Market channels within the village

In the questionnaire sample (2008–2011), 16% of smallholders adhered to the strategy of selling within the village when marketing their agricultural products, primarily bananas, vegetables and milk, products that are already integrated in existing farming patterns (see Table 3). Selling to the village shops requires smallholders to set up long-term contracts where they are expected to deliver products every day or week, while being paid weekly or monthly. They may also run a credit in the shop, buying farm inputs such as animal feed and other necessities. Purchases are later deducted from the payment for their products. On the one hand, profit levels for selling within the village are usually 10–15% lower for the producer than when receiving optimal payment in the local marketplace (smallholders, Meru, September 2009 int.). On the other, risks and transaction costs are also lower. The system offers security to the producer as it relies entirely on traditional, endogenously developed market institutions and prices are arranged beforehand. In addition, as most smallholders find it difficult to save money that can later be spent on farm inputs, it is valuable to secure access to these products from the shop and to have a contract where they can be paid in instalments. Further, taking goods to the nearby shop means that the smallholder has no expenses for transport to market or marketing fees. Finally, labour resources can be concentrated on working in the fields, increasing agricultural production instead of investing time and effort on travel to the market (ibid.).

There is no shortage of local customers in the village: smallholders who have either specialised in other products or do not produce enough for their household needs. Village smallholders may have difficulties finding the time to go to the local marketplace and therefore prefer buying in the village. Neighbours who find that they have common interests in complementing their own agricultural production with the surplus production of other households may well set up their own trading arrangements. Prices and transaction costs resonate with selling to the village shop, and contracts between neighbours are enforced by social pressure and continuous opportunities for both parties to exit and use alternative marketing channels (smallholders, Meru, September 2009 int.).

As well as securing a supply of products from smallholders in the villages, shopkeepers also travel to the local markets, buying up local agricultural products or food cash crops produced in other parts of Tanzania. As costs for transport to the village have to be added, retail prices in the village shop are often 5–10% higher than in the marketplace. However, when shopkeepers successfully buy wholesale in the market, they can offer agricultural products in the village at the same retail prices as in the marketplace, and still make a reasonable profit. Shopkeepers with access to storage facilities can buy larger quantities of staple crops such as maize and beans, thereby negotiating better prices and improving their profits even more (village shop keepers and smallholders, Meru, September 2009 int.).

Marketing through cooperatives

Government-initiated cooperatives were top-down projects, the preconditions for which depended on national policy. The movement for building smallholder peasant cooperatives in Tanzania originated in the Kilimanjaro area in the 1930s, and received a further boost during the post-independence socialist policies of the 1960–70 s. Cooperatives were given a prominent role in the rural development process, represented a government strategy for controlling and taxing agricultural production, and primarily promoted cash crops – coffee in the case of Meru. They would pool together the efforts of small-scale producers and act as a mediator between them and large-scale buyers, offer subsidised farm inputs that smallholders could get on credit, provide education, etc. (Hydén Reference Hydén1974). In Meru today, most coffee cooperatives have disappeared or are in decay since the economic crisis of the 1980s and deregulation in the 1990s (coffee cooperative representatives, Meru, September 2009 & February 2011 int.). Although cooperatives were formerly used by most smallholders in Meru, only 11% of farmers in the questionnaire sample presently sell their products through cooperatives of some sort (see Table 3).

There are still a few surviving coffee cooperatives, and 33% of farmers producing coffee use them for marketing their products. The decline of coffee cooperatives over the last three decades has gone hand-in-hand with the decrease in incomes from coffee. In the 1990s, it was thought that deregulation and the presence of private traders would improve market opportunities for smallholders as well as increase producer prices, but this turned out not to be the case. Annual average prices for coffee paid to growers in Tanzania fell from US$1.19 per pound in current terms in 1997 to US$0.24 per pound in 2002. Since then there has been an upsurge in prices, and in 2008 producers received US$0.88 per pound (ICO 2011). The downfall of the cooperatives, however, began before deregulation and falling prices as corruption and inefficiency undermined their activities. Since the heyday of the cooperatives in the 1970s, some coffee cooperatives in Meru have lost 85% of their previously active smallholders (coffee cooperative representatives, Meru, September 2009, February 2011 int.).

Today, 67% of coffee growers report selling to private traders who represent large national and international companies. A few state that this is a conscious choice due to higher prices, but most would prefer to have access to a well-functioning coffee cooperative (smallholders, Meru, September 2009 int.). The cooperatives offered their members access to factories for washing, pulping and drying the coffee, and this improved the quality of the final product. With the disappearance of the cooperatives and their factories, smallholders rely on their individual resources, but poorer quality results in lower producer prices (coffee cooperative representatives and smallholders, Meru, September 2009 int.).

Due to falling coffee prices, increasing prices for farm inputs and expanding markets for horticulture and dairy products, smallholders in Meru started uprooting their coffee as early as the mid 1990s. Despite the last decade of systematic increase in producer prices, this trend has continued (coffee cooperative representatives, Meru, September 2009, February 2011 int.). Thirty-five per cent of smallholders in the questionnaire sample still grow coffee (see Table 1), but only 4% claim it to be their main source of income (see Table 4).

Table 4

Main sources of agricultural incomes among smallholders

Source: Questionnaire 2008–2011.

Generally, both coffee cooperatives and private traders pay in two instalments over the year, but smallholders find it difficult to budget coffee incomes to buy the necessary farm-inputs at the appropriate time. Instead, many smallholders prefer to sell milk, which provides a small but daily income for the family (Hillbom Reference Hillbom2011). Vegetables are also favoured, as they give three to four harvests a year, and different types of vegetables have different seasons, so that that there is a more constant flow of income (smallholders, Meru, February 2011 int.). During the last decade, smallholders have initiated a new type of cooperative to organise their production and marketing of dairy and horticulture. This trend of local initiatives to create rural producer organisations is not unique to Meru. It has been recognised in numerous micro-studies by scholars, and has also captured the interest of donors and governments (Bernard & Spielman Reference Bernard and Spielman2009).

The newly formed vegetable cooperatives usually operate under contract farming schemes, where deals are made between cooperatives and larger national or international private companies seeking high-quality production of specialised crops, such as green peas and baby corn, to be exported or sold in national supermarkets. Significant investment in farm inputs is needed to farm these exotic crops, and meet the quality standards of the companies, but with higher production costs come potentially higher profit margins. Such contract farming has expanded rather than revolutionised existing vegetable farming, and provides a good match between top-down interests and grass-root initiated smallholder organisations (vegetable cooperative representatives, Meru, February 2011 int.).

Meanwhile, locally initiated milk cooperatives have developed their own refinement processes in Meru. They set up continuous as well as temporary delivery contracts with smallholders in surrounding villages to ensure a constant supply of milk. Based on local supply, they produce pasteurised and packaged milk, yoghurt, butter and cheese that are sold directly to consumers in the village or through street vendors in urban areas, to rural and urban shops as well as to supermarkets in Arusha (Hillbom Reference Hillbom2011). Their major constraint is to find the money needed to invest in dairy plants and counter the seasonal demand for certain products such as cheese, which is vulnerable to fluctuations in the tourist sector. The volumes of these small, local dairies are increasing and they can collect 7,000–12,000 litres of milk per month depending on seasonal variations in production (milk cooperative and micro-finance representatives, Meru, September 2009, February 2011 int.).

The new cooperatives have taken up several of the services offered by the old government-initiated cooperatives: smallholders access buyers in lucrative markets with whom it would be difficult to negotiate as individuals; payments are made in instalments so that smallholders have their incomes spread out over the year; farm inputs and veterinary services are offered on credit, using the future production of the individual smallholder as collateral; the cooperatives attract other sources of credit such as micro-finance organisations; and farm demonstrations and other types of education are offered.

Private traders

In the wake of market liberalisation in the 1990s, the number of private traders travelling to the farms has increased, and the range of agricultural products has diversified beyond promoted cash crops (coffee) and traditional crops (bananas, beans, cassava, coffee, maize, millet), to include horticulture (tomatoes, cucumbers, carrots, Irish potatoes, green beans, sweet peppers, etc.) and dairy. The characteristics of these traders vary. Traders in bananas, beans, cassava, maize and vegetables may be either agents of larger companies, or self-employed in small-scale business schemes. The larger enterprises are likely to be registered and be part of the formal sector of the economy, while the self-employed as a rule operate in the informal sector. Capital to set up the business can be secured in various ways: registered trading companies may get it from commercial banks, while informal businesses may receive micro-finance loans (wholesale traders, Meru, September 2009 int.).

Smallholders selling to private traders save the time, effort and costs (transport, markets fees, etc.) of taking their products to the marketplace, and do not have to risk being unable to off-load their products or having to sell at bargain prices. On the other hand, prices offered by travelling traders are lower than those the smallholders could get if they themselves went to the market. The questionnaire sample shows that 55% of smallholders sell to traders who come to their farm, and that this marketing channel embraces all sorts of products (see Table 3).

Table 5 contains selected illustrative examples of prices and profits for various products. It is important to emphasise that this information can only be read as an illustration of existing market conditions. Prices fluctuate significantly over seasons, primarily due to availability of a crop depending on harvest conditions and for some products due to changes in demand during tourist seasons. On top of seasonal inconsistency, there are also no set prices in the marketplace. Instead profits are determined by negotiations between sellers and buyers, reflecting the temporary match between supply and demand.

Table 5

Selected illustrative transactions (all prices in US$)

* The price for banana stems fluctuates depending on size and quality.

** Cabbage is bought at a set price in the plot before harvest and the selling price fluctuates depending on size and quality of each head.

Sources: Interviews with banana/cabbage/maize/milk/tomato growers, Meru, September 2009.

Transactions between smallholders and private traders include both long-term contracts and temporary opportunities. Most commonly, traders travel around the countryside looking for suppliers, and negotiations are carried out at the farm. Farm gate prices are 10–15% lower than those obtained at the market, but the advantage for the smallholders is saving time and expenses involved in going to market. Smallholders make informed decisions about these trade-offs, as they are well aware of the prices paid in the marketplace, the cost of transport, and the amount of time spent going to market. Contracts between traders and smallholders are set up without any interference from the state, or any real possibilities to call on official authorities in the case of a breach. Despite the lack of external enforcement and written agreements, both parties will stick to their obligations as they are involved in playing an open-ended game in a competitive context. With the high numbers of both traders and smallholders, they are replaceable and need to maintain a professional relationship built on trust in order to do business continuously.

Marketplaces in Meru

An increasing number of smallholders hold plots that are too small to feed the household or provide a sufficient income, with some even becoming landless. Consequently, a growing number of smallholders have to turn to off-farm incomes, and have become permanent net consumers of agricultural products. Further, with the expanding opportunities for cash incomes derived from the sale of agricultural products, smallholders who are net producers can afford to change and diversify their consumption patterns. Net consumers and net producers together make up an expanding local demand for agricultural products. Marketplaces in Meru are also frequented by large and small-scale traders, residing in and outside Meru, who buy products that are then shifted to other regional, national and international markets. As many as 74% of smallholders in the questionnaire sample brought their agricultural products to marketplaces in Meru where they would sell to consumers as well as traders (see Table 3). Below follow two examples of how Meru is increasingly becoming a ‘bread basket’ for nearby as well as distant consumers.

Example 1: Bananas are traded not only on the local and regional markets, but also to other parts of Tanzania such as Dar es Salaam and Lake Victoria, as well as neighbouring countries like Kenya and Rwanda. International traders set up regular trading routes and travel to Meru once or twice a week to buy banana stems. In Meru they may either set up long-term contracts with larger producers or scan the market for temporary transactions. While demand is constant, supply fluctuates depending on season and with that, prices also fluctuate over the year (banana traders, Meru, September 2009 int.). Bananas have gone from being considered a subsistence crop to being one of the main income earners in Meru. They share advantages with milk in the sense that they provide a regular income with limited seasonal fluctuations, and in the questionnaire, 11% of smallholders state bananas to be their main source of income (see Table 4).

Example 2: Tomatoes are traded extensively from Meru to national and international markets. With the spread of mobile phones it is relatively easy for smallholders to find out the going price for tomatoes, e.g. in Dar es Salaam. They thus also know if the deals offered by traders in the local marketplaces are fair or not. In the questionnaire sample, all smallholders claimed to be fairly or very well informed about market prices of the products they were selling. Should there be significant price differences between marketplaces, a larger number of smallholders may get together and transport their tomatoes themselves from Meru to other national and international marketplaces to secure the profits (tomato growers, Meru, September 2009 int.).

While market institutions are generally developed jointly by producers, consumers and traders, the government contributes by setting up and maintaining basic physical market infrastructure, such as roads and marketplaces with permanent stalls, cooking facilities, etc. In Meru, there are marketplaces designated for specific products such as the Kikatiti livestock market and the Nguruma banana market. There are also mixed marketplaces with all sorts of agricultural products as well as a great variety of consumption goods, e.g. in Tengeru and Usa River. Government officials uphold physical infrastructure, organising stalls, charging markets fees of US$0.18 per day, and so on (government officials, Arusha, September 2009 int.). These officials are, however, few and far between, and several vendors complained that they are corrupt and that it is difficult to get any help if you have been cheated in a transaction, unless you pay a bribe. The intense everyday trading is not supervised by government officials or regulated by formal institutions. Instead, the conduct of buyers and sellers is regulated by informal institutions and local codes of conduct (traders, Meru, September 2009 int.).

Urban markets

In nearby Arusha town, bananas, vegetables and milk are sold fresh in marketplaces to traders and consumers, or may be taken to supermarkets, hotels, restaurants and processing plants such as dairies. The opportunity costs for smallholders to invest labour and financial resources in transporting their products to town are high, but profits will increase as the producer cuts out the middle men. Some larger-scale producers may therefore pool together with neighbours to organise transport (traders, September 2009 int.). Expenses consist of transport, market fees and meals, and the fact that smallholders are less well informed about urban market procedures brings additional transaction costs. In the questionnaire sample, 11% of smallholders marketed their products themselves in Arusha (see Table 3).

A few of the more progressive smallholders set up long-term contracts with traders owning permanent high-end vegetable stalls in Arusha's main Kolombero market. They produce uncommon and expensive types of vegetables such as lettuce, broccoli, leak, green beans and baby corn. With such products a stall keeper can make a daily profit after deducting all expenses of US$6. As seeds, fertilisers and other farm inputs for these types of vegetables are more expensive than for more common crops, urban traders assist producers with inputs or alternatively set up credit arrangements so that the smallholders can afford to secure the necessary inputs themselves. Producing and trading in these up-market vegetables is a growing business, as an increasing number of consumers in Arusha want them. There is a significant interest from both smallholders and traders for this type of contract farming, although such arrangements are demanding in terms of financial capital and farming skills, and thus provide an opportunity that is open only to a smaller group (smallholders and traders, Meru and Arusha, September 2009 int.).

Expanding urban markets take various forms, and new marketplaces take over as the African urban setting becomes increasingly modern. Urban supermarkets for high-value agricultural products for domestic consumption are, for example, the fastest-growing mediators of agricultural products in most developing countries today (Delgado et al. Reference Delgado, Rosegrant, Steinfield, Ehui and Courbois1999; World Bank 2007: 12). Supermarkets usually start by targeting upper-income households, then the middle class and finally urban lower-income earners. They are primarily interested in processed foods such as cheese, secondly in semi-processed goods such as treated milk and lastly in fresh food (World Bank 2007: 126). Generally, customers for both high-end market stalls and supermarkets come from a relatively small number of socio-economic groups in town who can afford to spend more on food and have more diversified consumption habits than most Tanzanians. These groups include businessmen in the tourist industry, foreigners who work temporarily in Arusha, and Tanzanians enjoying higher than average levels of incomes, including many members of the Indian community.

The milk market

Petty trading in milk is dominated by men, and there are more so called milk boys than milk girls. As a rule they are sons and daughters of local smallholders who still live with their parents, and milk trading diversifies household incomes. The individual usually combines milk trading with either on-farm milk production and other agricultural activities, or with off-farm activities. Milk is a product that until the introduction of exotic breeds in the 1960s and the expansion of the milk market in the 1980s was primarily for subsistence consumption, but has developed into a reliable daily income for many households. Milk boys/girls buy fresh milk from smallholders and transport it to village shops or to Arusha, where it is sold to private consumers, hotels, restaurants and, to some small extent, dairies (Hillbom Reference Hillbom2011). In general, it is preferable for smallholders to sell their milk to these petty traders, rather than having to travel to Arusha themselves with only a few litres per day. Advantages of scale give the milk boys/girls an upper hand.

There seems to be a never-ending demand for milk, especially from urban consumers, the tourist sector and processing plants. The constant high demand secures relatively constant high prices all year around, with only some decrease during the most productive season, which is the rainy season (see Table 5). The amount of milk that a milk boy/girl trades each day varies significantly, depending on their contacts with producers and consumers. As an illustration, someone trading 40 litres of milk per day would gain a daily income of US$2. The milk is transported in plastic jerry cans loaded on wheel-barrows and bicycles, which means that once they have secured the cans and a means of transport, milk boy/girls can conduct trade without any extra expenses (milk boys/girls, Meru, February 2011 int.). Milk boys/girls are often accused by producers of not paying their suppliers on time, while consumers and processing plants accuse them of watering down the milk. Despite this discontent, the system seems to be working overall, and there is no evidence that poor market institutions have hampered the expansion of the milk market. In the future, milk boys/girls are likely to get more competition from local processing plants, and this could push for a strengthening of market institutions (local dairies, Meru, September 2009 int.; milk boys/girls, Meru, February 2011 int.).

Food cash crops

Petty trading in food cash crops is monopolised by women: in the questionnaire sample, 100% of this type of trading was done by women. Visits to markets in Meru and Arusha confirm that few men adopt individual strategies which combine petty trading of food cash crops with farming. They may still be part of a household strategy where the husband stays at home farming, while his wife goes to the market to sell the household produce as well as engage in petty trading. This division of labour within the household makes the husband concentrate on the local community, while the wife has more connections to the world outside the village. It also strengthens the economic position of women within households, as they are in control of a large part, or even all, of the household's cash income. Some husbands even confess to having no insight into the incomes brought in by their wives, and relying completely on their budgeting for the family's economic strategies (traders and smallholders, Arusha and Meru, September 2009 int.).

The explanation for female dominance in trading with food crops lies in the local historical division of labour and incomes. Traditionally, women were responsible for feeding the family, especially the children. As farming food crops was primarily for subsistence purposes, this was the responsibility of the wife, while the husband controlled the cash crop, such as coffee. The negligible surplus production, particularly of bananas and milk, could be sold by the wife and generated some minor income from trading. Women of today have maintained their position as the petty traders in the family. What has changed drastically is the context. Farm intensification, with the introduction of new high-value food crops such as vegetables, and increasing urban demand, including demand for traditional staple crops such as maize and bananas, has significantly expanded both supply and demand for the trading sector controlled by women (smallholders, Meru, September 2009 int.).

Daily incomes from women's petty trading fluctuate significantly depending on season, supply, demand and other short-term circumstances. Seasonal fluctuations in crop prices result from harvests as well as daily insecurity. On every market day it is a challenge to get the maximum price as the deals that are struck depend on factors such as finding a good spot in the marketplace, networking, competition from other traders, and so on. If you are left with products at the end of the market day you may have to sell them cheaply or, in some cases of perishable crops, dispose of them. Storable products can, of course, be taken home again and brought to the market another day, but this involves transport costs, new market fees and time-consuming labour. Petty trading can be a risky business, but very profitable if you manage to secure a continuous supply of products in high demand and counter seasonal changes in prices (petty traders, Meru, September 2009 int.).

For those who want to get involved in petty trading as a small-scale business, credit is available in the form of micro-finance loans. Organisations such as SACCOS and PRIDE give special business loans that are easily accessible, but have high interest rates running on a weekly or even daily basis. The conditions often encourage traders to off-load their goods as soon as possible rather than to set up long-term strategies. For example, in Tengeru there is a SACCOS office located within the marketplace offering traders loans for one day's trading at an interest rate of 5%. Such loans are very popular as the profits of one day's successful trading can be a source of significant income for smallholder households. With potentially high daily profits, however, come high risks. If you are not successful it may be difficult to pay back the daily interest rate of the loan and you may end up making a loss (micro-finance representatives and traders, Meru, September 2009, February 2011 int.).

Table 5 offers some illustrative examples of prices and potential profits, but as incomes depend on harvests, seasonality and fluctuating demand, it is difficult to calculate average incomes from petty trading. The overall importance of these incomes may instead be illustrated in a different way. Forty-seven percent of households in the questionnaire stated that they could not cover all of their expenses if they did not have the incomes from petty trading in milk and food crops, and 7% claimed that petty trading was the main source of income for the family. Apart from being a significant income, it also has the advantage of providing, if not a daily, then at least a weekly income. Even at times when there is nothing to harvest and sell from the farm, it is always possible to buy some products from your neighbours, take them to the market and generate some income (smallholders and petty traders, Meru, September 2009 int.).

The study was set up to investigate the channels through which agricultural products are marketed in Meru; the relative advantages of different marketing channels for smallholders; and the significance of petty trading in agricultural products for smallholders' household economies. Following these lines of questioning, the study has identified the following main findings.

1. 1) Opportunities to choose due to access to numerous marketing channels for agricultural products play an important role in smallholders' ability to opt for profitable market alternatives.

2. 2) Due to easy market access, smallholders can diversify household incomes with petty trading, which is particularly important for net consumers.

3. 3) Lower transaction costs due to improved physical infrastructure, market expansion and smallholders' increased experience from market interaction have facilitated commercialisation.

4. 4) Accumulated experience and access to updated market information allow smallholders to make knowledgeable decisions on how to optimise the use of their factors of production (land, labour, capital).

5. 5) Despite some initiatives from government and large-scale private companies, existing market institutions are primarily the results of an endogenous processes of repetitive interaction between producers, consumers and traders involved in local, regional, national and international marketing networks.

6. 6) Continuous open-ended games and repeated interaction between actors with limited access to financial capital mean that social networks, reputation and trust are the most important assets for producers and traders in local markets.

7. 7) Dynamic rural–urban exchange is pushing for a new balance between rural supply and urban as well as rural demand. While such exchange between medium-sized towns and the surrounding countryside is not yet typical, either for Tanzania or sub-Saharan Africa generally, it can be significant for other so-called ‘islands of intensification’ as well as for future overall agricultural development.

In conclusion, this article has argued that there is good potential for well-functioning market institutions to develop through endogenous processes of change. While government and large-scale private initiatives are in no way dismissed, it emphasises the strength of local processes and the fruitful interplay between the two. Well-established local incentives and opportunities for commercialisation provide an imperative precondition for further agricultural development in Meru specifically, and in sub-Saharan Africa generally.