Phase 2 - What the market wants in terms of product - now and in the future

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Phase 2 involves finding out what the customer wants. By customer we refer to the individuals in the marketing chain who buy and sell the produce, as well as the final consumer. We need to know who currently supplies the market, at what times and at what prices? Also, what volumes are sold and how the produce is packed and presented. As the objective in most eases will be either to start or to increase the supply of produce the extension officer should try to understand what the effect of this will be on the market. It could, for example, result in oversupply which will force down prices or it may supply a previously unsatisfied demand, which of course is the ideal situation. The critical questions are: what volume can sold; during which periods is it best to supply the market; and how should the produce be graded and packed?

Building up answers to these questions is again a process of information gathering. The sources are varied and certainly no single source is satisfactory. The extension officer should seek opinions from knowledgeable individuals, particularly those who are commercially involved with trading. In addition there are often valuable statistics which should be collected such as price data or information on the volumes of produce delivered to the market. As the extension officer becomes more experienced his own observations are extremely valuable. It is very important to cross check information whenever possible. Even then views will be contradictory. This is because an individuals' views are often narrow and prejudiced. The extension officer should aim to become an expert in the market's requirements and become the eyes and ears in the market on behalf of the farmers he or she represents.

FINDING OUT GOOD POINTS & SAD POINTS BY TALKING TO:

CHECKLIST OF QUESTIONS IN THE PRODUCTION AREA

Product Information

What are the main horticultural crops grown and what varieties? When are they harvested? Where are the crops grown; are there specialist production zones?

When are they harvested?

Do these crops have any advantages over other areas' supplies in terms of yield, quality, price, seasonality?

What are typical yields per unit area and what prices are farmers currently receiving?

Is the produce graded; if so why and into what grades?

Is the produce packed into any packaging material; if so what type, size and cost?

What prices do farmers think are poor, break-even, average and good for the crop?

What are the costs of growing, harvesting and transporting the crop?

Are any new technologies or techniques being tried on these crops and are they successful?

What volumes are produced locally?

What are the main production problems?

Input supply

Are the correct seeds, fertilizers, sprays and boxes readily available for ail farmers?

Are these inputs of the correct quality? Do input suppliers provide advice to growers, and if so, how good Is the advice?

Can farmers readily obtain equipment such as soil cultivation machinery and sprayers, either to buy or to hire?

Do farmers have the money to pay for these inputs?

Is it possible for farmers to obtain shortterrn and long-term credit?

What are the sources of credit; what security Is required and how available is the finance e.g. banks, relatives, input suppliers or middle men?

Local marketing system

How is the crop marketed at present? Who buys and when?

Who are the most important middlemen or buyers?

Which buyers have the best reputation? What prices are paid?

Is there competition between buyers?

Is there a great difference between the prices that farmers receive and if so why?

Do buyers provide credit to farmers?

How is produce transported to the market?

What are the main markets where produce Is sold?

Who carries out the transportation? How much is carried?

What Is the unit price of to the different markets?

How long do the journeys take?

How frequently does transport leave the area?

How good are the transport links and are there any planned or recent Improvements to them?

How much contact do farmers have with the market?

What is their source of market information and how quickly do they obtain market news, particularly on prices but also on volumes required and quality requirements?

What complaints do farmers have about the middlemen?

What complaints do middlemen have about farmers?

Underutilized local resources

Are there any local resources/facilities which are not being fully utilized e.g. food processing, empty returning transport, storage/cool room facilities, box manufacture, local radio, central telephone links with markets?

The farming community

Who are the leaders of the farmeng community?

Who is being especially successful and why?

Do farmers think they need help in marketing and if so what type of help?

Product knowledge and market segmentation

At the outset it is important to understand the role of the crops in the diet and in the market, i.e. what the product is used for, how the product is normally sold and to whom?

The first question is how is the product used. Is it eaten fresh or is it cooked or processed (or prepared) before being sold? Typically, if a product is to be eaten fresh then the quality requirements, especially in appearance, are high. Sometimes a product which is going to be processed before being sold to the final consumer need not have such a high quality standard e.g. where the manufacture of pickles and fresh juices is involved. If, however, a hotel or restaurant is buying, it may demand the highest quality standards.

GAIN PRODUCT KNOWLEDGE FROM TALKING TO:

The role of the crop in the diet will affect its sales and marketing characteristics. Some crops are basic and major ingredients in the diet (e.g. yams, cassava, potatoes), others are normally purchased when they are perceived as good value. Some are used in small quantities for their flavour (e.g. garlic, chili peppers) while other products are luxury crops (e.g. asparagus, strawberries).

The sales of basic ingredients as a whole are not greatly affected by changes in price. They are termed "price inelastic".

The volumes of sales of herbs, spices or condiments are also largely unaffected by price. In practice this means that when supplies are short very high prices can be obtained. In situations of oversupply the prices drop dramatically because lower prices do not stimulate sales. As a result these crops are risky to grow.

The amounts of individual fruit and vegetables sold are affected by their price. In practice most consumers shop for what they consider value for money. If, for example, oranges cost less than apples then consumers will buy more oranges. This is called substitution buying. Although higher prices are an advantage to growers they will also mean that sales are limited. If produce can be delivered to the market at a price which is below that of other competing products and still be profitable, sales will generally be increased.

The market for high priced luxury items is limited, particularly in developing countries, unless there is a tourist trade. As a society develops and becomes wealthier, the demand for luxury items increases. These products are called "income elastic", which means that sales increase as incomes rise. These luxury items, linked to high incomes, include food items as well as garden and house plants and flowers. Normally sales of products such as fruit, for example, tend to increase as a society becomes wealthier. Sales of processed convenience foods, such as canned vegetable soups and snacks, also tend to increase as consumers want to save themselves preparation time.

Climate can effect sales. During hot weather vegetables which are cooked may not be demanded, while the sales of refreshing crops like juicy fruits or salad vegetables may increase. Festivals such as Ramadan or Christmas can significantly affect sales, particularly for fruits.

Prices

Price information is a critical part of market research. Prices can normally be used not only to show how much the farmer should receive for his produce but, in a free market (i.e. one in which prices are not regulated), also what worth customers put on the crop.

The problem is that prices of horticultural crops vary from day to day. Past prices are no guarantee of the prices which will be obtained in the future. Analysis of them will give guide prices for the future to be used in budgeting. Perhaps more importantly price analysis will also give an indication of the typical seasonality of prices and therefore show the best time to market crops.

There are normally two sources of price data, official price data and typical prices provided by the wholesalers. Official data is often recorded inaccurately and wholesalers must be considered an unreliable source of price data.

TABLE 5. Cauliflower prices - wholesale market, Lahore, Pakistan In rupees per 40 kg

Nevertheless, provided the extension offficer understands the weaknesses of price analysis in predicting future prices, the work needs to be done to give a broad idea of typical prices and seasonal price patterns.

Seasonal price patterns

Table 5 shows official wholesale price data collected in Pakistan. In this example the average monthly price for the last six years has been recorded for cauliflowers in the Lahore market. Because of the variation from year to year it is important to try to average out these differences by analysing the figures for a number of years. Six years is probably the maximum number of years worth examining. In practice data, if available, usually only covers two or three years.

In this example the monthly price data have been added and then divided by the number of observations, to give a monthly average. These have been set out on Graph 1 and show the classic price pattern of exceptionally high prices at the start of the season. This is a measure of the build up in demand during the off season. The earliest crops nearly always obtain the highest prices. As supplies build up, prices rapidly fall. In this example, during the peak supply period, December to March, the average prices are about 75 rupees per 40 kg. At the end of the season, as supplies diminish, the price rises again, but not to the same level as at the start. The same analysis has been carried out for two other markets (Hyderabad and Peshawar) and plotted on the "Mph. The results show that Lahore is the highest priced market and Peshawar the lowest. Hyderabad only has cauliflower available from October to February.

Accurate interpretation of the figures depends on a broad knowledge of the country, the different climates and the wealth of the consumers. Lahore has broadly the same climate as Peshawar but is a wealthier society. Consumers can afford to pay higher prices for vegetables but they are also more discriminating and demand a higher quality product. Therefore, provided the transport costs can be covered, Lahore would be a promising market for cauliflowers, particularly for the first quality. The lower grades could be sent to Peshawar. Hyderabad has a much hotter climate and local production is limited to the coldest winter months. Experimentally it may therefore be worth sending cauliflowers, particularly at the start and at the end of the season, to try and take advantage of high off-season prices. Because high prices are dependent on making sales to the wealthiest consumers, top quality, well-packaged crops should be sent.

Averaging prices

In Table 5 the overall average price for each year is set out. This is an unweighted average which means no account is made of the fact that proportionately very little produce is sold at the high prices-as a result this average price is above the normal farmer price. A weighted average canonry be calculated if you have both the price and the volume of sales figures for a period, e.g. monthly. Such data is rarely available. When weighted averages cannot be calculated the average price during the main supply season is generally used, i.e. November to March in Table 5. Here the average is 78 rupees as opposed to the overall average of 97. Sometimes annual crops show a pattern of one high-priced year followed by a low priced one. This is a common phenomenom caused by many farmers seeing that one crop has achieved high prices and deciding to grow it themselves in the following year. The result is oversupply in the next year. There is a saying amongst market gardeners in northern Europe that you "should never follow a good market".

With longer term crops such as tree fruits growers will of fen respond by planting trees because existing prices are high. As this is so often a collective response, when the new trees start cropping prices tend to drop.

Price rises and inflation

In Table 5 it is noticeable that prices have in the main been increasing. There are two explanations for this:

Either there is increasing demand which has caused prices to rise (this may be due either to a reduction in production, which is generally an uncommon explanation or to consumers wanting to buy more cauliflowers);

Or because of inflation, which is a general trend of price increases.

Inflation is normally the major contributor to price increases. It is important to see whether prices have in general been increasing faster than inflation. If this has been happening it is probably owing to increasing demand and therefore indicates good opportunities for more supplies. If, however, prices have not increased as fast as inflation this would suggest that further supplies will reduce the prices in real terms.

To try to establish an average rate of increase, the average main season price for the first three seasons has been calculated as 66.66 rupees, while the main season average for the last three seasons is 90 rupees. This price increase has occurred, in effect, over three seasons. The average annual percentage price increase is calculated as follows:

Av. price (82-85) - Av. price (79-82) x 100
———————————————————
Av. price (79-82)

i.e. [(90-66.66) x 100]/66.66 = 35% over 3 years or 10.5% p.a

(figures taken from Table 5)

The question that needs to be asked is whether this annual price increase (10.5 percent) is above or below the inflation percentage.

Finally the extension officer will need to calculate the likely future price. This can most simply be done by drawing a graph with the two average prices marked. A straight line is drawn between the two points end projected into the future. The forecast future prices can be read off the graph.

Graph 1 - Comparison the average wholesale price of cauliflower 1979/80 to 1984/85 for three markets

In practice, although this method is useful as it gives a guide to what price might be achieved, it is much better to surprise than to disappoint. It is advisable to use a lower budget price for farmers.

Strengths and weaknesses of official and unofficial prices

By analysing price statistics it is possible to show price patterns and predict months when high prices can be achieved. Analysis shows whether prices are going up faster or slower than inflation and, using these figures, it is possible to predict likely future prices. As explained earlier, past prices do not necessarily reflect future prices. Horticultural marketing is like gambling: careful analysis helps improve the odds in favour of the grower However statistics are very often inaccurate.

Plotting a price trend

Some of the common reasons for inaccuracy are that:

• the official prices that are gathered are normally those at the peak of the market sales, rarefy do they reflect the much lower prices of sales made at the end of the day;
• the staff collecting the information are rarely trained and often have no appreciation of the potential uses of the information. Sometimes there are inconsistencies between the collectors. For example one person may collect the top prices for first-class produce while another gathers average prices;
• sometimes the prices quoted are what the official price should be not the price that the produce is actually sold at.

The extension officer should be aware that the prices collected are the prices obtained by the wholesaler or commission agent not what the farmer will get. Commissions, margins, market charges and marketing costs will have to be deducted.

Price data must be viewed with scepticism. Most confidence can be placed in the general price patterns but not necessarily the actual figures. With experience, when price patterns are drawn up on graphs, it is possible to learn a lot about the supply patterns to the market by remembering that in general high prices indicate low volumes and vice versa. This understanding can be helped by drawing graphs of the supply pattern. An example is set out in Graph 2.

Price data should also be collected from middlemen, be they orchard contractors, commission agents or wholesalers. This is essential in order to compare and check official price data. In the absence of official statistics, such people are the only source of price information.

For commercial reasons middlemen will often give distorted price information. For example, a middleman who sells on a commission basis will tend to exaggerate prices as it is in his best interests to encourage sales. Conversely a middleman who buys produce will often underestimate prices to discourage further supplies if he thinks this will provide competition.

Most middlemen make their money in spot trading, that is buying and selling produce at a profit on a daily basis. Although they will know the prices over the last few days they are usually unaware of how prices have changed over the last few years. They are normally very poor at identifying long-term market trends.

Supply and volume

Production statistics. The quality and detail of production statistics varies considerably from country to country. Regional or provincial statistics giving crop areas can help to identify the major producing areas and their relative importance. This is useful in identifying competing areas. Some statistics will also give tonnages of crops produced. These figures are notoriously unreliable as they have to be based on crop areas multiplied by an estimate of yield. Yield figures used are often little more than guesses.

Supply figures. Occasionally statistics are available on the monthly supply of individual product to the market. When plotted on a graph this can show times when market supplies are low. Graph 3 shows that mango imports are in short supply in the United Arab Emirates market from October to March.

Graph 2 - Monthly sales & wholesale prices for Imported grapes Kuwait, 1982

Graph 3 - Monthly Imports of mangoes Into the United Arab Emirates, 1985

Graph 4 - Comparison of the average wholesale prices of tomatoes 1979/80 to 1984/85 for three markets

Estimated supply patterns for tomatoes

Graph 5 - Diagramatic view of vegetables seasonality in Near East

It is possible to be able to 'read' from price data the typical supply patterns. Graph 4 sets out the price of tomatoes in three major markets in Pakistan with different climates. Hyderabad in the Sind is sufficiently hot in the winter for tomato production with peak sales in January and February. Some of the crop is transported to Lahore and Quetta, hence the falls in price during those months. The main tomato crop around Lahore in northern Punjab is planted after the winter frosts and harvests in May and June. Thereafter the summer temperatures are too high to allow fruit production. Quetta is a high altitude area in Baluchistan where tomato production is possible in the late summer, i.e. August through to September. The extremely high prices in all markets in November and December suggest an opportunity for growers with the right climate, location and technology to supply this market demand.

Drawing up diagramatic graphs of the typical supply patterns of the major producing areas is a useful exercise in that it highlights shortfalls in supply and therefore possible market opportunities. An example of this is set out in Graph 5.

In any market research exercise it is important to try to assess the effect of increased supplies on the market. Obviously if the likely increased volume of crops will only add a few percent to the supply to the total market there is likely to be little market reaction. Information on the amount supplied to the market can sometimes be obtained from the wholesale market itself. The market authority will often record the number of trucks or the weight of produce delivered in order to calculate charges. In addition the wholesalers themselves will often be able to indicate the number of trucks that arrive daily at the market and the approximate weight of produce delivered.

Quality requirements

Quality in terms of grading, packaging and presentation can significantly affect sales and prices but quality requirements vary considerably.

Two examples will demonstrate how different the market's reaction to presentation and grading can be.

In the Dubai market, which is the major distribution point for imported horticultural produce marketed in the southern Arabian Gulf, French Red Delicious apples were being sold for 55 Dinars a box. This market, along with many in the Near and Middle East, has a preference for red fruit. The fruit were size graded, polished, and packed in cardboard trays in a strong attractive cardboard box. At the same time Golden Delicious apples were available on the market from Iran. In taste there is no real difference but in terms of presentation the produce did not look nearly so appealing. The packaging material, although effective in protecting the fruit from damage, was not as appealing. As a result the Iranian apples only obtained 25 Dinars a box, less than half the price of the French produce (see colour insert). The Gulf market is an increasingly sophisticated and wealthy market where customers are prepared to pay for quality.

In contrast is the example of a tomato seller at a village weekly market in Ismalia, Egypt. He would buy twenty 18-kg boxes of ungraded tomatoes from the local wholesale market. He would then grade the tomatoes into three grades himself, according to quality but not ripeness. Housewives would then go through the tomatoes selecting individual fruits to match their needs. For example, some selected over-ripe fruit for cooking, others firm fruit for salads, others semi-ripe fruit for eating later in the week. Clearly this stallholder would not want to pay extra for graded fruit. The retailer made his profit and used his time valuably doing the grading himself. Even if the tomatoes were graded he would have to repeat the exercise because of damage in transport. His customers wanted to be able to buy fruits with a range of ripeness.

Product quality requirements

The stallholder here makes a margin on sales of 79.5 LE. This will have to cover rent, transport of produce and the salary of his assistant. The profit is, in effect, his salary and will pay for capital investments such as sacks and the cost of the stall itself.

Higher quality produce will normally obtain better prices than average produce and, in situations of oversupply, will be the only saleable produce. Quality is dependent on growing conditions. Grading does not improve quality, it separates qualities and is itself a costly exercise. The question that needs to be answered is whether or not the activity is required by the market and whether the extra prices obtained will cover the additional costs?.

Quality specifications

Occasionally export markets will have stipulated grading standards which have to be met by the exporter. In practice these are normally minimum standards and, because of the transport costs involved, only top quality produce is exported. It is very important to establish directly from the potential market what quality standards are required, how produce should be presented, what size and type of packaging is preferred and what price differences exist between the various grades? Generally this information is readily available from middlemen and wholesalers. Sometimes they will give actual size requirements and may specify particular varieties or appearance characteristics which they favour. From talking to the wholesale market the extension officer should attempt to draw up with them a crop quality specification.

TABLE 6. Economics of a tomato stall, village market, Egypt

Horticultural quality is very difficult to communicate merely through words. It is a tremendous advantage to be able to show photographs of what is considered to be good, average and poor quality produce.

Very often there are differences between markets in their demand for quality produce. For example, it may be possible to supply the major cities with the highest quality produce while the medium quality produce is sold to nearby towns. The poorest quality is sold in the villages and outgrades are used as animal feed.

Packaging

The principal purpose of packaging is to reduce damage in transport. Another purpose is to keep the produce in a sensibly sized unit for handling and marketing purposes. In addition, good packaging can contribute to the attractiveness of the produce and help to promote sales. Packaging is, however, expensive. Indeed in field vegetable production in Europe the single most expensive production cost is very often the packaging material. In practice any recommendations on the introduction of new packaging material must carefully weigh the additional costs against the likely benefits.

While visiting wholesale markets it can be very instructive to examine the amount of damage caused in transport. Produce at the bottom of boxes should be looked at as well as the crops that have taken the full weight of the truck's load. Very often there is a conflict between the lorry driver's objective of transporting as much produce as possible and the problems of overloading and crushing the lower tiers of produce. Well-designed packaging needs to maximize the use of space so it is normally oblong or square. To prevent tiers of boxes crushing the lowest produce the strongest points need to be the four corners of the box. The floor of the box acts mainly as a shelf. A certain amount of air movement needs to take place through the stacks of produce to prevent the build-up of heat and gasses. Sometimes, however, if produce is to be transported in very dry dusty conditions, excessive air ventilation can become a problem.

The size of unit that the produce is packed in is very often determined by how the produce is to be sold. Major products are normally packed in larger containers. Smaller volume commodities have to be packed in small units because the retailer would be reluctant to buy more produce than he thinks he can sell. Recently there have been significant developments in packaging in consumer-sized units. In the Arabian Gulf market, for example, where large individual purchases of produce are common, the more progressive exporters have now started packaging a portion of their produce in retail units, e.g. grapes in three-kg boxes and five-kg nets of onions. In other markets there have been developments in pre-packaging tomatoes, cucumbers and sweet peppers into one-kg nylon nets.

CHECKLIST OF QUESTIONS ON PRODUCT REQUIREMENTS MARKET

Existing sources of supply

Current important suppliers?

Seasonality of supply, start of season, peak season and end of season?

Packing specifications, weight of produce per packaging unit, type of packaging?

Grading and quality standards?

Prices obtained and net resumed to farmer, average price, maximum and minimum prices, effect of different quality standards on price?

Problems with existing suppliers and produce?

Volumes sold daily, monthly, annually? Popularity trend?

Types of buyers and consumers? Use of crop?

Factors affecting sales, e.g. weather, special festivals, day of arrival in market?

Is the crop stored; If so where and by whom?

Recommendations for new suppliers, or increased supply

Best period of supply?

Type and size of packaging material?

Grading and quality standards:

• acceptable size ranges?
• whether different sized produce should be packed separately or Jumble-packed?
• state of ripeness and should produce of the same ripeness be packed together?
• acceptable level of blemishes?
• important appearance characteristics such as colour, variety, shape, presence of stalks, bunch size?

Budget gross and net prices?

Volumes required?

Frequency of shipment, best day and arrival time on market?

Transport arrangements, e.g. whose responsibility Is It to arrange transport?

Storage arrangements, It any?

Potential and techniques for developing sales?

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