Can someone explain the importance of caravans to a noob like me?

They give a food bonus to the city where they are sent. So just pile them toward the highest food production city you have. They give no gold bonus.

Also you can use them to ferry items from one place to another (Woot! )

They create free roads so they are incredibly important if you have a forest between two cities.   For this one reason I always research diplomacy first.

Hmmm i am playing the game for the first time (campaign) - i sent all my caravans to foreign cities, but according to the above statement, i therefore get no benefit doing that?

Depends. If you have a city that produces food (not counting the one that created the caravan) then you should have sent it there.

My third city has two farms, so presumably i should send them to it rite? Can i redirect my caravans do do that then?

I have never tried, but I think you may have to select them and disband them, then make a new one.

If i disband a merchant, will the road vanish? If not, then this would be some compensation for having to rebuild the merchant.

It does not vanish if a monster kills the Caravan, so I would not think disbanding does either.

No roads stay.

Thanks for all the info.  I'm a little slow and understanding it still though, so let's take the following example:

City A has 1 farm.

City B has no farms.

I create a Caravan from City A.

I just send it to City B and leave it there.

For the rest of the game assuming nothing changes, does City A still produce 1 farm worth of food for itself, in addition to 1 food for city b?

When the caravan reaches B, it creates a road and starts to travel from A to B to A on it's own.  City A and City B get a bonus to food production which varies based on distance. This can be as little as 5% (maybe lower) to upwards of 150% (maybe higher). This is bonus modifier not a base production. So say the caravan gave a 100% food bonus. City A would produce 2 food: 1 base plus 1 x 100% bonus. City B would produce 0 food: 0 base plus 0 x 100% bonus.

Say an Apiary appears next to City B. City B would now produce: 5 base plus 5 x 100% bonus or 10 total food. This in addition to the 2 total food from A.

The caravan will go back and forth between the two towns and every turn you get teh food bonus!

I use Caravans for road building first, disband then send for greatest food bonus.