Mike Cordes

I’m not against a farmer supplying direct to a supermarket. I am, however, not in favour of a farmer giving everything to a supermarket. This can rebound on a farmer in a variety of ways.

A fundamental business principle dictates a supermarket’s activities – buy as low as possible, sell as high as possible. When Mr Supermarket Buyer arrives on the farm to negotiate a supply deal he’s going to make the deal sound as sweet as possible knowing all the time what his non-negotiable ‘bottom line’ is when it comes to the price.
Does Mr Farmer know this? He should! Many farmers will tell you they know their costs and what profit margin they require, and that’s the basis of their negotiations. They’ll tell you they don’t need the fresh produce market’s prices to determine their own.

Benchmark
Yet I wonder how many supermarkets and farmers still refer (some secretly no doubt) to the market prices as a benchmark for their negotiations. The market price might not be the ultimate guide, but it’s the only one that’s reasonably reliable, reflecting supply and demand and quality.

Now does the supermarket take the whole crop or specify only what it requires? Does the farmer still have to find an outlet for the balance – inevitably the lower quality ‘leftovers’? If he sends these to the market, what does that do to the market price? Lower quality is going to cause lower prices.

No good
With lower market prices, Mr Supermarket Buyer has a subtle bargaining tool at his disposal to ensure he stays within his ‘bottom line’ buying price. Mr Farmer, on the other hand, finds himself defenceless against the ‘logic’ of market prices and ends up justifying to himself why the market is ‘no good’. So his ‘bottom line’ is attacked from two sides – price pressure from the supermarket and lower prices from the market – hardly a win-win situation.

Averages
Have you ever wondered why the successful fruit and veg farmers always keep their options open? They supply both supermarkets and markets, not to mention exports. They don’t put all their eggs in one basket and they make sure they consistently supply quality products to the markets as well as the supermarkets. They know it’s all about building their averages.

Think about it!

Contact Mike Cordes at farmersweekly@caxton.co.za. Please state ‘Market floor’ in the subject line of your email.

Issue date: 07 September 2012