The gap between a small-scale farmer in Nakuru and the notion of commodity markets seemed like an absolute distance. Price signals were received via middlemen, local brokers, and co-operative organizations between the farmer and the prevailing market price, thereby making the farmer effectively out of the price discovery process. The exclusion was not limited to economics. It was information-based, that is, farmers’ planting, harvesting, and selling decisions were made with little insight into the factors influencing the prices they actually received. That is starting to change, however, with mobile internet connectivity and an emerging array of agricultural market information services, albeit in an incremental way, but with real meaning.
Even for the simplest understanding of commodity prices, it is necessary to develop a mental model of the forces that move commodity prices, and Kenyan farmers who have gone through the process say that this is disorienting before becoming useful. Maize prices in Kenya are influenced by the availability of maize at domestic harvest, regional price parity for imported maize, government policy on the maize trade via the National Cereals and Produce Board, and global market drivers which are a result of U.S., Brazil, and Ukraine agriculture decisions. All these forces act simultaneously, and the downstream result is the price a farmer receives; developing even a basic understanding of the interactions between these forces alters the way production and marketing decisions are made.
Although the trading of commodities as a formal financial activity is at a considerable distance from the developing conceptualization of price awareness that most Kenyan farmers have, the conceptual distance between the two is not as great as it may seem. The existence of agricultural commodity futures markets is really for the purpose of making it possible for farmers, processors, and end-users to discover prices and manage transaction risk. Even if a farmer in Kenya does not plan to place a futures trade on the commodity derivatives market on the JSE, that farmer has adopted the same logic that underpins formal commodities trading, namely considering the price of white maize on the JSE to be driven by regional supply and demand.
The transfer of practical knowledge is taking place in the form of extension services, networks of farmer cooperatives, and an increasing number of agricultural fintech platforms that provide market price information via user-friendly interfaces available on simple smartphones. Access to market price information has been shown to shift the negotiations of smallholder farmers with intermediaries, resulting in better farmgate prices, by closing the information gap that the traditional intermediary chain relied upon. Knowledge gained through commodities trading awareness is not being used as a trading tool but as a bargaining tool, a distinct application that reflects the practical power of understanding how prices form.
The more formal linkage between the financial infrastructure of commodity markets and the risk management needs of Kenyan farmers takes the form of weather derivatives and agricultural insurance products based on commodity price indices. Development finance institutions and agricultural insurance providers have piloted index-based insurance products that pay out when commodity prices drop below certain thresholds, analogous to the way futures and options work for commercial agricultural producers in more developed markets as a form of price risk protection. These products remain in an early stage of adoption in Kenya and help fill the gap between smallholder farmers and formal commodity trading infrastructure, using instruments tailored to the unique risk profile of smallholder agriculture.
Mobile technology, market information, and financial product innovation have been steadily opening up commodity market knowledge in Kenya’s agricultural sector, a space that processors, large-scale commercial farms, and professional traders have long held to themselves. These farmers are not becoming financial commodity traders, but they are becoming commodity price literate, altering the way they participate in the value chain. In specific cases this change has been modest, but collectively, if it produces a larger impact on the way agricultural markets operate in Kenya, the gap between a smallholder farmer and commodity market awareness is not as large as agricultural commerce made it seem.