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MARKET POWER AND EFFICIENCY IN INDIGENOUS SMALL RUMINANT MARKETING

By Daniel Morris,2014-03-22 08:55
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Figure 1 Market flows of sheep and goats from the producer to the terminal market - end of market chain for live animals

    MARKET POWER AND EFFICIENCY IN INDIGENOUS SMALL RUMINANT

    MARKETING CHANNELS IN MARSABIT, KENYA

    134234, A.G. DruckerG.P. Juma, I. Baltenweck, M. Ngigi

    Abstract

    Eighty percent of Kenya’s land is arid and semi arid (ASAL), best suited for indigenous

    livestock production, particularly small ruminants, offering employment to a majority of people in the areas, and contributing to livelihoods. The “livestock revolution” is projected to double meat consumptions in developing countries, by the year 2020 compared to 1993. The rural poor are expected to benefit from this growing market, yet pastoral population in arid districts of Kenya lack reliable marketing outlet which would provide increased benefits from indigenous small ruminant resource. One contributing limitation is lack of data and information on the marketing of indigenous small ruminants, subsequently leading to gaps in the existing knowledge; and a failure to appreciate the importance of indigenous animals. The need for data and information on marketing associated with the development of small ruminant’s resources creates a demand for research to provide such information. This paper aims at contributing to filling this information gap by collecting and analyzing data on the marketing of indigenous small ruminants. A cross-sectional survey of 148 traders involved in the selling and/or buying of indigenous small ruminants was conducted in Marsabit district and the city of Nairobi. A simple random selection was done in the markets to select traders. The structure, conduct and performance approach was used in analyse of market channels. Results reveal two market channels. A Lorenz curve and Gini coefficient (G) results of both primary and secondary traders showed highly concentrated markets. The paper recommends improving market and transport infrastructure from production areas of Marsabit district to the terminal market in Nairobi as an important strategy.

    1 Introduction

     1 Corresponding and major author, other authors are according to alphabetical 2 Charles Darwin University, PO Box U512, Darwin, Australia 3 International Livestock Research Institute Kenya P.O Box 30709 00100 Nairobi, Kenya 4 Department of Agricultural Economics, Egerton University P.O 536, Njoro, Kenya

    Eighty percent of Kenya‟s land is arid and semi arid (ASAL), best suited for livestock

    production (Barret et al., 2003). ASALs are well endowed with indigenous livestock (AIS, 2003), particularly small ruminants, which are a major component of the pastoral population‟s household economy (Njanja et al., 2003). This is because they are relatively easy to keep, they reproduce quickly, spread the risk inherent in agricultural production (Ehui et al., 2003), and can be used as a first step on the ladder out of poverty (Peacock, 1995). They also utilize the low potential areas of the country where environmental conditions prohibit to keeping other domesticated animals (EPZ, 2005). They thus offer employment to a majority of people in these regions (Muriuki 2001). In addition to natural capital, and financial capital, small ruminant livestock contribute to social capital as well as to the sustainable livelihoods and security of the rural poor (Perin Saint Ange 2002).

    However, production without access to market is a problem for many livestock producers in Kenya (Lightfoot et al., 2005). Delgado et al.‟s (1999) “livestock revolution” can be expected

    to allow the rural poor in developing countries to contribute to this growing market yet pastoral populations in arid districts of Kenya lack reliable marketing outlets that could provide the full benefits of indigenous small ruminant resources, to be captured by both pastoralists and consumers in the region (AIS 2003) and beyond. To achieve these benefits it is necessary to address the constraints within the pastoral production system. Thus, reconsidering government policies and how supportive they are of small scale and pastoral production (Conroy, 2004) is important. One outstanding aspect of the livestock revolution is the implied change of production from traditional subsistence to a market-oriented industry (Delgado et al 1999), making livestock

    marketing a significant factor in the development of ASALs in Kenya (McPeak, 2003). Faced

    with several demand-led factors such as population and income growth, urbanization and changing consumer preferences (Devendra 2005), policy makers need to consider those policies that will encourage the expansion of food production and improve the quality of life at urban and household levels (Lanyasunya et al, 2001). This study examines the existing market channels for indigenous small ruminants, quantifies market costs and margins, and assesses opportunities for livestock keepers to access markets, with a view to contributing to market information and assisting in the formulation of appropriate policies that might address marketing constraints faced by indigenous small ruminant livestock pastoral producers.

    2 Materials and methods

2.1 Study area

    Marsabit district is one of the ASAL districts in Kenya and lies to the north of eastern province. It covers an area of 66,000 kilometres squared (GoK, 2002). It has a bimodal rainfall pattern with short rains falling between October and December and long rains between March and May. On average, it receives between 200mm to 1,000mm of rainfall per annum. Most of the district is an extensive plain lying between 300m to 900m above sea level, and is characterised by hills and mountain ranges, inselbergs, volcanoes cones and calderas. The land spans agro-ecological zones III, IV, V and VI and is mostly suitable for camels and sheep and goats (GoK, 2002). About 80% of the district‟s residents are pastoralists deriving their livelihoods from livestock and livestock based industries.

    2.2 Survey methodology

     A cross-sectional survey of 148 traders involved in the selling and/or buying of indigenous small ruminants was conducted in Marsabit and Nairobi. Traders were characterised within two categories; primary traders (buying from producers to sell in local markets), and secondary traders (buying from both producers and primary traders, then transporting to sell in terminal market). Gabra and Rendille communities were selected for the study on the basis of their keeping large populations of indigenous sheep and goats and being representative of the potential target communities for a community based management (CBM) project. The survey was carried out between the months of June and September, 2006. A random selection was carried out in

    markets by identifying the total number present, noting their physical appearance, and simultaneously assigning them a number. A lottery method was then used to identify those trades that would form part of the sample. Traders in a total of seven markets were surveyed.

    2.3 Data collection

    Personal interviews were conducted using a pre-tested structured questionnaire. Information from market agents was obtained with regard to period in business, initial capital, number purchased, market prices, mode and cost of transport, opinion with regard to what attracts buyers and what determines prices and problems faced in trade. A total of 63 primary traders, and 85 secondary traders were surveyed, trading a total of 15,887 animals. 2.4 Statistical analyses

    Data was statistically analysed. The structure, conduct and performance approach was used to analyse operating market channels. Market structure was analysed based on market

    concentration exercised by traders and barriers to market entry for potential traders. Traders were stratified into trade-levels (i.e. primary and secondary traders). Analysis of primary traders considered trades over a time period of the previous month, while secondary traders considered trades over a time period of the previous three months. Consideration was based on the frequency and volume of sale. To analyse concentration, the market shares of individual traders, in terms of volume of trade, were analysed using a Lorenz curve. A Gini coefficient, according to Brown (1994) was used to measure the level of inequality in market shares among traders. The study assessed market entry, through the capital requirements for potential entries.

     Market conduct was analysed based on pricing strategies. Traders were asked if they looked for market information and how they used such information in their trade.

     Market performance was assessed using market costs and margins. To determine the

    level of profits, the study used individual traders stated opportunity cost in terms of average net

    monthly income. By analyzing the level of market margins, net returns and their cost components, it was possible to evaluate the impact of structure and conduct characteristics on market performance (Koch, 1980). Marketing costs involved operating costs which were related

    to the volume and level of business transacted. Costs included; buying costs (purchase price multiplied by number of animals, local government marketing fee, brokers‟ payment),

    transportation costs and selling costs. These costs were also considered in the context of an initial capital requirement for a potential trader. Gross margins were calculated as the difference between buying and selling prices for individual traders. Net margins were calculated by subtracting operating costs from total revenues.

    3 Results

    3.1 Description of marketing channels

     The study findings reveal two market channels through which indigenous small ruminants move from the producer to the terminal market. These are:

    1. First point of sale (producer) ____ local market (primary trader)____terminal market

    (secondary trader)

    2. First point of sale (producer) ________terminal market (secondary trader)

    Marketing channels include primary traders and secondary traders (transporters). Both primary and secondary traders deal with the producer to buy animals. Primary traders buy in small numbers daily and sell to secondary traders in the local markets. Secondary traders buy

    from both producers and primary traders and transport to the terminal market to sell. Secondary traders play an important role in transporting animals from points of sale close to the producer up to points closer to the consumers.

    3.2 Description of market flows

    Market flows from the producer‟s gate to the terminal market in figure 1 were analysed in terms of marketed numbers of animals recorded by market agents and species. The basis for recording animals by market agents and species stems from the fact that during the survey, primary traders considered trades over a time period of the one month, while secondary traders considered trades over a time period of three months. The difference in considered trades over a time period periods required the study to harmonize the periods by extrapolating the period for primary traders. Therefore marketed animals for primary traders were extrapolated to cover three months, a period similar to secondary traders.

    PRODUCER

    (First point of sale for the traders; producers‟ home, foora,

    watering point and holding /grazing grounds)

     Goats Sheep Goats Sheep (5692) (3003)(5685) (1507) 36.83% 19% 36.78% 9% of of all of all of all all shoats shoats shoats shoats

    Local Market

    (Animal collection point)

    Terminal Market

     (End point for collection and transaction of live shoats)

    Figure 1: Market flows of sheep and goats from the producer to the terminal market - end of market chain for live animals

    From figure 1, a total of 11,377 goats and 4,510 sheep were transported through secondary channels to the terminal market. On the basis of extrapolation, goats traded by primary

    traders increased from 1895 to 5685 and sheep increased from 1001 to 3003. These animals were included in the numbers transacted by secondary traders, since most primary traders sell to secondary traders. Looking at both primary and secondary channels the difference in the number of traded goats was small giving a percentage that is almost same. This means both groups buy almost the same percentage of goats from producers. Sheep seem to be less traded as compared to goats.

    Due to the post-drought situation when the survey took place, there was no market per se (i.e. no busy market operation), making physical market structures non-functional as is usually the case under such circumstances. Few animals would be brought for sale by producers, compelling both primary and secondary traders to find producers and their animals at watering points or holding/grazing areas, a situation that showed excess demand for animals. Primary traders would then bring purchased animals to town and sell them to secondary traders. Most of the secondary traders do business in partnership, basically to share market costs, particularly transport cost.

    3.3 Market structure 100

    Analysis of market structure was done based on market agents.

    803.3.1 Market share distribution by primary traders

    Lorenz curve for primary traders60

    40

    20

    cum. %of traders

    0

    020406080100

    Figure 2: Illustration of degree of inequality in market shares of primary traders. cum. % market shares of traders

    The Lorenz curve shows the cumulative percentage of market share versus cumulative percentage of primary traders. The figure shows that the largest (6%) 4 of total primary traders controlled about 16% of total market trade and the largest (14%) 8 of traders accounted for about 31% of total market trade Similarly the largest (50%) 33 controlled about 75%. Empirical illustration of inequality levels of market shares by the Gini coefficient (G) is 1- 0.68 = 0.32. By definition, Gini coefficient ranges between zero and one, where one would result in a case of monopoly (monopsony), and only one primary trader buys/sells all sheep and goats in the local

    market. The study results of coefficient (G) of 0.32 together with percentage market shares show an imperfect market, dominated by a few primary traders.

3.3.2 Market share distribution by secondary traders

    Lorenz curve for secondary traders

    100

    90

    80

    70

    60cum. % of traders

    50

    40

    30

    20Figure 3: Illustration of degree of inequality in market share of secondary traders

    10The Lorenz curve shows the cumulative percentage of market shares versus cumulative

    0

    percentage of secondary traders. The figure show that the largest (5%) 4 of total secondary 020406080100

    traders handled about 21% of total market trade and the largest (9%) 8 of traders handled about cum. % of market shares of traders

    33% of total market transactions, similarly the largest (50%) 43 handled 81%. Empirically, illustration of the inequality level of market shares by the Gini coefficient (G) is 1- 0.54 = 0.46. Comparing to Gini coefficient that ranges between zero and one, the results of coefficient (G) of 0.46 implies that the market is not perfect, being dominated by a few secondary traders. 3.4 Conditions to market entry conditions

    Capital requirements serve as an entry barrier since only those who have such capital (to cover market costs) can enter the market. The study used operating costs as a measure of the initial capital needed for potential entrants. From table 1 below, mean market costs per month for primary traders were Kshs 64,362 (equivalent to US$ 946.5) and that of secondary traders per season was Kshs 313,059 (equivalent to Kshs 104,353 ((US$ 1534.6)) per month). These costs were compared to a bench mark of average wage earnings per employee in trade, restaurants and hotels in private sector, which was Kshs 251,308.2 (US$ 3695.7) per annum (GoK 2002). When changed into monthly earnings, it was Kshs 20,942.35 (US$ 308) per month. In this context

    market costs can be considered to be high (3-5 times a monthly salary of an employee) and could act as a barrier to potential traders.

    3.5 Market conduct

    The determination of prices by traders was assessed relative to the availability of market information. Since the lack of market information could be the means by which secondary traders could exploit primary traders in the interior villages, market participants were asked if in their opinion, market information especially, regarding the level of prices and volumes was available, and if they were satisfied with the available information. Results show 63% of primary traders and 82% of secondary traders said market information was available, sourced from fellow traders, showing trust among the traders. Further, 35% of primary traders and 32% of secondary traders were satisfied with the available information. The reason for those not satisfied was unstable market prices that changed with market supply and demand. The study generally noted that market information was available. In addition regression analysis was done on selling price as the dependent variable. Results in table 1 show that the selling price of animals of both market agents was influenced by the buying price of animals, the particular market where sale takes place and the type of animal.

    Table 1: Regression parameter estimates for factors influencing small ruminant‟s selling price.

    Variables Coefficient (OLS) Std. Error

    Primary traders * Animal buying price 0.770.10 *Information availability (1= available, 0= if not) - 185.76 68.55 *Market location ( 1= Marsabit, 0= otherwise) 245.94 73.58 *Choice of animal type (1= yes, 0= no) 203.27 79.15 **Business period over 10 yrs -182.72 97.87

     R-squared = 0.76

    Secondary traders *Animal buying price 0.40 0.08 *** Number of animals purchased 0.28 0.17 **Choice of animal type (1= yes, 0= no) 208.38 101.32 **Choice of animal characteristics (1= yes, 0= no) -456.63 209.99 *Market of selling (1= Nairobi, 0= otherwise) 303.50 92.36

     R-squared = 0.57 * ***** , and = significance at 1%, 5% and 10% respectively

    3.6 Market performance

    Results of the analysis on market performance are based on the two market channels. Analysis of gross margins aimed to assess the ability of traders to cover the market costs and analysis of net margins was intended to assess the profitability of marketing trade, and whether net returns constitute economic rent or normal profits.

    Table 2 shows primary traders have a mean gross margin of Kshs 358.30 (equivalent of US$ 5.3) while secondary traders revealed a mean gross margin of Kshs 479.10 (US$ 7.0).

    Compared with the opportunity cost as a benchmark, the study showed that primary traders receive a lower mean net margin of Kshs 15,071.40 (US$ 221.6) per month compared to the opportunity costs of Kshs 61,285.70 (US$ 901.3). Similarly secondary traders receive lower mean net margin of Kshs 81,793.70 (US$ 1202.8) compared to the opportunity costs of Kshs 116,373.50 (US$ 1711.4). This could imply that the net returns received by traders in both primary and secondary channels are normal. On the other hand, higher nominal opportunity cost could mean that the trade returns are below normal.

    The market situation of high concentration with low profits for traders (who constitutes sellers) would indicate that the market is controlled by the buyers, especially at the terminal market. This could explain the small number of primary and secondary traders in the market. High costs involved in the market coupled with traders being price takers leads to less profit. This could indicate a non-attractive market for primary and secondary traders, thereby reducing market entry. Accordingly existing traders could choose to leave the industry, but findings of the survey indicate that traders are limited by the capital required to enter into other industries. Traders also claim that they are not literate enough to venture into other businesses.

    Considering returns per animal per agent-period, primary traders receive a net margin of Kshs 288.90 (US$ 4.2) per animal per month; secondary traders receive a net margin of Kshs 1,908.60 (US$ 28.0) per animal per season. Considering returns to labour, primary traders‟

    labour was presumed to equal a month‟s days since they operated on daily basis, thus mean net margin per man day was Kshs 502.40 (US$ 7.4). Secondary traders‟ labour was calculated in terms of transported lorries. Assuming a trader takes 8 days to transport a lorry to the terminal market sell and travel back then mean net margin per man day was Kshs 21,989.40 (US$ 323.4). Table 2: Numbers of animals traded, market prices, costs and margins by market agents. Market agents/ Variables viewed Mean Std. Dev Min Max

    Primary traders

    Gross margins 358.3 269.4 0 1,175

Trader‟s total costs 64,361.5 50,583.6 11,180 246,000

    Net margins per month 15,071.3 19,366.3 -1,500 89,400

    Net margins/animal/month 288.9 265.1 -30 1,131

    Net margin/ man day (labour) 502.4 645.5 -50 2,980

    Alternative business profits/ month 61,285.7 106,955.7 2,000 500,000

    Secondary traders

    Gross margins 479.1 390.5 -1,875 1,475

    Trader‟s total costs 313,058.9 383,098.2 31,355 2,759,50

    Net margins per season 81,793.7 117,649 -190,675 704,000

    Net margin/ animal/season 1,908.6 633.8 579.1 3640.6

    Net margin/ man day (labour) 21,989.4 11,925.6 2,830.6 58,470.8

    Alternative business profits/ season 116,373.5 210,315.4 0 1,000,000

    4 Conclusions and recommendations

    Compared to small ruminants, the population of large ruminants in the study area can be said to be very small. Thus the small ruminants are a major component of the pastoral population‟s household economy.

     Results show that both primary and secondary traders operate in an imperfect market, controlled by buyers. Buyers exercise market control influencing pricing decisions, especially at the terminal market, meaning that sellers (traders) are absolute price takers. Based on the benchmark opportunity cost of traders the results show an absence of economic rent since in both channels net margins are lower than the opportunity cost. Yet in an imperfect market situation of sellers, we would expect to find that profits are above normal.

     The study was part of a larger study that aims to improve the livelihoods of poor livestock keepers who depend highly on indigenous small stock. The proposed improvement was to be achieved through the community-based management of indigenous breeds. The findings of this study suggest that part of such interventions should focus on marketing issues and, in particular, improving the market infrastructure from the very interior areas of the district to the terminal market in Nairobi is important. One such means of improving market infrastructure would be to elevate the market at the district head quarters to a secondary market to serve as a second collection point for animals. This would call for an enabling environment to increase the market size in terms of both volume transacted and/ or number of traders. Increase in market size can be encouraged through providing facilities such as water, roads, grazing ground around the market. Provision of such facilities could be done by the government which would help support value addition to these animals through change of ownership along the market channel and raise prices for both producers and primary traders who would be walking the animals to this market.

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