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The Potential of Virtual mMarkets for Reducing Transactions Costs and Bridging the Economic Divide in Dualistic Agriculture

Jack Armour1 Operations Manager

Free State Agriculture Bloemfontein, South Africa

Email: jack@vslandbou.co.za

ABSTRACT

Key words / concepts: Transactions cost theory, agribusiness clusters / agricultural hubs, duel economies, rural revitalisation, integrated systems approach, Geographic Information Systems (GIS).

This paper is a presentation of a sound business concept based on economic marketing theory, which has the potential to bridge the economic divide between substance and commercial farmers. In the South African context this means providing a market based incentive for the 2.7 million subsistence and backyard home gardeners (DAFF 2011) to market their excess produce at virtually no transactions costs. This could potentially provide 1 million additional jobs, dramatically improve local food security, revitalise backward rural economies and facilitate the graduation from small-scale to commercial farming, adding to the much needed pool of suitably experienced potential beneficiaries for land reform projects in SA.

The holistic integrated systems approach applied to the concept in short:

1. THE I.C.T. PLATFORM: Using a basic mobile phone, a producer of any quantity of produce, no matter how small, can place a geo-referenced log of the produce, on a centralised database platform listing various product attributes

2. THE AGENT – PRIMARY FUNCTION: Entrepreneurial market agents, using a GIS enabled smart phone, can either

a. calculate the shortest route to fill their e.g. 1ton pickup or

1 Author Contact: R. Jack Armour Free State Agriculture, # 4 Nobel Street, Bloemfontein, 9300, South Africa. E-mail: jack@vslandbou.co.za tel: (+27) 051 444 4609 mobile: (+27) 071 672 0271 fax: (+27) 086 512 6656

Biographical Note: Jack Armour (PhD, Agricultural and Natural Resource Economics, University of the Free State, 2007) currently works as operations manager for Free State Agriculture, a provincial affiliate of AgriSA, serving the commercial farmers of South Africa. The main portfolio he manages is agricultural transformation, land reform and black economic empowerment, necessitating innovative ideas to transform the post apartheid white dominated agricultural sector whilst protecting the constitutional rights of the commercial farming sector and at the same time maintaining food security. The aim of presenting at this forum is to present a concept that will hopefully guide applications development to make the concept a reality to improve livelihoods and food security in Africa.

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b. scan within an x radius of how far they are prepared to travel, what is available or c. calculate what is the shortest route to complete an order for xyz product/s

3. THE LOCAL AGROPROCESSING HUB: Agents have facilities at the local small town agricultural hub / agribusiness cluster to further process the raw produce into the form required by the formal agricultural markets and retailers, thereby stimulating rural revitalisation, job creation and place of origin branding

4. THE AGENT – EXTENDED FUNCTIONS: Agents effectively become extension officers; suppliers of market information, suppliers of inputs and micro finance to the small growers, catalysing the formation of small cooperatives, and facilitating the transition from subsistence to commercial market orientated agriculture.

5. THE POTENTIAL NICHE / BRAND: The database platform can also be used by the marketing agents to bypass the traditional oligopolistic fresh produce marketing system in SA and sell directly to the retail sector under a niche market brand that stands for inter alia, Fair Trade, minimal travel costs, efficient resource use, etc. etc.

Following introductory chapters consisting of a literature review and the history of the development of the concept, the chapters of this paper expound on each of these points above.

Most of the ICT components required for the above already exist as individual applications, but an integrated seamless connection of these does not, as far as the author is aware. For example, Google Trader, Google Maps and M-PESA exist on their own, but no dedicated database to capture all the valuable market information for analysis and research, no application that works out the shortest route from my current position to the geo-tagged trades advertised on Google Trader, no application to book the trades and request mBanking details for payment on delivery, and no platform to evaluate the concluded trade rating both the seller and the agent, and so building up a track record as in E-Bay for example.

Furthermore the human resources (agents) and physical infrastructure (3G coverage and network of local agro processing and logistics hubs) on the ground required to make the system successful are also crucial components that are discussed in the paper.

This paper is a plea to bridge the digital divide between farmers, agricultural researchers, extension officers, government officials and practitioners on the ground dealing with the physical aspects of growing food, who know and experience the real problems on the ground and the often very distant ICT programmers and developers. Working together as an integrated team / with the correct structures and systems in place, we could do far more toward achieving Improved Livelihoods and Food Security in Africa.

The challenge is thus to bring the locally applicable supply of ICT applications and demand for these together at grassroots organisations level, and not just at international research and development / NGO level.

1. INTRODUCTION

The following current dynamics in the agri-food sector are the major game-changers that will have major implications for smallholder integration into formal markets in South Africa in the near future: Massmart/WalMart has recent announced a R100 million supplier development fund, with a

30% smallholder procurement commitment. They have bought FruitSpot, a major fruit and vegetable wholesale and Logistics Company and ‘poached’ Woolworths’ ‘Farming for the Future’ manager, Kobus Pienaar. This has the potential to shake up the existing very concentrated food retail sector and open the playing fields for smallholder procurement. As such also to stimulate innovations around efficient organisation of and procurement from smallholders.

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New Broad-Based Black Economic Empowerment (BBBEE) regulations with preferential procurement policies, forcing large retailers to procure from AgriBEE accredited suppliers and value adders, who in turn will have to procure from small-holder farmers

Increasing competition from the rest of Africa as, with the help of mainly the Chinese, infrastructure is developed and markets opening up, and so-called ‘land grabs’ bringing in foreign investment and technology, including the Alliance for a Green Revolution in Africa with the backing of inter alia, seed giant Monsanto, the Bill and Melinda Gates Foundation, etc.

Vodafone and Accenture released a research report in October 2011 showing that mobile phones had the potential to add US$138 billion additionally to the turnover of small-scale farmers in Africa.

The much publicised recent global trio of climate change (requiring a new energy economy), the global food crisis (leading to a rethink of concepts such as food sovereignty, and national and local food security), and the global economic meltdown (forcing a rethink on capitalistic greed and financial markets and systems). All of these point to corporate responsibility and long-term sustainability.

The big “What if?”: What if the price of Brent Crude should double? Clem Sunter did a similar exercise for Anglo American in the mid 1990s, a decade before fuel shot up from $40 to $80/barrel (Visser & Sunter, 2002) . Would current value chains exist as they are today, or would they look considerably different with brent crude at $200 / barrel?

The Arab spring and eastern uprisings at the end of 2011 show what potential social-media on mobile phones can have.

All of the above depict the environment in which smallholders, as well as the value chains they provide, will need to compete and survive in. Conventional wisdom (mainstream economic and agricultural economic teaching) dictates that creating economies of scale is the means of reducing transactions costs to remain competitive. This theory may be sound with perfect markets, free trade, transparent and open information exchange and unlimited resources, but bearing in mind the above, we need to be very careful of the systems and structures we propose for integrating smallholders into value chains. Dame Barbara Stocking, Chief Executive Officer of Oxfam is quoted in the media release of the Vodafone and Accenture (2011) report saying:

“With more than 1.5 billion people worldwide dependent on smallholder agriculture - a group that includes half the world’s undernourished people - mobile telephony could have significant potential to help the poorest farmers towards food and income security. We particularly welcome the focus that this research places on how core business, rather than corporate philanthropy, can operate to have a positive developmental impact.” The problem: Background of smallholder agriculture in South Africa: The author was involved in the BATAT (Broadening Access to Agricultural Trade) Marketing Drive as reported by Van Reenen (1997) as a programme aimed to improve market access of small scale farmers in previously disadvantaged communities of newly post-apartheid South Africa. The importance of marketing in rural development cannot be overemphasised. It is the profit incentive which encourages farmers to produce commercially. An overview of the present production and marketing activities of small scale farmers was obtained and the marketing constraints experienced by small scale farmers were identified. Constraints include a lack of transport services, a lack of road infrastructure, communication infrastructure and storage facilities. Farmers also needed training and a regular source of market information. Provincial Departments of Agriculture were suggested to

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play the role of providing information and training. Infrastructure, however, was identified as a function of other government departments and in some cases private companies. The establishment of rural processing facilities was to be encouraged, and it was also suggested that farmers could also seize marketing opportunities by working together in their production and marketing activities.

In a paper by Groenewald (2003) entitled “Conditions for Successful Land Reform in Africa”, conditions 3 and 4 out of the 6 related to markets:

(3) Potentially successful farmers must be selected and given special support, including extension and adult education. Existing extension services are generally not adequate, particularly in the fields of finance and marketing.

(4) Complementary services and infrastructure are needed in the form of improved access to financial services, markets and inputs and also improved transport, health, communications and other infrastructure.

Van Renen (1997) further summarised the marketing situation of small farmers as:

i. Substantial amounts of production are either used for home consumption or sold to local communities.

ii. The use of channels available varies among individuals and also among provinces, being mainly influenced by the availability of market information and infrastructure.

iii. Although cooperatives do play a role in grain marketing, the role of cooperatives is rather limited and in some provinces, small farmers complain about discrimination against them by traditionally commercial farmer-owned cooperatives.

iv. Very little value-adding was done by the small-scale farmers. v. Transport services and infrastructure varied from satisfactory to very poor, depending on

location. vi. Cool storage facilities were generally not available and in grain producing areas, silo’s often

not favourably located for small-scale farmers. vii. Small scale farmers generally did not have satisfactory access to market information.

Groenewald (2003) further stressed that “for their development, new farmers depend on revenues obtained by selling products at prices which render it profitable to produce; marketing, or rather access to profitable markets, is vitally important for the success of any farmer.”

Access to markets (the transaction costs problem): ample research clearly states that a link between smallholders and markets is missing. A form of collective organisation is usually suggested to transcend the transactions costs problem. The Government in South Africa is currently promoting the formation of co-operatives. However, empowering local entrepreneurial agents (National Rural Youth Services Corps – NARYSEC youth) with ICT technology to access virtual markets may be a more effective strategy, also creating more jobs. Marketing: The potential for Fair Trade-type labelling/branding to distinguish small holder farmers exists, but do smallholders have the collective organisational capabilities to utilise this form of branding. The development of a community brand name for a niche market product / or range of products may also create an agri-tourism spinnoff in a community, attracting tourists to visit the community and .

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The proposed solution:

Pinstrup-Andersen and Pandya-Lorch (2001) devote a concluding chapter, reported by Uday Mohan, in their IFPRI series book looking at the 2020 Vission or Food, Agriculture and the Environment to “Bridgeing the Digital Divide”. Here the use of the GrameenPhone mobile phones by Grameen Bank, a little more than three years old then, had already put mobile phones in the hands of women in more than 1 200 Bangladeshi villages.

The use of mobile phone technology as the core of a business model has the potential to bridge the economic divide between substance and commercial farmers. In the South African context this means providing a market-based incentive for the 2.7 million subsistence and backyard home gardeners (DAFF 2011) to market their excess produce at virtually no transaction cost. This could potentially provide 1 million additional jobs, dramatically improve local food security, revitalise backward rural economies and facilitate the graduation from small-scale to commercial farming, adding to the much needed pool of suitably experienced potential beneficiaries for land reform projects in SA.

The report by Vodafone and Accenture (2011) provides the following breakdown of the principal benefits of mobile telecommunications applications:

Mobile information services could lift incomes by $51bn and require 174 million mobile connections.

Mobile financial services could increase incomes by $50bn based on a required 240 million mobile connections.

Mobile agricultural trading services could generate $35bn, assuming 133 million mobile connections were established.

Supply chain and data services could save over 2 mega tonnes of CO2 emissions and reduce food waste.

Assuming in South Africa, the 2.7 million subsistence and backyard home gardeners (DAFF 2011) use the potential technology described in the Vodafone and Accenture (2011), and have access to a mobile connection, Mobile agricultural trading services could generate an additional $.7bn (133mil/100 x 2 = 2.66 mil, so 35bil / 100 x 2 = .7bil) to the rural economies desperately needing this king of capital injection.

According to the Vodafone and Accenture (2011) report, “mobile telecommunications can connect farmers to markets, finance and education, making it possible to monitor resources and track products. This unlocks productivity potential while helping to manage the impacts of increased production, such as increased water use and greenhouse gas emissions.” These all very topical issues, especially since recently concluding the COP17 Climate Change negotiations here in Durban, South Africa.

The Vodafone and Accenture (2011) study focused on 12 opportunities that deliver broad socio-economic and environmental benefits, grouped in four categories identified through stakeholder consultations as the most important:

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Improving access to financial services 1) Mobile payment system 2) Micro-insurance system 3) Micro-lending platform

Increasing access and affordability of financial services tailored for agricultural purposes Provision of agricultural information

4) Mobile information platform 5) Farmer helpline

Delivering information relevant to farmers, such as agricultural techniques, commodity prices and weather forecasts, where traditional methods of communication are limited Improving data visibility for supply chain efficiency

6) Smart logistics 7) Traceability and tracking system 8) Mobile management of supplier networks 9) Mobile management of distribution networks

Optimising supply chain management across the sector, and delivering efficiency improvements for transportation logistics Enhancing access to markets

10) Agricultural trading platform 11) Agricultural tendering platform 12) Agricultural bartering platform

Enhancing the link between commodity exchanges, traders, buyers and sellers of agricultural produce

As the Vodafone and Accenture (2011) report concludes: “The systems required to deliver these opportunities are both complex and fragmented and, as such, need the collective support of key stakeholders across the agricultural supply chain.” This supports the basic premise of this paper, namely that a holistic integrated systems approach is required to integrate all the separate fragments in an easy to use and seamless (“farmer friendly”) mobile application, together with the physical infrastructure required and the trained agents to do the jobs and spread the word.

In the study by Urbach & Sacks (2009) four simple technologies that have major benefits for smallholder farmers are profiled; Hybrid and genetically modified seeds, greenhouses, irrigation, and plug seedlings, all of which increase farm outputs and allow farmers to harvest multiple crops a year. However, though these technologies have the potential to be very successful, there are several barriers that prevent their greater use, namely, lack of credit, poor infrastructure, high transaction costs, and educational and cultural barriers.

In Baiphethi et al (2011) the adoption of rainwater harvesting technology for increased crop production among resource poor smallholder farmers in Thaba Nchu in the Free State Province was initially good and substantial yield increases were achieved, but when the farmers realised it was difficult to sell the increased production, there was no longer the incentive to use the productivity enhancing technology. Virtual mMarkets could be just the tool required for the revitalisation of rural smallholder agriculture.

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The subsequent sections deal with the potential integration of the various ICT identified with the existing marketing chains and government programmes.

2. THE I.C.T. PLATFORM:

Using a basic mobile phone, a producer of any quantity of produce, no matter how small, can place a geo-referenced log of the produce, on a centralised database platform listing various product attributes

Figure 1: Schematic of the proposed virtual agricultural market database populated and accessed by mobile phones

In the initial research proposal (Armour 2007) transactions cost were cut to a minimal with the use of a 7 digit code using a “please Call me” free SMS on any basic mobile phone in South Africa. More comprehensive research has recently been published on the use of the “Please Call Me” function by Bidwell et al 2011a&b. An exciting development to partially counter the problem of poor rural mobile phone coverage is the launch of affordable mobile satellite phone systems by inter alia SAAB-Grintek and Vox-Oreon.

3. THE AGENT – PRIMARY FUNCTION:

Entrepreneurial market agents (including the Department of Land Reform’s National Rural Youth Services Corps - NARYSEC student to be trained to access the database), using a GIS enabled smart phone, can either:

a. calculate the shortest route to fill their e.g. 1ton pickup or b. scan within an x radius of how far they are prepared to travel, what is available or c. calculate what is the shortest route to complete an order for xyz product/s

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4. THE LOCAL AGROPROCESSING HUB:

Agents have facilities at the local small town agricultural hub / agribusiness cluster to further process the raw produce into the form required by the formal agricultural markets and retailers, thereby stimulating rural revitalisation, job creation and place of origin branding.

Market forces dictate best where these should be located – as soon as there is political interference you could create a “white elephant”. Careful spatial analysis and community participation is required if government agenises are building the agro-processing hubs.

Figure 2: Example of the planned Tweespruit Agribusiness Cluster as a form of facilitative infrastructure for local market value-adding facilities

5. THE AGENT – EXTENDED FUNCTIONS:

Agents effectively become extension officers; suppliers of market information, suppliers of inputs and micro finance to the small growers, catalysing the formation of small cooperatives, and facilitating the transition from subsistence to commercial market orientated agriculture.

Agricultural extension officers will be tasked to educate smallholders about the virtual market and how to use it, a “viral” spread if the virtual market via word of mouth and the social media would also be hoped for! Thus agents may be anyone who uses the programmes and sees the potential. NARYSEC youth could also be trained to complement their community participation and facilitation skills they are expected to take back to the local communities from which they were selected.

6. THE POTENTIAL NICHE / BRAND:

The facilitation of market access by drastic reduction of transactions costs, provided by the virtual mMarket may also lead to the proliferation of niche / speciality branded produce and eventual place of origin branding.

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The database platform can also be used by the marketing agents to bypass the traditional oligopolistic fresh produce marketing system in SA and sell directly to the retail sector under a niche market brand that stands for inter alia, Fair Trade, minimal travel costs, efficient resource use, etc. etc.

7. START OF A SPECIALITY CLUSTER AND SMALLHOLDER REVIVAL?

As the value adding hub become productive and other value adding activities cluster around these hubs, a demand for the subdivision of neighbouring farm sizes will exist, spurring small-holder farmer growth around the cluster. Where the cluster is close to an urban area offering executive jobs, health care and good schools as some of the critical location requirements for a viable agri-village, these agric-villages could potentially attract ageing white farmers from their extensive rural farms to bring their agricultural institutional knowledge to the local village and cluster, thus freeing up extensive land for much needed Land Reform in the South African context. We can come closer to achieving the transformation objectives in South Africa, while simultaneously addressing the fears of commercial white farmers by promoting and facilitating the transition of large-area market related small turnover farming to small-area, intensive-farming with well-established value chain linkages.

An example of a vibrant agri-village is Crossways Farm Village in the Eastern Cape Province, 20km outside of Port Elizabeth (http://www.crosswaysfarmvillage.co.za/) developed by Architects Chris Mulder and Associates ( www.cmia.co.za ) as a state of the art agricultural residential development.

8. SUMMARY AND CONCLUSIONS

Most of the ICT components required for the above already exist as individual applications, but an integrated seamless connection of these does not, as far as the author is aware. For example, Google Trader, Google Maps and M-PESA exist on their own, but no dedicated database to capture all the valuable market information for analysis and research, no application that works out the shortest route from my current position to the geo-tagged trades advertised on Google Trader, no application to book the trades and request mBanking details for payment on delivery, and no platform to evaluate the concluded trade rating both the seller and the agent, and so building up a track record as in E-Bay for example.

Furthermore the human resources (agents) and physical infrastructure (3G coverage and network of local agro processing and logistics hubs) on the ground required to make the system successful are also crucial components that are discussed in the paper.

This paper is a plea to bridge the digital divide between farmers, agricultural researchers, extension officers, government officials and practitioners on the ground dealing with the physical aspects of growing food, who know and experience the real problems on the ground and the often very distant ICT programmers and developers. Working together as an integrated team / with the correct structures and systems in place, we could do far more toward achieving Improved Livelihoods and Food Security in Africa.

The challenge is thus to bring the locally applicable supply of ICT applications and demand for these together at grassroots organisations level, and not just at international research and development / NGO level.

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For effective integration of smallholder farmers into traditional and new food value chains the following is required: To embrace new technology available; to access available information, to group and mobilise

effectively as necessary so as to transact effectively and efficiently; To fully equip NRYSC learners with this new technology, teaching them the skills to identify

value-adding opportunities in the areas from where they come, and equipping and supporting them fully with effective linkages at local government, agricultural extension, organised agriculture, and through these to facilitate direct linkages with existing agricultural value chains and enhance their ability to create new locally-specific and niche value chains.

For smallholders to organise into smaller sub-groupings of local agricultural associations create efficient and effective win-win relationships, where experience farmers can provide mentorship and basic assistance to the smallholders and in return improve AgriBEE ratings.

References:

ARMOUR R.J. (2012 forthcoming) The potential of mobile technology and smallholder integration into value chains. PLAAS, Programme for Land and Agrarian Studies, University fo the Western Cape. Smallholder access to markets and value chains workshop publication.

BAIPHETHI, M.N, VILJOEN, M.F, KUNDHLANDE, G, AND RALEHLOLO, N.G (2011 forthcoming) Participation in land transfer markets and the adoption of rainwater harvesting for crop production among resource poor smallholder farmers in Thaba Nchu, Free State. Department of Agricultural Economics, University of Free State, Bloemfontein

BIDWELL N.J., LAMAS M., MARSDEN G., DLUTU B., JONES M., TUCKER W.D, VARTIAINEN E., KLAMPANOS I., AND ROBINSON S. (2011a Nov) Please call ME.N.U.4EVER: Callback & Social Media Sharing in Rural Africa. http://pubs.cs.uct.ac.za/archive/00000715/01/CallBack-Final.pdf Conference on IT in Asia 2011. accessed 23 March 2012.

BIDWELL N.J., LALMAS L., MARSDEN G., DLUTU B., NTLANGANO S., MANJINGOLO A., TUCKER W.D., JONES M., ROBINSON S., VARTIAINEN E. AND KLAMPANOS I.(2011b Jul) Please call ME.N.U.4EVER: Designing for ‘Callback’ in Rural Africa. IWIPS 2011, Kuching, 11-14 July. P&SI 2011 117 ISBN 0-9722184-6-7. http://researchspace.csir.co.za/dspace/bitstream/10204/5153/1/Kotze3_2011.pdf accessed 23 March 2012.

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URBACH, J. AND SACKS, D. (2009) Fixing Famine: How Technology and Incentives Can Help Feed Africa published in the US by the Mercatus Center at George Mason University (Mercatus Policy Series Policy Comment no. 25) and in SA by the Free Market Foundation. http://www.policynetwork.net/sites/default/files/Fixing_Famine_2009.pdf accessed 4 April 2012

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