Phase 3 - The marketing system

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The previous section discussed what the customer wants in terms of product. This section deals with finding out what the customer wants in terms of service. In other words, finding out the best way to work within the existing marketing system. This involves building up an understanding of how produce is distributed and sold. The price relationships between the different sales points in the marketing chain have to be studied. Knowledge must be gained about which companies in the distribution chain have reputations for honesty and integrity. Finally it is important to understand how growers can be kept regularly updated with market information in terms of prices and volumes and quality required.

Middlemen are subject to a lot of hostility, much of it unwarranted. They are generally accused of making excess profits and of dishonesty. It is sometimes not realized that middlemen perform an essential function in carrying out the marketing of produce. They are, in effect, the channel through which produce is taken out of the rural areas and money returned. Experience shows that, provided a market opportunity is identified, which is normally the responsibility of the middleman, farmers will respond by producing the crops. Only rarely is a lack of technology the critical constraint.

Provided middlemen operate in an atmosphere of strong competition it is unlikely they will make excessive profits. Clearly if this were the case numerous other businesses would be attracted and the competition would force down profits. As in all businesses there are some middlemen who are dishonest. The challenge for the extension officer is to identify reputable middlemen and to ensure that the marketing system minimizes opportunities for dishonesty.

The produce distribution system

There are very many different systems of marketing fruit and vegetables. They differ from country to country and indeed sometimes from crop to crop and from farmer to farmer. The extension officer will need to fully understand the marketing system if he is going to be able to make it work for the benefit of farmers.

The most important stage to understand is the first link in the production/marketing chain, that between the farmer and the person to whom he sells. To help understand the system it is very useful to draw up a flow diagram showing different stages in the distribution chain.

Some likely business people who can form the links in the production/marketing chain are:

• contractors who buy crops in the field and undertake the harvesting;
• agents, collectors, hawkers or country wholesalers who buy the harvested crop at the farm;
• wholesalers who buy at rural assembly or village markets;
• commission agents or auctioneers who auction produce in a wholesale market on a commission basis;
• wholesalers who sell produce on a consignment or commission basis in the wholesale market;
• wholesalers who buy produce from farmers at firm prices and sell at the wholesale market for their own account;
• exporters and importers;
• secondary wholesalers who buy at the wholesale market and transport the produce either to sell to retailers or at another wholesale market where prices are higher;
• semi-wholesalers who are located near the wholesale market and sell produce by the box either to small retail businesses or directly to consumers.
• retailers who sell to the final consumer such as street hawkers, stall holders, retailers, greengrocers, supermarkets;
• catering establishments, food processors.

An example is set out in the diagram. This shows a typical distribution chain for tree fruits found in much of the Middle East and Asia. Here around 70 percent of the produce is sold as a standing crop to an orchard contractor. Normally a number of contractors will bid for an orchard. One third of the price is paid three months in advance and the other two payments are made during harvesting and at the end of the crop. The orchard contractor undertakes the harvesting, grading, packing and distribution of the crop and may hold the produce in cold storage. This system has a number of advantages:

• the farmer is partly paid in advance;
• the farmer need not worry about organizing labour for harvesting;
• the contractor's labourers are skilled in harvesting, grading and making up the wooden boxes on site;
• the contractor will normally undertake the harvesting on a number of small farms which will achieve economies of scale in terms of transport;
• the contractor is a specialist in marketing and understands the requirements of the commission agents and wholesalers.

Understanding how the market system works

In this system it is the contractor who is taking the most risk. Risk and profit are very closely linked.

About 30 percent of the produce, normally that of the larger growers, is marketed direct to the wholesale markets. These wealthier farmers are in a better position to absorb the risks involved with marketing the produce themselves.

In most marketing chains there is a dominant business force. In this example it is the commission agent. He may superficially appear to be only the auctioneer of produce in the wholesale market, working on a small commission. In practice he operates very much like a bank, providing credit, often apparently interest-free, to farmers, contractors and wholesalers. By providing credit he guarantees that produce will be marketed through himself.

Diagram 1 - Fruit crop marketing channels, Near East

The commission agent sells to wholesalers. The wholesalers normally purchase several consignments of fruit and ship it in bulk to distant markets for re-auctioning. Other wholesalers purchase produce in bulk at the auction, split it into smaller consignments and sell it immediately to stall holders and street hawkers, often on short-term credit.

Marketing margins

The proportion of the final retail price that is resumed to the grower arouses much emotion and discussion. Calculating the margins in the marketing chain can be a difficult exercise because they vary depending on the retail price of the product, its perishability and the marketing costs, particularly those for transport and packaging.

TABLE 7. Retail margins for tomatoes sold at a village market, Egypt

An example of how to calculate margins in horticultural marketing is set out below based on the example of the tomato retailer discussed earlier. Normally the easiest price to obtain is the wholesale price, i.e. the selling price to retailers.

It is often mistakenly assumed that the difference between the retail price and the wholesale price is the retailer's profit. This is wrong because it fails to take into account the fact that produce is often sold at different prices and that some produce is downgraded or even wasted entirely. In Table 7 the average retail price is 1.05 LE/kg. When the mistake is made of not taking into account the 10percent wastage then the average retail price would appear to be 1.17 LE/kg. As a result the percentage mark-up would be incorrectly calculated as 41 percent. The actual mark-up is 21 percent.

It is also a mistake to assume that the margin or mark-up, which in this case is nearly 4 LE per box or 0.22 LE per kg, is purely profit. The margin has to cover transporting the tomatoes and any salaries, rents, taxes and investments in equipment as well as to allow the stall owner an income and an opportunity to put money aside to cover periods when losses are incurred.

It is of particular interest to work back from the wholesale price to the farm gate pace. To do this the extension officer will need to establish what margins are calculated in the wholesale markets. Information like this is highly sensitive and will need to be rechecked from different sources, including farmers, contractors, commission agents, wholesalers and retailers.

To do this properly the extension officer will need to retrace each step in the marketing chain and establish from each middleman his buying and selling pace. Typically, margins are greatest when the middleman pays a firm pace and actually takes ownership of the produce. This is because he is taking the Ask and Ask and profit are closely linked. When produce is auctioned or sold on a consignment basis, the middleman, be he a wholesaler, importer or commission agent will hold back a percentage commission, normally from the seller but sometimes also from the buyer.

Using the example of a tomato crop in Egypt again, the method of calculating the return to the grower is set out.

As has been shown, accurate calculation of margins is extremely difficult. All too often it is assumed that from a simple comparison of an individual retail price, wholesale pace and farmer pace it is possible to accuse middlemen of excessive profits.

Wholesalers and middlemen

An important part of the extension officer's work is to identify suitable and reputable middlemen as trading partners. This involves finding out which companies are best equipped and most prepared to trade in the produce from his area. Secondly, he should find out whether these companies have a reputation for integrity and honesty. Discovering this information involves not only having meetings with possible trading partners but also, in effect, taking references about their reputation from other traders.

There is often a shortage of simple company information on potential trading partners and yet it is crucial when growers are planning to supply a new market or start marketing. The top priority should be honesty, but it is also important to identify businesses which are appropriate to the type of commodities which are planned to market and the scale of production which you envisaged.

TABLE 8. Farmer prices calculated from the wholesale market

TABLE 9. Selection of suitable trading partners

Information services

Growers have to plan over the long term as there can be months and sometimes years between planting and harvest. Much of this chapter has concentrated on trying to read long-term trends. However, it is also important to try to introduce flexibility in marketing in order to maximize profits and minimize risk. This can be achieved by ensuring that there is a system set up whereby the producer receives rapid feedback on the state of different markets. He or she requires information on prices and on the demand of the market in terms of quality and quantity. This information can be used to maximize sales when the market is short and quality demands are not as stringent. When prices are very low the response may be to send only top quality produce or in exceptional cases, not harvest the crop at all. Access to information on a number of different markets gives the producer the option to switch produce to the higher priced outlets.

It is absolutely vital that this market news information is accurate and rapid. In practice the most important method of communication is the telephone but few farmers in developing countries have access to phones. The telephone can be one of the best investments for a horticultural producer; the additional returns may outweigh his costs many times. In the absence of a telephone link a well-run radio market news service broadcasting price and state-of-supply information has a number of advantages. As almost all growers have transistor radios the information is available to all. Growers can respond to market opportunities by diverting produce from one market to another. Ultimately, price differences between markets are reduced, which provides benefits to the consumer in terms of price stability and better continuity of supply.

CHECKLIST OF QUESTIONS TO ASK POTENTIAL TRADING PARTNERS

1. Name of company

Address
Telephone
Telex
Contact name
Number of staff
Number of years of operation
Estimated turnover in the last three years
Locations of businesses

2. Brief description of company activities, i.e. importer/wholesaler/commission agent

Main products handled
Main suppliers
Typical terms of trade i.e. commission, letter of credit, firm buying, etc.
Main outlets serviced i.e. secondary wholesalers, street hawkers, shops, supermarkets, hotels, etc.
Percentage sold by different outlets and typical consumer serviced.

3. Normal procedure for doing business:

Is the grower advised when to dispatch produce?
Whose responsibility is it to arrange transport?
Does the wholesaler expect advance warning of a shipment?
How are buying price and selling price agreed on?
What deductions are made before money is returned to the grower?
How quickly is money returned to the grower?
How does the wholesaler keep the grower informed about market requirements in terms of quality and quantity and expected price?

4. Recommendations of other businesses dealing in horticultural produce which have gained a good reputation for reliability and honesty with good management and a progressive and professional approach.

Normally wholesalers and middlemen have an advantage in negotiation by being better informed on market prices. The growers' negotiating position is improved by having ready access to price information. This is particularly important when there is little competition between buyers, e.g. when an individual contractor bids for a fruit orchard on a farm. The extension officer needs to consider ways in which price information can be made more available. Some techniques used include publishing information in newspapers and chalking up typical prices in markets and village meeting places.

Extension officers should also ensure that the market information provided is relevant to the farmers' needs. Prices in distant markets which cannot be easily served by farmers are of less relevance than prices in nearby villages and town markets. These "local" prices are often not broadcast by radio stations. The extension officer should collect and disseminate these prices back to the farmers. This can be done by word of mouth or by placing notices on bulletin boards at locations regularly visited by farmers e.g. market places, chief's offices, input supply points, etc.

One danger which the extension officer should be aware of is growers not understanding the reason for the difference in price between the farmer, the wholesaler and the retailer. It needs to be explained that distribution and marketing involves costs and business risks and prices have to cover the salaries of those involved in the distribution chain. Unless these costs are covered the marketing system will collapse.

Summary and conclusions

The main emphasis of this chapter has been on the need for information gathering and how to go about it:

• The extension officer needs to learn for trim other self the problems and opportunities of horticultural production in his region.
• He must find out what the customer wants in terms of both product and service.
• Finally, he needs to have gathered sufficient information to assess whether products can be supplied profitably to the market.

Although some of the basic necessary information may be available in reports and statistics, most of the information gathering will depend on picking up the views and opinions of individuals. This is a skill in itself. Much of the information required, particularly price information, may be considered sensitive. Some respondents will be suspicious of the reasons for wanting this information. They may, for example, be concerned that the information will get back to the tax authorities or it will be used to demonstrate that they make unfair profits.

At the outset of any interview the extension officer explain who he is, what he is trying to achieve and how that may be of benefit to the individual he is are talking to. Respondents will be much more forthcoming if interviews are arranged at a convenient time. For example the best time to speak to wholesalers is often after the main trading period. During the early part of an interview a rapport should be established with the interviewee. Normally people enjoy explaining their business and how it developed and like to feel that their opinions are respected and that their advice is being sought. The more sensitive questions are best asked towards the end of the interview when the atmosphere should have changed from slight suspicion to that of interest and cooperation. People's opinions will be different but the extension officer should try to use all the information that has been gathered to build an overall view of the market and how it works.

Finally a word of warning

A trend means that somebody has identified a market opportunity and begun to exploit it. However, all marketing opportunities are limited in scope; the gap in the market gets filled, and then overfilled in the course of time. The people who make money out of those trends are those who start them, not those who follow them. Those who try to jump on a bandwagon when it is moving fairly fast are liable to fall off and get hurt.

L. Broadbent, 1985, Horticulturists Handbook, Duncan Publishing, London, U.K.

Starting a trend requires analysis, insight and, finally, courage.

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