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Marketing margin analysis of flowers in Sindh

By Ali Muhammed Khushk & M. Ibrahim Lashari
Aug 27 - Sep 02, 2001

The objective of this article is to report preliminary research findings that describe the structure and operation of the flower marketing system and to quantify the marketing margins of producers and other marketing intermediaries and assesses ways to improve the producer share. In addition, result of the present study would help the producers, market intermediaries and other organization agencies to frame a dynamic horticultural development policy.

Flowers are always remained a favourite of both upper and lower society of Pakistan, since the earliest period of history. Virtually no other gift can be compared with flowers in colour, fragrance and form. It serves as a symbol of perfection, elegance, purity and love. It is found in various writing, poetry, painting, architecture and customs etc. Not only flower a source of inspiration and pleasure but also at the same time it is useful in many ways. For example "Altar" of rose obtained from rose petals, is perhaps the most valuable of all scents and it forms the basis of most superior perfumes. In Pakistan, cultivation of flowers is increasing day by day, particularly in area adjacent to big cities, there is an ever growing demand of fresh flowers for garlands, bouquets, wreaths and for a number of other uses associated with several social and religious ceremonies. Flowers are not only cultivated for domestic purpose but also for export. The dried flowers are being exported to U.S.A and other countries. The essence of dried flowers are taken out in these countries and used for flavour in various food products.

The flower farming is neither capital intensive nor labour intensive as compared to other horticultural (vegetables) crops rather, it lies in between the two ends with the skilled labour force and modern farming techniques, it has been proved that the investment in this sector yields high returns. The flower farming is being realized and it is evident from the increased number of nurseries, green houses, flower markets and flower auction centers and the sale of cut flowers turn out to be about 10,000 to 12,000 tons per annum (EPB, 2000).

It was reported that flowers farming system has been passed down from previous generations and still dominant among the growers in Sindh. The traditional methods are commonly used in flower cultivation and flower fields are not mechanized. They also possess great scope to increase export to many countries; cut flowers have plentiful market demand in the Middle East and European countries.

Methodology

This article is based on Primary data collected from a survey of flower producers, market intermediaries in production and consumption markets. Hyderabad district was selected for this study because it is considered the main flower growing area. In Sindh flower growing area is particularly located in Hyderabad district. The (Hatri) near to Hyderabad was purposively selected as a representative study area. The price data were collected from various market intermediaries.

Initially an informal survey of flower producers and market intermediaries in various markets in the study area was carried out to gain an understanding of the existing marketing system. Open-ended interviews were held with representatives of each category of respondents to identify key issues and variables. Sampling frames for each category of respondents were prepared and interview checklist and general questions were refined. Formal interviews were completed with the following samples: Producers 50, kanthy wallah, 10, commission agent 10, wholesaler 10 and retailer 10 respectively.

Market margin analysis

Marketing margin are the differences between prices at two market levels. Marketing margins have been examined on the basis of data obtained on prices at different stages of the marketing chain. Marketing margins have been calculated through computing the absolute margins or price spread, which is essentially the same as the difference between the price, paid and received by each specific marketing agency . The following formula has been used to compute percentage marketing margins as earned by each market intermediary in the marketing of farm products.

Mm = (Ps x 100) / Sp

Where. 'Mm' indicates the marketing margins earned by a specific agency, 'Ps' stands for price spread availed by that agency and 'Sp' represents sale price of the same agency for the same commodity.

Net margin

The net margin of a specific agency is the net earnings, which it earns after paying all marketing costs. Net earnings of various market agencies involve in the marketing of flowers has been computed with the following formula.

Nm = Ps - Mc

Where 'Nm' stands for net margin. 'Ps' indicates the price spread availed by the specific agency and 'Mc' represents marketing costs incurred by the same agency.

Breakdown of consumer's rupee

Breakdown of consumer's rupee is a phrase applied to the manner in which a consumer's one rupee expenditure on a particular commodity is divided among the producer and marketing agencies. It shows that portion of a consumer's rupee which goes to the producer, or is earned by various marketing agencies such as contractors, commission agents, wholesalers and retailers. This was calculated by expressing the net margin of a specific agency as proportion of the retail price. The following formula was used to determine the breakdown of consumer's rupee.

Bdcr - Ps / Rp

Where 'Bdcr' stands for break down of consumers rupee spent on specific commodity, 'Ps' indicates price spread and 'Rp' represents retail price.

Marketing costs

The marketing margin indicates the amount received by the different marketing agencies for providing their services. The next stage of the analysis is to determine whether these Margins are responsible in relation to their services provided. Therefore, it is essential to calculate the 'costs' of these agencies. Marketing costs are the expenditure incurred by various market intermediaries from the time when commodity leaves the farm until it reaches the consumers. Such costs are necessarily incurred to create form, time, place and possession utilities in the products to make them marketable. Marketing costs indicate the actual expenses of a marketing agency including fixed and variable costs. These costs was incurred by the producers and other marketing intermediaries and have impact on prices as well as on the margins of the market intermediaries.

The major cost components included grading, packing, loading, unloading, transportation, commission charges and market taxes. These cost has been computed on a per 40 kg basis. Each marketing agency was inquired about the amount it spent per 40 kg and the cost of each agency was calculated by using the following formula.

MC = As + qh

Where MC" stands for marketing cost of a specific unit quantity, 'As' for actual amount spent and 'qh' represents quantity handled and all these marketing costs were calculated in this way except for commission charges. To calculate commission charges, the following formula has been used.

Cc = (Sp x Rc) + qm

Where Cc' stands for commission charges 'Sp' denotes sale proceeds of marketed "Rc' represents rate of commission and 'qm' quantity marketed.

Flower marketing system

Awareness of marketing concept is a vital and dynamic element in economic development has greatly been increased in the developing countries during the last three decades. In Pakistan, there is a lack of comprehensive information on the horticultural crops particularly on flowers marketing system because it has been never studied. Questions about the efficiency with which the marketing functions are performed have only been answered hypothetically. There is a growing need to investigate the efficiency and competitiveness of the marketing system. The primary objective of this research is that empirical information about the flower marketing system can be provided to policy makers for appropriate policies to be formulated. This paper hopes to answer one of the most important questions that are "what are the marketing channels available for producers".

Marketing channels

Agriculture marketing channels are concerned with the concept of "marketable" or "marketed" surplus of farm commodities that enter the process of circulation and exchange. The purpose of exchange of commodities for money and vice-versa is to have access to a variety of products. Here agricultural marketing channels refer to the outlets or routes through which commodities pass to reach final consumers. In the study area, flowers' marketing is carried out by individual, private organizations and exporters are the principal market agencies. The existing flowers marketing channels have been identified and their brief functions are described here under:

Producer

Flower cultivation is carried out by a large number of producers who are geographically dispersed in various locations in Sindh. Flower producers, in general, belong to farming families and their farm could be either inherited or purchase A large majority of the flower producers, 80%, sold their produce to the kanthy walla. Only 12 per cent sold their produce to the contractor, and 8% of the wholesaler mainly with the hope of getting better prices.

Contractor

The contractor performs a key role in the marketing of flowers. It can be described as merchant middleman buying the produce from farmers and selling in the market. The contractor is a local man who belongs to the farming community and possesses enough knowledge about the market conditions. During contracting of flower field the contractor estimates its yield and considers expected costs to be incurred for supervision, labour, transportation and marketing. The seasonal losses in harvesting, handling and marketing process were estimated about 12 per cent. Each contractor usually maintains close contact with the wholesale or processing factories. Survey results show that more than 90% of contractors obtained loans from a wholesaler to pay the initial installment to flower producers and to pay an advance for labour and packing material. Only 10% of contractors managed these expenses from their own resources.

Kanthy Wallah

Kanthy wallah are small-scale traders who, normally do not involved in supplying inputs or credit. He assembles small amounts of flowers, which he sell direct to wholesaler or processing factories. Their name derives from the Urdu word kanta, which means to weight. They locate themselves temporarily at strategic road junctions in the rural areas, often close to a teashop.

Because of the small quantities involved kanthys generally buy from growers who have cultivated flowers at small scale, from hired labourers. Kanthys do not themselves arrange for transport from the farm gate, this is by their supplies. They do, however, arrange transport from their site to the wholesaler and processing factory.

Wholesaler

Wholesalers buy and sell large quantities of farm products. Usually they perform their business in wholesale markets. They deal in several commodities such as fruits, vegetables and other agricultural produce within inter-regional markets and also supply produce to processing industries, exporters and retailers according to their demand. They maintain contacts with commission agents in wholesale markets and retailers in the local area. A wholesaler usually purchases flowers from the kanthy walla and sells in smaller quantities to the retailers and consumers. They mostly buy from kanthy walla on a credit basis and about one-week after selling that quantity, they pay the kanthy walla.

Retailer

All market activities come to an end with the retailers. They buy and sell small quantities according to the demand of consumers in the area. They maintain direct contact with consumers and make transactions according to the qualitative and quantitative aspects of the products. A small number of flower retailers occupy small shops in the main street or in the town. Majority of flower retailers are hawkers, selling through hands. They move from one place to another places of a town. Among the retailers there is a high degree of competition. Retailers buy flowers from the wholesalers on a credit basis. They repay that amount to the wholesaler the next day, after selling that quantity.

Marketing margin analysis

Marketing margins are the differences between prices at two market levels and are commonly used to examine the differences between producer and consumer prices for a commodity. Marketing margins represent the price charged by market agencies for their services including buying, packing, transportation, storage and processing. Under competitive market conditions, the market margins are the result of demand for marketing services and equal to the minimum cost of services provided plus normal profit (Scarborough &; Kydd, 1992).

In order to measure market margins, data on flower prices were obtained at various stages in the marketing chain. It is very difficult to come up with a unique solution for the price to be used. There are many complications in formulating standard prices, which can be summarized as: (a) day to day variation of prices, (b) variety differences, (c) grade differences, (d) price variation over the time (e) price differences in consumption and production areas. Such problems have been resolved by collecting prices of rose, which may cover most of the above conditions. The price of rose was collected on a per 40 kgs basis. The prices were collected weekly during the flowers harvesting season from assembly, wholesale and terminal markets and from different marketing channels. At the same time information on the retail price of flowers was collected from the same city from the retailers and shopkeepers. Simple analysis of mean prices on a per 40 kgs basis were calculated and presented in (table 1).

Table 1.

Sale Price of Rose at Different Market intermediaries (Rs/40 kg)

Market agency

Early morning

Late morning

Total

Producer

480

400

440

Contractor

600

500

550

Kanthy wallah

650

550

625

Wholesaler

680

590

650

Retailer

800

800

800

Source: Survey data, 2000

The above results show that flower producers has received better prices if they picked early crop in the morning. There is similar pattern for wholesalers and contractor they received higher prices in early morning.

Share in consumer's rupee

The consumer's one rupee expenditure on a particular commodity is divide among the producer and other market agencies. This indicator shows that portion of a consumer's rupee which goes to the producer and that earned by the various marketing agencies. This was calculated by expressing the absolute cash margin of the agency as a proportion of the retail price of the specific commodity. The producer's share in consumer's rupee (on final retail price) was calculated on a per mds (40 kgs) basis. When producers sold the produce to a kanthy walla, the maximum producer share in consumer's rupee was 60% in early morning and 50% in the late morning. The overall producer's share was 55% (table 2). These results are higher to the results obtained by Memon, 1978, Siddiqui, 1979 and Mohy-ud-din, 1989. They calculated the producer share of fruit on a per maund (40 kg) basis, as 22% 27%. The main reason for receiving lower margin in fruits marketing was found that most of the producers contract out their fruit orchards at the time of flowers.

Table 2.

Percent Share in Consumer's rupee among Market Intermediaries

Market Agency

Early morning

Late morning

Total

Producer

60

50

55

Contractor

15

13

14

Kanthy wallah

6

6

6

Wholesaler

4

6

5

Retailer

15

25

20

Consumer

100

100

100

Source: Survey data, 2000

Marketing costs

One way of defining marketing costs is as all expenses incurred in organizing and carrying out the marketing process. Another definition is as the charges, which are paid for any marketing activity such as, assembling, transportation, storage grading processing, wholesaling and retailing. The most important factors which influence marketing costs are: distance between production and consumption markets, condition of the roads, seasonality, perishability, packing, storage and processing (Smith, 1992). For this study marketing costs of flower were computed at each stage of the marketing chain on the actual expenses incurred.

The production cost of flower were estimated to be Rs. 150 to 160 per 40 kgs which includes ploughing, farm yard manure (FYM), fertilizer, pesticide and interculturing during the year. Also costs of contractors were estimated to be Rs. 60. Wholesaler had cost of Rs. 17 per 40 kgs, this is due to cost of transportation from auction floor to their shop, rent of shop, storage and license fee. Finally retailers had costs of Rs. 58 per 40 kgs, because transportation of cost produce from wholesaler to their local area and rent of shop or etc. (table 3).

Table 3.

Marketing costs of Flower Producer and other Market Agencies (Rs/ 40 kg).

Market agency

Early morning

Late morning

Total

Producer

160

150

l 55

Contractor

60

60

60

Kanthy wallah

30

25

28

Wholesaler

15

18

l 7

Retailer

45

70

58

Source: Survey data, 2000

The researcher in collection the marketing costs from the market agencies encountered a few problems. These problems are briefly described here:
(a) the first and probably the major problem in collecting the required information were the lack of available written records of the producers and other market intermediaries. In some cases, where written records were maintained, it was out of reach from the research workers. Therefore, an extensive cross checking of information was exercised with neighbouring, in order to reduce the margin of error.
(b) It was observed that, there was general hesitation on the part of respondents to answer most of the questions relating to their costs and profit margins in their business. Various interesting topics of current public debate such as increased taxation of the agricultural sector and the likely enforcement of measures by the government for marketing the tax recovery system more effective, were probably the major factors contributing to the added hesitations of the respondents to give most of the required information. Consequently it involved a lot of time and effort on the part of the research worker to gain a fair degree of confidence of respondents and hence to obtain from them the required information.

Net profit margin

The net margin of a specific agency is the net earning which it gains after paying all marketing costs. The net profit margin of producers was calculated as sale price of flowers in the market minus production costs. Whereas, net profit margin of kanthy walla was calculated as profit on sale revenue minus purchase price and regular expenses. Finally, the net profit margin of wholesalers and retailers were calculated as sale price minus purchase price and other marketing costs (table 4).

Table 4.

Net Profit margin of Producer and other Market Intermediaries (Rs./40kg)

Market agency

Early morning

Late morning

Total

Producer

320

250

285

Contractor

60

40

50

Kanthy wallah

20

25

23

Wholesaler

I 5

22

18

Retailer

75

130

102

Source: Survey data, 2000

To examine the above indicator in a broader perspective, other studies on regional and national level on fruit and vegetables were reviewed. Abid, (1980) studied the major fruit (date, banana, and onion) in Sindh province and estimated the producer share as 20, 15-22 and 22-24 per cent respectively. Siddiqui (1979) also covered the major fruits and vegetables in Sindh. banana, dates, guava, papaya, chillies, onion, potato and tomato were studied. He estimated the producer share in consumer's rupee for fruits as 24, 15, 27, 32, and in vegetables, 45, 32, 32, and 29 per cent respectively. Memon, (1978) also covered the major fruits of Sindh and furnished the same conclusion that producers receive the lowest share of the consumer's rupee. He estimated the producer share in the case of flower, banana and dates to be 22, 23 and 24 per cent respectively. This low margin of producers is the result of their act that most of them sold their fruits orchards to the contractors at the flowering stage. The costs and risk born by the contractors in this case.

Conclusion

Marketing system analysis showed that government has left all marketing activities and export of flowers to the private sector and there is no restriction of its movements from one place to another place. Thus, it can be concluded that flower marketing system is not perfectively competitive, but it is sufficiently competitive to prevent market traders from reaping excessive margins. A large number of buyers and sellers participate and none is able to corner exclusive access to large supplies. There is competition at each stage of the marketing chain. No strong evidence was found of collusion among market agencies with price at each stage normally set by supply and demand factors, and no intermediaries are able to manipulate prices. Spread of information regarding quantity and price is rapid amongst all agencies.

Recommendation

In the current environment flower marketing system is working relatively efficient given the constraints is an importance are and should be used to protect the sector from further regulation or other government intervention. However, public investment in all forms of infrastructure is justifiable to reduce transaction costs and risk faced by the flower producers. Natural factors including good climate, soil and sufficient irrigation and manpower are favourable to produce good quality flowers. There is a need to strengthen this sector by improving management practices and reducing post-harvest losses. Government must make considerable effort to expand existing facilities such as, transportation, credit, communication network and infrastructure development, in order, to facilitate the private sector ability to respond to opportunities created by expanding domestic export demand.

There is a need for collaboration between private and public development programmes to improve management practices, particularly use of available technology and focus on improving existing planting material keeping in view the demand for exportable quantity. Effort are needed to improve grading, packing and product presentation, that is, to educate growers and contractors and show them why their profits are reduced by not following proper grading, packing and presentation.