Role of Middlemen in Marketing System

Transcription

1 Article Role of Middlemen in Marketing System Abdul Latif Sarker* and Takashi Sasaki** (*United Graduate School of Agricultural Science, Gifu University and ** Shinshu University) I Introduction Mechanism of formation of distribution channel(from producer to consumer)for agricultural produce in general and the role of middlemen in the formation of that channel in particular have never been elucidated fully, especially in developing countries. The remarkable study of Hayami and Kawagoe(1993)which has intensely focused on finding out the potential for peasant marketing in Indonesia to be converted into modern commerce and industry to support Indonesia's emergence as a industrial state in future, however, brought up the issues of channel formation and middlemen's role only meagerly. Recently, inquiry into this issue has gained a big headway with the application of Transaction Cost Theory(Sato, 1998), which has originally been developed within the context of Economics of Internal Organization(Williamson, 1975). Our first intention in this paper is to analyze agricultural distribution channel of Bangladesh from the viewpoint of Transaction Cost Theory. In Bangladesh this issue has been argued centering on the length of distribution channel and it is a conventional claim that because market chain is longer than it is felt necessary, it should be shorter. However, this argument has not focused on what are the factors that have definite influence on the length of distribution channel and its structural change. Hence, policy proposal based on the argument has not been persuasive. It was examined in this paper, if existing middlemen and, especially the faria[who collect produce from farmyards and sell to local markets, either to the bepari(traders, who assemble in local markets and supply to urban centers)]have economic rationality or not from the viewpoint of Transaction Cost Theory. We focused on margin of middlemen as a second theme of this paper. On this point, conventional prudence claims that longer channel distribution in Bangladesh results in an excessive middlemen margin, of which a big share is profit. This argument intends to show a causal relation between length of channel and marketing margin/profit. However, these two issues deserve to be addressed separately because the factors that bring about longer distribution channel are not always the same which cause excessive margin. With this view in mind, we computed margin and profit for each middleman stage and assessed if they were excessive. Also, margin for the major distribution channel was evaluated comparing it with that in some South Asian countries. II Methodology We resorted mainly to primary information in analyzing our points mentioned above. Primary data were collected through field survey of producers and all kinds of middlemen in relation to Bangladesh's most important vegetable, potato and fruit, banana for the year A total of 50 potato farmers were selected from one of the major producing areas-pirgonj of Rangpur district(300 km northwest of Dhaka). We interviewed 50 banana farmers from one of the main production areas-shivgonj of Bogra district(250 km northwest of Dhaka). Both areas are facilitated by good transport

2 system with Dhaka markets, the major consumer markets in Bangladesh. Also farmhouses were found to have been well-connected with several nearby primary markets. A total of 30 potato and 25 banana farias and 10 potato and 15 banana local retailers were interviewed in the rural primary markets near producing areas. We interviewed 10 potato and 12 banana beparis while they were visiting the primary markets near production areas to collect produce and ship to major consumers at Dhaka markets. They have been termed asbeparil in this study. While visiting Dhaka wholesale markets, we interviewed 10 potato and 12 banana beparis who were collecting produce from nearby districts of Dhaka. These potato beparis were found collecting from Munshigonj district (about 60 km south of Dhaka) and banana beparis were collecting from Gazipur district (about 50 km north of Dhaka). These beparis are termed as bepari2 in this study. A total 10 potato and 10 banana urban retailers were interviewed in Dhaka retail markets. We interviewed 15 potato cold store merchants, who stored potato in harvest season in the cold storage located near producing areas and released them in the off-season. Finally, 4 potato and 4 banana aratdars (auctioneers) at Dhaka wholesale markets were interviewed. III Role of Middlemen in Distribution with Special Emphasis on the Faria Longer chain of middlemen has always been a concern to the researchers and policy makers in Bangladesh. Specially, raison d'eêtre of the faria has always been doubted as an extra linkage to the market chain. We tried to analyze this issue in the light of Transaction Cost Theory. According to this theory, typical transaction costs that make distribution channel longer are the following two. Firstly, diversification of risks (caused by natural factor such as weather) among distributors. And secondly, cost relating to distribution such as collecting, transportation and information. If division or specialization of distribution of work reduces transaction costs, distribution channel become longer (Sato, 1998). Under the dominance of small scale farming (and small shipping lot) and where middlemen do every collecting and grading work, distribution channel is likely to be longer. This paper aims to testify how far these factors were working effectively, especially how far the faria were contributing to diversify risks or reduce cost in Bangladesh. 1.Major Distribution Channel We examined the existing distribution channels and participation of each middleman (Table 1). It was observed that longest channel involving faria, bepari and aratdar in between producer and consumer was the major channel in terms of the amount of distributed quantity. More than 80% of farmers' marketed quantity for both potatoes and bananas were channeled through urban retail markets by the bepari, of which 63% of potato and 72% of banana were distributed through the aratdar. The faria contributed 16% of potato and 20% of banana to this major channel. The faria were also observed to be one of the major suppliers to the local retailmarketc. Table 1: Marketing Channel of Potato and Banana in Two Selected Areas of Bangladesh Source: Authors' calculation from field survey, Sep-Dec, Faria's Role in Diversifying Risk and Reducing Cost It is evident from Table 2 that while 23% of marketed potato was sold at farmyards (all to the faria), about 74% of banana was sold at farmyards (30% to the faria and 44% to the bepari). Farmers lost TK 4/quintal of

3 potato and TK 2/100 bananas for selling at farmyards. We investigated the reasons for such selling behavior and acceptance of loss. According to the farmers, they diversified some risks by selling at the farmyards. Table 2: Economics of Spatial Sale of Potato and Banana' 1Estimates are for potato/quintal and banana/100 nos. 2Marketing Cost includes: shipping, grading/packing/loading, personal cost, and opportunity cost of family labor. TK stands for Bangladeshi money Taka (1US$ =TK 48.5) Source: Authors' Calculation from Field Survey, Sep-Dec,1997. Selling to markets was not always not risk free. All rural markets are open-air markets and transactions may not take place sometimes due to bad weathers. Again, sometimes price may fluctuate beyond farmers' comprehension. Farmers, from their experience, try to minimize this type of risks by selling some quantities at farmyards. In the case of potato, farmers' marketed quantity for one market day (rural markets sit twice a week) was usually small. The main shipping mode in the study area was found to be rickshaw-van, capacity of which is about kg. Its charge was usually fixed, regardless of quantity shipped within its Capacity. Usually some farmers loaded one van to economize costs. But sometimes, quantity was not enough to load a van. In such cases, farmers would sale to the farias. Large sale of banana at farmyards, however, had different reasons. Banana trees planted at a certain time and producing a lot of mature banana at aetime required speedy and large marketing in a specific timeframe. Lack of economic and large shipping mode was absent at farmers' ownership. The faria, due to their poor financial ability, could not buy large quantities of bananas at farmyards. Hence, the bepari came to the scene. The bepari found it reasonable to collect at farmyards, as the quantity was large enough to load their trucks. Farmers diversified risk by selling bananas, when they were still in the trees (sometimes before they got mature). The faria and the bepari harvested according to their conveniences. Farias were found to have economized shipping cost compared to that of farmers. It is evident from Table 2 that farias' shipping costs were lower than that of the farmers by TK 2 in one quintal potato and TK 1 in 100 bananas. However, this difference of shipping cost was not the only source of faria's margin. They also economized other costs related with market selling (e.g., market toll). They sometimes re-sorted and re-graded farmers' produce to get better price from the bepari, local retailers and local consumers. Unlike farmers, the faria held produce unsold, waited for an expected better price in the next market day or looked for an alternative primary market, where better prices were prevailing. All these practices of the faria were associated with risks, which were apparently not taken either by farmer or other traders in the local markets. IV Analysis of Middlemen's Margin and Profit Rate Our discussions in the preceding section shows that the channel involving the highest number of middlemen stages was the major channel in terms of percentage of distributed quantity. The faria, who are usually doubted to be an extra-linkage to the chain, were found to have been operating rationally. Our next concern is that if the longer chain is economically rational, then what might be the sources of excessive margin. At this juncture, it is imperative to analyze if middlemen's margins, especially profit rates were really high and if high, in which stages. We examined this issue as follows. Firstly, margin and profit for each

4 middleman were analyzed. Secondly, margins for the major distribution channel were estimated for potato and banana and were compared with the margins of perishables of some South Asian countries. 1. Marketing Margin and Profit at Each Middleman Stage Marketing margins were calculated separately for each potato and banana middleman. Apart from absolute margin, cost and profit shares to total margin were also calculated. Since aratdars did not buy and sell produce, commission received by them was considered as their margin because it consisted of both profit and cost of marketing. However, profit share to margin does not show if middlemen earn excessive profit or not. Profit measured as a percentage of investment can show that. This profit rate was also estimated and assessed. Potato middlemen's margins and profit rates are shown in Table 3. It was apparent that cost and profit shares to margin could not say in which stages, the middlemen have earned how much profit. For example, Beparil's share of profit to margin was 18% only, against 39% of that of faria, but both earned profit at the rate of 4%. On the contrary, cold storage traders' profit share to margin (35%) was lower than that of all other middlemen (except beparil), but they earned highest rate of profit (29%), which was only next to that of aratdars (120%). Bepari2 earned more than double of beparil because of lower cost incurred by the former (56% against 82% of the latter). This was due to the fact that bepari2 collected from nearby areas and at a cheaper price. Both local and urban retailers were found to have earned better than faria and beparil. Table 3: Potato Middlemen's Margin and Profit (Per Quintal) Figures in parentheses indicate cost and profit as a percentage of margin, respectively. Investment includes both working capital (buying commodity and other 1variable items, hiring casual laborer and interest on loan capital) and fixed capital (depreciation of fixed items, e.g., gunny bags and baskets, salary of permanent laborer and opportunity cost of own capital and family laborers). Source: Authors' estimation from field survey, Sep-Dec, Banana middlemen's margins and profit rates are shown in Table 4. Like that in potato, profit share to margin was not an indicator of profit as a percentage of investment. For example, profit share to margin was the highest for faria (54%), but they earned the lowest (11%). Here too, beparil incurred highest cost mainly due to their long distance shipment. However, absolute cost of bepari2 was similar (TK 22) to that of beparil (TK 23). But bepari2's earning was higher than that of the beparil. Bepari2 collected and sold in higher prices. Though shipping cost of bepari2 (TK 5) was much lower than that of beparil(tk 9) [not shown in Table 4], their marketing cost was similar because bepari2 incurred higher cost in better care and ripening of banana, which brought them higher price and profit. Their profit rate was the highest among all middlemen (except aratdar), followed by urban retailers (15%), beparil(13%) and local retailers (12%). Rate of profit by most of the potato and banana middlemen was found quite reasonable. A comprehensive study estimated rates of profit in Bangladesh's main staple and less perishable rice to be much higher (processing level 24%, wholesale level 61%, retail level 105% and overall 44%) [Chowdhury, 1992]. Another

5 conventional way to evaluate profit rate in Bangladesh is to compare the earning with bank rate (Chowdhury, 1992; Harriss, 1979), which hovers below 10% recently. In this consideration too, earning of most the Table 4: Banana Middlemen's Margin and Profit (Per 100 nos.) Figures in parentheses bear same meaning with those in Table 3. Source: Authors' estimation from field survey, Sep-Dec, middlemen may not be termed as excessive. However, protit rates of potato coid store tracers anu arataars, especially the latter's seemed very high. Entry into these two particular businesses is very difficult in Bangladesh. Cold storage traders need a lot of cash to pay for cold storage charges, which many traders can not afford. On the other hand, aratdars have to have enough spaces in big cities (where land price is very high) for auction to take place and giving shelter to the visiting beparis. These entry barriers brought excessive margins and profits for these two middlemen. However, before saying this, one should bear some caveats in mind. High profit of potato cold storage traders can not be taken for granted every year. Table 5: Comparison of Margin in Selected South Asian Countries Sources: a Estimated from Table 3 and 4; bsidhu (1997); C Sabur (1990); Wadkar et al (1994); and e Chatha and Kaul (1984) If off-season prices go down for any reason (e.g., good harvest of potato and resulting big storage in home and release in off-season or good harvest of vegetables that substitute potato), they have to suffer a colossal loss. Aratdars' profit rate was calculated on the basis of only tangible costs in this study. They provided lots of intangible but valuables services (e.g., security of the beparis ), cost for which could not be assessed in monetary terms. 2. Comparison of Margins In Table 5, we compared total distribution margins (as a percentage of retail price) for the major distribution channel (farmer-faria-bepari-aratdar-retailer-consumer) of potato and banana with those of some perishables in some South Asian Countries. Total margin, as well as cost and profit shares to margin of perishables in other South Asian countries were found similar or in some cases higher than those for potato

6 and banana in Bangladesh. Profit shares to margin for all vegetables and mango in India were higher than cost shares. Potato margin was found little higher in India (45%) than that in Bangladesh (40%). Margins in Nepal and Pakistan were also found more or less similar to those in Bangladesh and India. V Conclusion Contrary to the conventional claims, necessity of longer distribution channel in Bangladesh was found economically rational. The faria, who are usually doubted to be an extra linkage, were found to have been enduring in the system by shouldering risk and economizing marketing cost. No explicit causal relation between length of channel and marketing margin was observed. Middlemen (except aratdar) involved in longer distribution channel such as farias, beparis and urban retailers were found to have generated reasonable margins and earned competitive profits. Barriers to entry at potato cold storing and auctioning businesses were found to have been a major reason for higher margin and profit. However, total distribution margin as a percentage of consumer price for the major distribution channel was found reasonable compared with that for perishables in South Asian countries. This study identifies the following issues for future investigation in order to improve the existing fruit and vegetables marketing system in Bangladesh. Firstly, potential for institutional credit to the potato farmers to check huge harvest sale and resultant high seasonal price variation and trade profit can be examined. Secondly, the prospect of development of institutions that can contribute to reduce trade risks and transaction costs (e.g., market information service and public wholesale market for transparent and rational price formation) can be investigated. Finally, scope of reducing transportation and wastage costs and promoting entry and competition through public investments in infrastructure (road, marketplace, communication, storage and processing plants etc.) can be recognized. References [1] Chatha, I.S. and J.L. Kaul (1984): "A Study into The Marketing Margins of Potato Crop in Punjab," Indian Journal of Agricultural Economics, Vol.39, No.3, pp.210. [2] Chowdhury, N. (1992): Rice Markets in Bangladesh: A Study in Structure, Conduct and Performance, A Report Submitted to the Government of Bangladesh, USAID and IFPRI. [3] Harriss, B. (1979): "Post-harvest Rice Processing System in Rural Bangladesh: Technology, Economics and Employment," The Bangladesh Journal of Agricultural Economics, Vol. 2, No. 1, pp [4] Hayami, Y. and Kawagoe, T. (1993): The Agrarian Origins of Commerce and Industry A Study of Peasant Marketing in Indonesia, New York: St. Martin's Press. [5] Sabur, S. A. (1990): Price Spreads and Price Structure of Vegetables in Bangladesh, Dhaka: Department of Agricultural Economics and Rural Sociology, Bangladesh Agriculture Institute. [6] Sato, K. (1998): Diversification of Vegetables and Fruits Distribution Channel and Marketing Strategy of Production Centers (in Japanese), Yokendo. [7] Sidhu, D.S. (1997): "Measures to Enhance the Efficiency of Agricultural Marketing Systems: Case for India," In: Marketing Systems for Agricultural Products, APO Seminar Proceedings, Tokyo: Asian Productivity Organization. [8] Wadkar, S.S., J.M. Talahi and G.G. Thakare (1994): "Price Spreads and Market Channels of Alphonso mango in Ratnagri and Sindhurg Districts of Konkan Region in Maharastra State," Indian Journal of Agricultural Marketing, Vol. 8, No. 2, pp [9] Williamson, O.E. (1975): Markets and Hierarchies, New York: Free Press.