CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
According to Behjat and Ostry, (2013) the profitability of small-scale producers using direct markets especially farmers and small business holders, is not well understood. Several studies discuss the potential profitability of using direct markets citing premiums for fresh produce and the need to produce a variety of high value or specialty crops (Adenegan&Adeoye 2011; Abba, 2013; Banciu&Prakash, 2013; Alizamir, Foad&Hamed, 2015; Akkaya, Kostas &Hau, 2016). Other studies (Maisamari, 2002; Goyal, , 2010;Nasiru, 2010 &Taru, 2012; Mukhebi a& James 2014) compared producer returns and potential profits between direct and other marketing channels.
Ohen, Abang and Idiong, (2007) find that producers who diversify marketing channels (direct, direct to retail, and wholesale) or use a single channel (not limited to direct marketing) tend to have higher earnings relative to producers who overlook these marketing options. The ability of Nigeria agriculture to perform its role in development has been declining thus creating wide gap between the demand for and supply of food (Chen & Christopher, 2015). It is the desire of most countries (Nigeria inclusive) to be self-sufficient especially in food production. This can be attributed to the low profit earnings accruing from these agricultural produce.
Nigeria agriculture is dominated by small-scale farms which constitute an important and invaluable component of the Nigerian economy. Food consumption expenditures accounts for a high proportion of total households’ earnings and expenditure in Nigeria and food demand has been growing at the rate of 3.5% per annum with food production growing at a rate of 2% per annum in recent years, while, the annual rate of population growth has been as high as 2.9 percent, thereby, creating a serious food deficit (Adeola, Folorunso, Gama, Amodu&Owolabi, 2011). This is aggravated by the low profits resulting from low and unsteady prices of such farm products.
Prices through which profits are gained are an important feature of every market (FAO, 2007). Webster’s define price as: “The price of a good or service is what it costs the buyer to acquire it from the seller; the same price is what the seller rewards for giving up its property rights on the good or service”. In the modern world, prices represent acceptable exchange ratios for goodsand services. Among varied goods, currency is the standard unit in terms of which the exchange values of all other goods can be quoted. Technically, price is the value expressed in terms of some exchanged commodity. This definition shows that there can be but one price in a market. This is a somewhat intangible but an important economic premise. Commonly, different people within the same market place may offer different prices for the same good. However, within a group of buyers and sellers where competition is nearly perfect, price is predetermined with some degree of precision. According to Cachon, and Martin (2005), prices can be found everywhere. Particular classes of goods or services have explicit price-name, e.g. wage as the price of labor, interest rate as the price of capital, discount rate as the price of time, risk premium as the price of uncertainty, etc.
It is an established fact that everything has its price, if not explicit then implicit, because in our societies all can be, and mostly is, traded against priced goods. Prices differentials are important to market participants, a major determinant of profits, a decisive factor in agent decisions, since they simplify evaluation of complex transactions, and hence contribute to greater efficiency in their maximization of utility. They also represent a very compact way of summarizing information about demand/supply conditions for efficient communication and profit maximisation. Banciu andPrakash (2013) also observed that prices allow producers to make a profit per unit produced/sold. They allow consumers to decide if they wish to spend more than a certain amount for a specific good or service. It is the place where sellers are charging as much as they can and buyers are buying as much as they can afford, at that particular price, that we call an equilibrium price.
Approximately two billion people live on 475 million small farms in developing countries, where each farm is not more than two hectares and is typically family operated (Food &Agricultural Organization FAO, 2007 & Rapsomanikis 2015). However, these small farmers have a great impact on a global scale. In addition, studies have shown that in aggregate, these farmers account for roughly one third of the total food supply in the world (Caldentey, & Gustavo 2007). Farmers in such settings typically face several common challenges that make it difficult for them to improve their profits. It is common for farmers to decide upon production quantities and harvest their crops before knowing how much their crops can be sold for. This is not the case with nonfarm businesses. Thus price uncertainty makes it difficult for farmers to make optimal production and harvesting decisions.
Second, farmers often have little to no choice of where to sell their crop: some farmers only sell to traders who stop by their farm gates, others might only sell through their local marketplace. Although these marketplaces are usually run as auctions, evidence suggests that cheating is a common practice (Upton & Fuller 2004) that further reduces how much farmers can earn for their crop. Interestingly, in a survey of farmers in Nigeria, farmers cite price fluctuations (coupled with the lack of price transparency) and market failures as the top two risks that they face, and rank these factors even above weather-related risk factors (Chen & Christopher, (2015).
The dire plight and vast numbers of these struggling rural farmers has gained the attention of researchers and governments across the globe, and many have funded initiatives to improve the income of farmers, often through social enterprises that leverage digital or mobile technology. A recent survey conducted by researchers at the World Bank (Chagwiza, Roldan & Ruerd 2016) identified better market links and distribution networks as one of the key categories of functions provided by such initiatives. The implementation of this function varies with the specific context: some implementations provide matches between buyers and sellers, as well as support on logistics and order fulfillment, while others purchase from farmers and resell to buyers directly. What is common among these implementations is that they provide a new, digitally-enabled channel through which farmers can sell their product to buyers at known, posted prices. This is geared towards setting the profit of agricultural based business at per with that of non-agricultural base businesses. Polaski, (2008) evaluated marketing channel options for small-scale producers in Central New York and compare price, sales volume, costs and market risk of alternative marketing channels.
They concluded that a combination of different marketing channels is needed to increase overall performance. However, they do not provide a rigorous test or method to choose the marketing channel. Instead, they develop an index for labor required, sales volume and average profit of alternative marketing channels and calculate the weighted average to assist producer decision making.
Gilbert and Morgan (2010) use an estimated cost and return based approach to compare profitability potential across marketing channels, often limiting the analysis to either a point estimate or examination of several scenarios (sensitivity analysis). Similarly, Jon, Mark, and Madelon, (2009) compare marketing costs and returns across alternative marketing channels and found that wholesale was the most profitable marketing channel, while farmers’ markets were the least profitable. The authors attributed this result, in part, to the low labor-to-revenue ratio in wholesale markets from savings in transportation, sales, and administration. The authors also found profits decreased by 53% with only a 20% decrease in produce sold when exclusively using farmers’ markets, and thus, recommended their use as a marketing and risk management tool to sell surplus produce. Conversely, Hernandez, Shahidur, Solomon and Tadesse (2017) found that utilizing farmers’ markets was more profitable than wholesale markets for producers utilizing high tunnels on one acre to produce a double crop of tomatoes and summer squash.
Rapsomanikis, (2015) through the analysis of five crops typically sold at farmers’ markets confirmed that production and marketing risk are significant factors for direct marketers. They use sales levels of 50%, 75% and 100% of production to assess potential revenues.
The results show that break-even prices were very sensitive to the amount sold. Salimonu and Falusi (2009) examined the feasibility of small-scale production in Northern Colorado using three scenarios based on varying levels of investment in production, storage, and distribution. The first scenario, exclusively utilizing wholesale markets, was unsustainable based upon the first three years of production. The authors concluded that risk for each option varied due to differing levels of commitment to capital and labor.
Farm and nonfarm profits refer to profits and losses that are incurred through the operation of a farm and nonfarm businesses (Wegner &Gine, 2011). Profit is the excess of revenue/income above the costs/expenses incurred in the process of producing the revenue/income. Profit is an absolute measure of the positive gain from an investment or business operation after subtracting all expenses. Put another way, it is the absolute amount of money a business makes after accounting for all expenses, and is calculated using the formula "Profit = Total Revenue – Total Expenses" as part of an Income Statement. Making a profit is what all businesses strive to do because without profit, the business will not survive in the long run. Profitability, on the other hand, is the size of the profit relative to the size of the business. Profitability measures how efficient the business is in using its resources to produce profit (rate of return on investment). Unlike profit, profitability is a relative measure of the success or failure of a business. It has more to do with the rate of return expected on an investment (capital), or the size of the return, compared to what could have been obtained from an alternative investment (such as putting your money in a risk-free certified deposit or buying government treasury bonds).
The point to note is that it is possible for a business to generate a profit but not be profitable. In other words, profit is a necessary but insufficient criterion for a business to be profitable. As much as there are differences in the profit margin of all businesses, their profitability is indeed more variable owing on the types and nature, of business and the circumstances surrounding its operations.
The Kaduna state central market is market for all sorts of items. It is the biggest market that services greater part of Kaduna metropolis. With majority of Nigerians largely dependent on small scale businesses largely at the subsistence level, virtually everyone is involved in one way or the other in agricultural productivity either as sole means of livelihood or in addition (Adetunji & Adesiyan, 2008). Much of these agricultural activities are characterized by mostly small-scale farming carried out by peasant farmers with an average of about 2 hectares of land which are usually scattered holdings. While the sector’s performance has improved in recent years, it is still described as one with a great deal of unrealized potential.
1.2 Statement of the Research Problem
Price fluctuation is a multifaceted problem attributed to various factors which, when combined, culminate in dangerous consequences for the most vulnerable especially small holder businesses. Although high prices can technically be good news for business owners, price fluctuation is extremely dangerous, as farmers and other agents in the food chain risk losing their investments if prices fall. One frequently cited reason for increased prices is ‘market fundamentals’. Demand is thought to be outstripping supply and thus leading to increased prices. Ampersand
Yet food production has never been as high as it is today and commodities markets are becoming increasingly interesting not only for financial speculators but for researchers also (Behjat&Ostry, 2013).Current trends in global markets, particularly the world food economy, creates certain challenges and opportunities for Nigeria’s agricultural sector, and hence, its economy (Bassey, Okon, &Ibok, 2013). The increasing prices of grains, like wheat (Nigeria’s largest import) and rice, imply increased import bills for Nigeria and higher prices for local consumers if the agricultural sector does not increase production of these commodities or provide alternative commodities to substitute for them.
Farming in Nigeria is controlled by the small scale farmers who are engaged in the production of the bulk of food requirements of the country (Onuk, Ogara, Yahaya&Nannim, 2010, Ogunniyi, 2011). In spite of the fact that these small scale farmers occupy a unique and pivotal position, they belong in the poorest group of the population and as such cannot invest much on their farms to boost their profit margins. According to Ogunniyi (2011), the vicious circle of poverty among these farmers has led to the unimpressive performance of the agricultural sector. Thus, resources should be used much more efficiently, which entails eliminating waste, thereby leading to increase in productivity and incomes.According to the Kaduna State Bureau of Statistics (KSBS, 2016), agriculture is the major contributor to the economy of Kaduna state with majority of the people actively engaged in farming. Cash and food crops are cultivated and the produce includes: yam, groundnut, maize, beans, guinea corn, millet, ginger, rice, cassava and many more.
Kaduna State Agricultural Structure Survey (KASS, 2017) shows there are 1,322,226 farming families in the State, 428,352 farming families were engaged in maize farming in 2016, 172,133 farming families were engaged in rice farming and 34,645 farming families were engaged inyam production. Kaduna State is the highestproducer of maize in Nigeria, producing2,166,799.8 tonnes in 2016 and one of the mainproducers of rice, producing 964,218.36 tonnesin 2016 (KASS, 2017). The major cash crop is ginger which the state has a comparative advantage as the leading producer in the country, Kaduna State have 65,807 farming families involve in ginger farming.
In Kaduna state, agricultural sector over the years has contributed more than one third of the GDP. There has been inconsistency in the contribution to the total GDP year on year from 2013 to 2016 but the drop in 2016 to 35.33% is largely due to the growth of other sectors despite the fact that it recorded a growth of 10.83% compare to 2015. The sector was driven by output in crop production which recorded one of the highest yield in recent years showing a growth of 11.05% compared to 2015, livestock recorded a growth rate of 8.16%, Fishing recorded the highest growth rate in Agricultural sector with 25.63%.
Agricultural prices observed over time are the result of a complex mixture of changes associated with seasonal, cyclical, trend and irregular or random factors. The most common feature observed in agricultural prices is a clearly marked seasonal pattern of change. Usually prices of storable products such as cereals and leguminous grams are depressed to the lowest level at harvest time and then rise as the season progresses, reaching a peak just before the next harvest. These price variations are caused by a number of factors.
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