities should also consider involving traders in decentralized management of the marketplace, which will help lower public expenses. Market fees and taxes should be rationalized and visibly used to improve the services and facilities in the marketplace. Local  authorities can mediate and facilitate coordination of the various stakeholders in the market.

National government

National governments have important roles to play in improving trade. A classic role is the provision of public goods: roads, rural infrastructure and telecommunications. Macro-economic policies are equally important, such as trade policies, price policies, competition policy and consumer protection. When government agencies are involved in trading, or when a country receives food aid, it is important to ensure a level playing-field for private traders, without unfair competition from subsidized government entities. The government is vital to build strong market institutions, such as efficient court systems, quality standards and market information. Governments can further promote trading by rationalizing taxes, deregulation, decentralizing the issuing of licenses, creating “one-stop shops” for licenses, clearing barriers for cross-border trade, and fighting corruption affecting traders. Finally the government is important in creating an enabling business environment, especially a strong financial sector that provides services for small traders.

NGOs and donor agencies

Most interventions from non-governmental organizations (NGOs) and donor agencies tend to disregard or even disrespect small-scale traders. While there are many projects supporting farmer groups to bypass traders, few support traders to make marketing more efficiënt and beneficial. NGOs and donor agencies should regard traders as a potential partner rather than the sworn enemy. They are just as worthy of support as farmers are. Like farmers, small traders are resource-poor, vulnerable entrepreneurs facing many risks and fulfilling a vital role in the national economy. Moreover, traders can serve as multipliers of development; as efficient conduit for donor interventions. Support to traders generates many spin-off benefits for other chain actors, including farmers.

Donors can strengthen trader associations through capacity building, accountancy oversight, and managerial support. Equally important is to improve the access of traders to financial services. Another area is to support linking and learning, exchange of information, and lobbying and advocacy among traders, farmers, and public authorities. Finally, donors can also invest in communications infrastructure, such as radios and mobile phones, and provide for capital assets for the service providers in the value chain, such as warehouses, cool houses, and transport.

Source:

KIT/IIRR, 2008, Trading up: building cooperation between farmers and traders in Africa