Lauren Falcao Bergquist on Credit, Storage, and Maize Markets in Kenya
Andrew Westbury, Senior Program Manager for the Agriculture Technology Adoption Initiative (ATAI) at CEGA, discusses credit products for farmers in Western Kenya with Lauren Falcao Bergquist, Research Fellow at the Becker Friedman Institute for Economics at the University of Chicago, who recently received her PhD from UC Berkeley.
In wealthy economies, seasonal price fluctuations present farmers with some pretty straight-forward business opportunities: harvest your crops, store them while you watch the market, and then sell when prices are high. Unfortunately, for the millions of smallholder farmers in Sub-Saharan Africa, this dynamic often plays out in almost exactly the opposite way — after many months watching their crops grow, farmers are forced to sell immediately after harvest, seeking money for pressing household expenses.
The flood of product into local markets drives prices down, only to rise again months later when farmers have exhausted their supply. Although a well-timed credit product could help farmers change this dynamic, agricultural lending institutions tend to offer loans at planting season (when farmers are buying inputs like fertilizer and seed), rather than at harvest.
Funding from the Agricultural Technology Adoption Initiative, supported by UK Aid and the Bill & Melinda Gates Foundation, has allowed Bergquist and colleagues Marshall Burke and Edward Miguel to study this important problem.
Between 2012–2015, they tested a “maize storage loan” designed to alleviate financial stress for farmers while they waited for prices to rise. The product was offered by One Acre Fund in Western Kenya. The results — detailed in a 2017 working paper, “Selling Low and Buying High: Arbitrage and Local Price Effects in Kenyan Markets” — were remarkable, especially the impacts of the loan product on local communities. In villages where more farmers received loans, maize prices fluctuated less for all consumers.
After reading the paper, I had a few questions for Lauren. My questions, and her answers, are below.
AW: Why do you think maize storage loans were so attractive to farmers in your study (60–65% of them adopted the product), compared to traditional microfinance products?
LFB: Traditional microcredit products target entrepreneurial activity, which requires entrepreneurial skill on the part of the owner, the right market for the good or service being sold, possibly access to skilled and trustworthy employees, etc. — a whole host of conditions that may or may not be there. In contrast, the maize storage loan is geared towards an investment opportunity that’s basically available to all; one simply has to wait for prices to rise. In focus groups run before the start of our study, farmers nearly universally knew about these seasonal price trends and saw the opportunity in storage, so there was a lot of demand for the product. Finally, the loan itself was carefully structured: given out at the right time, with a low interest rate and a flexible repayment window, which has been shown in other research to be important (Field et al., 2013).
AW: How important do you think it is that NGOs and other providers offer maize storage loans in high concentrations?
LFB: When maize storage loans are offered to more farmers in a community, the direct benefits to individual borrowers are smaller. This is because borrowers are using the loan to arbitrage seasonal price differences, which are diminished when lots of other people in the area are also storing. The point we make, however, is that higher levels of saturation are likely to have important benefits for non-borrowers, who face smoother maize prices. An NGO or public institution that cares about the total social benefit of their services or products may want to consider this, and offer the product to more farmers. Still, offering the product to even a few farmers would be an improvement on the status quo, as it would result in large gains for those farmers.
AW: I understand that One Acre Fund is now offering maize storage loans outside the context of your evaluation. How is this going?
LFB: Yes, One Acre Fund has expanded the product to 70,000 farmers across Kenya, which is really exciting. It’s an organization that takes evidence seriously. I think they were particularly enthusiastic to learn that there may be benefits for the broader community — even beyond their direct beneficiaries — through smoother prices. For an organization trying to drive broad social impact, improving market efficiency is an exciting avenue.
AW: The farmers in your study had already received traditional input loans from One Acre Fund. How do you think this product affected the success of the maize storage loan?
LFB: We’re unfortunately unable to say whether there was any interplay between the two products, because our study is run only with One Acre Fund clients, meaning that both those in our treatment and control groups received One Acre Fund’s traditional input loans. It’s hard to say whether the loan would be equally effective without an existing credit provider relationship, though evidence from other settings suggests that take-up of the loan product might be higher when farmers trust the financial provider (Casaburi et al, 2014).
AW: To what extent would you urge researchers evaluating other types of financial (or non-financial) products to look at market-level outcomes?
LFB: Considering market-level outcomes is important when (1) the intervention being studied is producing a sizeable shock to local supply; and (2) markets are isolated enough that a meaningful portion of this supply shock is felt locally. Measuring market-level outcomes is likely relevant when looking at agricultural interventions designed to increase local production in rural markets. It might also be useful when testing microfinance products, vocational training programs, and other interventions, depending on context.
AW: Your colleague Marshall Burke at Stanford has used measurements of crop yields from your Kenya study to calibrate satellite-based yield estimates that he is working on. Do you have other plans for usage of data from this study?
LFB: Through this project we collected high-frequency price data from some very remote, local markets. Data like these are typically hard to come by. Agricultural prices are often only available for major urban markets and usually only on a monthly basis. We’re talking now about using these data to estimate transport costs and better understand how those costs vary by remoteness and season.
