Farmers operate in a free market, but this does not mean that price formation in the market is fair. While the market is free in the sense that there are few legal barriers to entry, the markets where farmers buy their farm requisites and those where they sell their products are highly concentrated, with a few large firms dominating.

When producer prices decrease, it usually does not result in lower ex-factory or retail prices.

The Competition Commission recently stated that the lower price of sunflower seed did not result in lower sunflower oil prices, and that lower wheat prices did not result in cheaper brown bread. Processors and retailers are not motivated to transfer lower prices to consumers, as this results in lower profits.

The same trends are evident in the markets for farm requisites, where changes in international input prices frequently do not result in lower prices in local markets, and where lower grain prices do not result in cheaper animal feed.

(The entry of several smaller companies into the feed manufacturing sector did increase competition in this market in the past few years.)

Farmers frequently complain about alleged price collusion between buyers like the major feedlots and millers or milk buyers. While there may be some isolated cases of price collusion, the reality is that, in many markets, there is strong price leadership, where the prices paid by a leading firm or firms are followed by other buyers.

The worst thing farmers can do is complain to the Competition Commission. The commission may investigate the alleged price collusion, and it may even find some firms guilty of contravening the Competition Act and enforce penalties on them. However, farmers are the price takers in these value chains and will have to ‘pay’ the penalties.

Bypassing the system

Farmers’ complaints about unfair pricing behaviour in the value chain will not improve the situation. In the grain value chain, many farmers realised that they could bypass the marketing system with its grain silos and standardised costs. Instead, farmers sell grain directly from their own storage silos, thereby saving huge amounts on transaction costs.

Beef farmers do not have to sell their weaner calves to feedlots at fixed prices; they can keep the calves, either feeding them or backgrounding them. In the dairy sector, many farmers process their own milk.

Many people buy products online, and there is a real opportunity for farmers to sell directly to consumers. There are already a few farmers doing this successfully and more will follow.

Farmers buy their farm requisites in an imperfect market, in most cases dominated by a few large processors. Manufacturers that produce similar products, such as animal feed or fertiliser, will try to differentiate their products with a lot of advertising hype.

A feed manufacturer will tell the buyers that he or she uses advanced technology from the US or France, for example, to ensure that their product is superior, while in effect the dairy meal or calf growth meal produced by Company A and Company B are nearly identical.

Farmers should ignore this advertising noise and buy at the best prices but always keeping quality in mind.

The origin of co-operatives

The co-operative movement developed in the UK when a group of weavers in Rochdale decided to combine their individual businesses to be able to negotiate better prices for the material they were weaving.

The idea of farmers selling their produce and buying their inputs jointly resulted in the co-operative movement expanding very quickly in the UK, Europe, and South Africa. By 1965, there were 338 agricultural co-operatives in South Africa with total membership of 287 000.

Since then, the number of co-operatives has declined as smaller ones were taken over and the majority of co-operatives were changed into public companies. Farmers’ control over the co-operatives also waned. Currently, there are only a few relatively small co-operatives operating in South Africa.

Individual farmers are usually too small to process and sell products effectively. They can and do form farmer-controlled businesses to operate jointly. There are a few examples of successful farmer-controlled businesses.

The free market is not a fair market. However, there are ways for farmers to remain profitable in these markets.

Dr Koos Coetzee is an independent agricultural economist.