The Myth of Scarcity in Ugandan Agricultural Market
One myth people like to tell about Ugandan farmers is that they don’t produce enough food—enough to feed their families, or to sell at market and improve their quality of life. But if I've proved anything in the first months of running Kudu, it’s that the myth of scarcity is just that: a myth. Kudu is a cell-phone-based auction market for agricultural trade in developing countries that has been piloted in Uganda since January 2013. In that time, 520 farmers have posted “asks”—seeking buyers for their produce—worth a total of $1.7 million dollars. I’ll say it again: 520 Ugandan smallholders have offered to sell almost $2 million in produce. The real problem is distribution.
Kudu started as an effort to design a system that would reduce inefficiencies in the Ugandan agricultural market. Before we began, we carried out a study using historical price information for produce in Uganda. It showed huge differences between produce prices in rural and urban areas, differences that were too high to account for transport costs between these locations. A sack of sweet-potatoes costs USD $15 in rural areas 80 KM from Kampala, for instance, while the same sack of potatoes can be sold for USD $28 in the city. Historical price data also showed high returns on investment for farmers and traders who stored produce during harvest periods (periods of plenty) and then sold during planting seasons (seasons of scarcity). Storage periods ranging from 3 to 18 months had several viable profit opportunities.
In an efficient market, timing and location alone would not offer such large opportunities for profit. It shows that a small group of people has been able to take advantage of an inefficient system: if more people knew it was so profitable to buy sweet potatoes in the rural areas and sell them in Kampala, then more people would do exactly that, helping to drive prices up in the rural areas, and down in the city. More buyers would compete for the available produce, and farmers could make more money. As it is, you can see the lack of competition among buyers on the side of major highways in most developing countries, where legions of women and children wait with their produce baskets desperate for a buyer.
Agricultural trade in Uganda and most sub-saharan countries has changed very little since the early 1900s.
Agricultural trade typically starts with small scale farmers carrying their produce on their heads or using bicycles.
Bulk transporters also have known stopping points in rural areas where they pick up produce for delivery to markets mostly in urban areas.
But the current system is troublesome for buyers too. The sellers (farmers) are usually uncertain of when the traders will come and how much they will be willing to pay. Traders, on the other hand, are usually uncertain of what produce is available, and how much of it is up for sale. Most of the challenges in the current market environment arise from information aggregation failures. Because farmers are uncertain of selling their produce at all, they typically do not have any incentives to collaborate and sell as teams. Instead, farmers aggressively compete for the few buyers who show up at their farms, reasoning that their best chance of selling produce is to sell it before their neighbors do.
All this chaos has a significant negative impact on the growth of agriculture and the trade in the country. A farmer that fails to realize profits from his/her produce will not be motivated to increase productivity and quality. The traders are also more inclined to pay as low a price as possible to offset uncertainty about produce quality and availability. If a trader has to drive along several different routes to buy as much produce as he requires, then he will try to push down the purchasing price as low as possible to compensate for transportation costs.
Kudu provides an SMS-based auction market for farmers to send their Asks and for Buyers to send their Bids. For instance, a trader who wants to buy 15000Kgs of maize at 800 shillings a kilo from Mbale district would simply text ‘BUY MAIZE 15000 800 Mbale’ to Kudu’s SMS shortcode, 8228 . In case they get it wrong, we correct this message on their behalf or call them back to determine their intentions. The SMS interface is available in English and two local languages (Luganda and Luo).
We designed a double auction mechanism that encourages truthful bidding as a dominant strategy for buyers. If a buyer submits a bid with a price below the farmer’s ask price, then no match takes place. As such, Kudu creates incentives for farmers who wants to sell quickly to submit a low asking price, and for buyers who are in a hurry to bid high in order to increase their chances of completing a trade. Our clearing algorithm also periodically matches buyers and sellers with each other and with details of the offer presented to accept or reject. Buyers can search across multiple districts, and use a web interface to view multiple matches at once on a large screen.
We had worries at the start of the pilot of whether rural farmers would be able to use their phones to send messages and or read responses from the market.
But it seems that most small scale farmers have access to mobile phones and have the ability to use basic functions for voice and text.
We started the Kudu pilot with minimal funding to secure radio adverts once a week, broadcasting in south west and central Uganda, which are rich agricultural areas. The market currently has 1024 buyers and sellers active from January until now. We made random call-backs to market matches to evaluate success rates for actual trades and found a 30% rate for matches that ended up in money exchanging hands.
It has been amazing to see the size of asks that come from rural areas often presumed to be low on resources. Yet the data also show that supply exceeds demand: with $1.7 million worth of asks on the farmers’ side, buyers posted bids worth only $1 million. Why is this so? Even as the southwest and central regions of Uganda produce a surplus, there is a small corner in the northeast where there is a chronic shortage of food. It demonstrates the power of information. What if the agriculture minister could have access to this information? Could it change policy? Help the government to address food shortages?