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Without disagreeing with the points Dirk makes, I would just like to caution against using the farmer's share of the retail price as a useful tool for research. Too many studies in the past have concluded something like "the farmers only get 30% of the final price. Therefore they are being exploited." In fact a marketing channel where the farmers get 60% of the price can be less competitive than one where they get 30%. It all depends on the crop, the season, the time of the day when price measurements are made, the distance of the farmer from market, the quality of the product and the standard of post-harvest handling, etc. etc. not to mention the impact of any processing done. Andrew Shepherd Agricultural Marketing Group, FAO http://www.fao.org/ag/ags/subjects/en/agmarket/agmarket.html <http://www.fao.org/ag/ags/subjects/en/agmarket/agmarket.html> -----Original Message----- From: Bezemer, Dirk [mailto:<address removed> Sent: 06 May 2004 11:47 To: <address removed> Subject: market conditions I respond to Vinay Chand's point that market conditions, particularly price, is more important than market access, which she suggests is nearly always there. I wonder if this is generally true in, for instance, Sri Lanka, but not necessarily elsewhere? Perhaps market access is in fact an important barrier to switching from subsistence to commercial production for SSA smallholders? What is the additional evidence? Second, Vinay Chand suggested that farmers will be more responsive to price movements as they receive a larger share of retail sale prices. This is important indeed and should be further developed. How do farmers receive larger shares of reatil prices? I suggest, by being in more competetive markets, i.e. those where they have more choice of sale channel. Also, this 'share of the cake' argument is one of two determining factors. The other one is price elasticity, which in turn depends on the product type and the general demand conditions. This is more than just an academic point, as it influences the scope for different strategies that aim at giving the farmers a larger share of the cake. A retailer who perceives increased demand can do either of two things in response: raise volume, or raise price. Both are ways to increase revenues (price times volume) and thereby profit. Raising price will decrase demand, and the extent to which demand is decreased is defined in the demand price elasticity of the product. With high price elasticity, demand may fall so much in response to a price increase that profit may actually fall instead of rise. With low price elasticity, the retailer can raise price without much profit loss. Whether or not the increase in price will be passed on to the farmer depends on competition. If there are enought other retailers who are potential buyers for the farmers, he or she will switch away from the one that does not pass on market price rises, to one that is willing to do so (or do so partly). The alternative retail response to extra market demand, raising volume, will bring in extra revenue, but will also imply extra costs, as the additional produce has to be bought fom the wholesaler or farmer. The profit opportunity here depends on the revenue-cost difference, i.e. the margin of the trader: the larger that is, the more will extra volume raise retailer profit. A first conclusion is therefore that for products with a high price elasticity (which is true for many basic foodstuffs), retailers will typically want to raise volume not price in response to more demand. This benefits the farmer by increased demand for his product. However, farmers are often not able to respond effectively (especially, quickly enough) to increased demand, because of the time lag between their investment (sowing) and sale. They may then run behind the market, increasing its volatiltiy. This is the down side of a high price elasticity. Non-basic foodstuffs (anything but staples) have lower demand price elasticity. An implication is that switching away from staples may be an effective way of ensuring larger farmer shares in growing markets. A caveat is that this is likely to be feasible only in conditions of general growth: when purchasing power drops or is stagnant, sales of such non-staples are the first to fall. They have low demand price elasticity, but high income elasticity. A second conclusion is that access to competetive markets matters, not just access to a market. If markets are non-competetive, price transmission will be weak or there will only be donwside price transmission: retailers may be in a position to absorp any price increases into their own profit, while passing on price falls to the farmer. dr Dirk J. Bezemer Research Officer, Overseas Development Institute 111 Westminster Bridge Road, London SE1 7JD, UK phone: (0044) (020) 79220313 fax: (0044) (020) 79220399 e-mail: <address removed> http://www.odi.org.uk/rpeg/staff.html#dirk <http://www.odi.org.uk/rpeg/staff.html#dirk> Visiting Research Associate, Imperial College The College, Wye, Kent TN25 5AH, UK phone: (0044) (020) 75942913 fax: (0044) (020) 75942838 e-mail: <address removed> http://www.wye.ic.ac.uk/staff/biogs/bezemerd.html <http://www.wye.ic.ac.uk/staff/biogs/bezemerd.html>
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