Understanding how the market operates

I’ve always defended the producer’s right to market his produce as he sees fit. If this includes supplying direct to a supermarket, that’s fine. For a large producer, not having ‘all your eggs in one basket’ is always wise.

For a smaller producer, relying on one buyer could be hazardous. If things do go wrong, he could find himself severely compromised – perhaps even dropped like the proverbial hot potato.

However, when a producer insists that the market agent must achieve a certain minimum price or be penalised, I can understand the reasoning, but I don’t like it. It flouts the basic rules of the free- market system. Yes, a farmer has costs to cover, but to penalise the agent if he doesn’t achieve the required price is not only unfair, it does not consider how price discovery on a commission market operates.

Law of supply and demand
Despite what the cynics might say about market prices, these prices are established through supply, demand, quality and another 40-odd factors. The market agent can do his best to squeeze out an extra rand or try to move a larger quantity,
but ultimately the ‘invisible hand’, as economist Adam Smith put it, will reign supreme. 

If the producer’s required minimum price is not met, that’s the law of supply and demand in action. Of course, the producer wants to make a profit, but he cannot do that by defying the basic laws of marketing.

He can, however, do what many other successful farmers do – supply the market consistently, through the highs as well as the lows, and so build an average price which will exceed his costs, provide a profit and give the best return of all marketing options.

Smaller farmers
The smaller farmer would do well to follow this pattern as well, but he might be challenged by limited quantities as well as logistical restraints. This does not mean, however, that he must give up.

Instead, he should try to be more focused on which markets to supply and build a reputation for consistency in both supply and quality. Getting these factors right means enjoying good returns back at the farm gate.

It’s about understanding the system.