Bridging the gap between farmers and retail prices

‘Farmers produce commodities … [they] will have to take control of their products outside the farmgate.’
Issue date 31 August 2007

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A well-known former US Secretary of Agriculture, Earl Butz, used to bring a loaf of bread to meetings with consumer groups. He sliced it, put the two crusts to one side and explained that those two crusts were all farmers received for their hard work. In SA the gap between producer and retail prices and the farmers’ share of the consumer rand is frequently debated. The Department of Agriculture stopped their publication of the farmer’s share of the consumer basket some time ago.

Luckily the National Agricultural Marketing Council’s food-price monitoring committee now includes a farm-to-retail price spread and farmers’ share of retail prices for a few major agricultural products in their report, the Food Price Review. T he farmers’ shares of the retail price for a few selected products are shown in Table 1. However, Table 1 doesn’t show trends – while the farmers’ share of the maize meal price seems high, the increase was caused by a 20% rise in the SAFEX white maize price from January to December 2006. Broiler producers get the highest share of the consumer’s rand, while wheat producers get 20% to 21%.

Milk producers get 39%. he difference between farmer and retail prices, the so-called farm-to-retail price spread (FTRPS), gives an indication of the amount of money made outside the farm. In December the FTRPS for super maize meal was R1 585/ton, R8 906 for white bread, R2,75/ℓ for full cream milk and R9,56 per broiler. While sharp increases in input costs shrink farmers’ margins, profits in the food and retail sectors increased sharply over the past couple of years. Taking control around the world Johan Kirsten and his co-authors of the Food Price Review summarised the position of milk producers in their report. “At farm level there exists nearly perfect competition. Farmers are numerous and largely price takers (that is, they accept prices offered to them rather than determining prices themselves) selling a homogenous product. They are subsequently subject to a perpetual cost/price squeeze, while on the input and output side farmers are faced with companies operating under oligopolistic competition.”

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Although this was written for the dairy industry, it applies to nearly all types of farming. W orldwide, farmers realise that if they want to earn a larger share of the consumer’s payout, they’ll have to take control of their produce. Since the early 1990s agricultural economists have been preaching market-driven production. Farmers were advised to start on-farm processing and sell directly to consumers. While that was good advice, in many cases it ended in the farmer’s ruin. In the last couple of years, especially in the US, the cooperative has been rediscovered as a means of gaining control over farm products. The majority of the new bioethanol plants in the US are cooperatives put up by groups of farmers. new style cooperative differs from the old style one, as in those the organisations soon became more important than their members. here are also other farmer-controlled business models. In Europe, a substantial share of the total agricultural trade is already in the hands of farmer-controlled businesses.

The trend is also evident on the international scene, where New Zealand’s dairy farmers own the global company Fonterra. Local co-ops here are many opportunities for farmers to cooperate and get farm-controlled businesses going. A recent Farmer’s Weekly article (20 July) highlighted the work a few dedicated farmers in KZN did to develop Midlands Milk. There are lots of other examples where farmers joined hands and created their own businesses. he motivation to expand a small, successful cooperative business into non-core areas is strong both on the management side, where a foreman with authority over 100 is paid more than a foreman over 50, and from the farm directors. In most cases the expansion results in a shift of focus, onto executive remuneration away from the basic goal of improving the farmer’s profitability. must resist this temptation. F armers produce commodities.

The price of commodities will come under pressure as production efficiency increases. price of inputs, on the other hand, will increase briskly. Farmers will have to take control of their products outside the farmgate. As the KZN farmers showed, it isn’t necessary to get all farmers to cooperate – you only need a few like-minded farmers. Farmers must also get reliable advisors. Beware of smart consultants with little practical knowledge and fancy computer models. SA farmers are entering a few years of better producer prices. This is a good time to develop businesses that can take control of their products and increase profitability. Dr Koos Coetzee is an agricultural economist at the MPO. All opinions expressed in this column are his own. |fw