How niche markets influence agricultural commodity prices

One of the most persistent myths in African agriculture is that commodity prices are set by traders, negatively referred to as “middlemen”.

BY CHARLES DHEWA

Paying lip service to understanding market dynamics has seen most interventions designed to get rid of “middlemen” failing dismally.

Working with agriculture markets for the past years has opened eMKambo’s eyes to the role of niche markets and different classes of consumers in setting prices of diverse commodities.

The power of consumers and niche markets to set commodity prices is based on taste, levels of income, background, age, gender as well as professional and health considerations.

Producers need to know who has the power to determine prices and how.
For instance, low-income consumers set prices of basic necessities like leafy vegetables and tomatoes, while high-income households set prices of high value commodities like peas, carrots and others.

On the other hand, the extent to which a commodity is frequently consumed or used determines whether it remains a necessity or becomes a luxury. Income levels also control consumer tastes.

Rarely do consumers develop tastes for commodities beyond their income levels. To the extent that some low-income households are often bigger than their incomes, household size is another key influencing factor.

Significance of customer characterisation

While different categories of customers are key determinants of commodity pricing and the behaviour of commodities on the market, the development of a niche market begins with the origins of particular commodities.

Most commodities do well in particular natural regions, where they become staples for local people and tastes are honed.

When people from different communities migrate to cities, they move with their food systems and associated tastes.

Where the market uses its convening power to pull commodities from different natural regions, urban consumers from those regions are the first port of call for commodities from their original areas.

Those, who grew up eating tubers like cassava or yams, are quick to fetch these commodities from the market and those who grew up eating small grains provide the first demand zone for commodities from their home areas.

How commodities cultivate their own niche markets

Once commodities are in the public market, they start building their own niche markets through characterising customers by gender, age and level of income, among others.

The development of niche markets is driven by knowledge sharing. Consumers are exposed to knowledge on how to use particular commodities they see in the market for the first time.

Through informal markets, there is sharing of knowledge on the benefits, preparation methods and all unique features attached to commodities.

As tastes improve within a particular niche, the commodity stabilises and this strengthens its sustainability in the market together with price elasticity. Any changes in supply will not affect price elasticity.

In fact, the commodity price stabilises in ways that solidify consistent supply.

This is unlike once-off commodities that are bought only during festive seasons like Christmas or when consumers earn a bonus.

Such commodities are not good at sustaining business. They can only be good for particular niche markets like high-income households.

Niche markets drive the promotion of a commodity in the markets. It is important for producers to understand niche markets.

Changes in staple food status

Due to their continuous presence in the market, some commodities carve a staple food status for themselves. For instance, in most African cities, western leafy vegetables and Irish potatoes have become part of staple foods.

These commodities have developed their own niche markets defined by household income and household sizes.

As long as producers are able to meet standards and specifications, agribusiness viability is assured.

Some of the consumption patterns are being driven by age, status and health consciousness.

From an age perspective, the young generation’s diets are largely influenced by external diets.

Young people’s choice of commodities is slowly taking the route of western diets. That is why they flood food chain stores.

It means producers and value chain actors keen to tap into this young consumer base have to mimic food chain stores in everything, including packaging and transactions methods.
However, they have to also be on the look-out for the band wagon effect among the youth, who influence each other through peer pressure to consume commodities that are not good for their health.

Status and health consciousness

Some consumers are being forced to eat specific commodities due to health recommendations. Those who have become conscious of healthy eating are deliberately and carefully choosing health diets.

Some choices could be influenced by level of income and status in the community. The gender dimension of consumption decisions is also worthy examining. For instance, pregnant women can consume certain foods as informed by health practitioners and institutions.

What remains to be explored is the role of health consciousness in triggering taste, especially among low-income households, where choices are mainly controlled by income.

If done properly, this could address malnutrition, which has a bearing on national budgets of many developing countries. Prevention is better than cure.

From a status angle, some consumers do not want to be associated with public markets, preferring to buy in food chain stores. This is more a status thing than rational nutritional consideration.

In most cases, the market ends up following this customer niche to meet its demands.

However, there is price discrimination, which is why upmarket prices tend to be at least 30% higher.

Tracking progress at meaningful levels of detail

Having looked at many factors from a market perspective, producers can be adequately informed to decide for whom to produce specific commodities and in what quantities.
Without customer segmentation, characterisation and preference mapping, price alone is no longer informative for decision-making. Data and evidence can show how much each niche market is absorbing.

If all farmers produce peas, who will take them? High value commodities may not meet the interests of more than 70% of the consumer base.

From eMKambo’s experience, customers tend to build blocs by diversifying taste — first into their budget and then adjust the ladder either upwards or downwards according to circumstances.

Within customer segments, there is transition from one class to another depending on changes in circumstances like new income streams.

That is why real-time evidence cannot be over-emphasised in generating trends. Policymakers and financial institutions should be able to accurately tell whether the consumption of potatoes or any commodity is increasing or decreasing so that production can adjust accordingly.