THE ROLE OF MIDDLEMEN IN AGRICULTURAL MARKETING: MYTHS & REALITY
(Lecturer, Dept. of Marketing & Agribusiness,
University of Agriculture, Faisalabad) & Dr. Khalid Mustafa
(Professor & Chairman, Dept. of Marketing & Agribusiness,
University of Agriculture, Faisalabad)
June 30 - July 06, 2008
An efficient marketing system means availability of quality inputs and outputs at desired place, at right time and in the suitable form which is not possible without strong infrastructure support, efficient transportation (especially for perishables), processing, grading and storage facilities. Generally, these physical marketing facilities lack in our country. In Pakistan, agricultural markets handle a substantial volume of produce. But as production and incomes have increased and consumers demand high quality products, most of the markets do not cope with the emerging requirements and have come under increasing strain and need improvement.
Many marketing inefficiencies like lack of market intelligence, insufficient infrastructure, exaggerated role of middlemen, adulteration, hoarding and profiteering, excessive rates of various services, collusion amongst traders to suppress prices, and mismanagement of input and output markets are some of the main problems which leave a small amount of marketable surplus. Meager marketable surplus of small farmers together with their weak financial position makes it difficult for them to withhold the produce for better prices, while the remoteness from the organized markets generally influence farmer's decision to sell locally at comparatively low prices. It is estimated that producers of farm products in Pakistan get 65% of the consumer price for their non-perishable commodities and 25-55% for perishables.
Middlemen are usually held responsible for farmer's low share in the consumer rupee and are blamed for exploiting the farmers. Government is usually urged to eliminate or minimize the role of middlemen from the marketing chain for increasing welfare of both the consumer and producer. The role of middlemen acting as a link between producers and consumers is very complex and needs an in depth analysis before concluding any results. Mostly they operate in the markets and coordinate producers with consumers under different terms and conditions. Village dealers, pre-harvest contractors (in fruits), commission men, brokers, wholesalers and retailers etc. constitute this group in our country.
The productivity of marketing system in any country is usually measured by the amount of usefulness the system adds to the agricultural products. This usefulness is often referred to as "utility" by economists. Alternatively, the role of marketing is to add utility and hence value and desirability to a product. These utilities are related to form, place, time, and possession. Middlemen are the individuals/institutions who specialize in performing various marketing functions involved in the purchase and sale of goods, as these move form producers to consumers. During this process, middlemen should create and add "utility" in the marketing system.
Middlemen provide many services but their role is considered as exploitative. It is assumed that middlemen get very high margins but their share is generally justified by considering provision of additional services and risks, which they usually undertake at each stage of marketing system. The marketing margins shared by middlemen consist of two elements viz. explicit costs and profits. Explicit costs consist of all the costs incurred by the middlemen in the performance of marketing activities and profits include the income accruing to them in addition to their costs.
An analysis of the marketing margins and marketing costs provides interesting insights into the working of the markets and can help to identify priority areas for improvement. Whereas the marketing margins provide an understanding of the spread between the producer and the consumer prices, marketing costs reveal inadequacies in the marketing structure and suggest, for example, the need for greater vertical integration of marketing functions. According to the Report of National Commission on Agriculture (1988) a significant proportion of food grain crops is sold in the villages to shopkeepers, itinerant merchants and others who purchase the produce during harvest to sell subsequently in the regular markets at higher prices. These village sales are usually disadvantageous to the producer because of unfair trade practices prevalent in these markets and lack of avenues for redress of any grievances the producer may have.
The wholesalers and commission agents in the regulated markets constitute key intermediaries for several products especially food grains not subjected to the Government support prices. In the case of cash crops, the concerned processing units, ginning factories, rice shellers, sugar mills or tobacco companies are the main agencies to whom growers sell their output.
The utility of the institution of middlemen in the marketing system can neither be denied nor eliminated. The main problem stems from two things i.e. multiplicity of middlemen and abnormal profits. In the agricultural marketing system of Pakistan, the prevalence of middleman exceeds than their required level. There are many middlemen who do not add any form of "utility" in the system but simply earn by changing hands due to price movements and poor staying power of farmers.
In reality, the exploitation of farmers at the hand of the middlemen is due to their ignorance of marketing and its functions. Majority of our farmers are illiterate and unaware in post harvest management of their produce like cleaning, sorting, grading, storage and proper packing. Post harvest losses which generally range from 25-40 per cent in fruits and vegetables are an outcome of the farmer's lack of awareness in performing various functions after the crop harvest. Consumer prices rise in addition due to the hidden quality losses. These losses bring low return to growers, processors and traders and the country also looses in terms of foreign exchange earnings.
Agricultural marketing today means more than linking the producer with consumer, it includes creation of favorable economic environment for farmers to enthuse him to grow more and get proceeds from transactions. Many alternative forms, such as, group marketing, contract marketing, futures trading, and direct marketing are in wake to enable the producers to maximize their share in consumer rupee and delivering quality produce at affordable price to consumer. Agricultural produce markets are nerve centers from where marketing impulses are transmitted to put all the marketing activity on track and safeguard the interest of both farmers and consumers.
Soon after harvesting, farmer intends to shift the produce to market, as early as possible. Farmer expects an environment to market the produce, where his decision should not be effected by any other variable factor or forces and is assured of a competitive price. This objective is enshrined in the creation of regulated market. In the management of these markets, a farmer representative serves as a member and this gives him a sense of belonging in the market, which makes the market environment more conducive for completing the transactions. Marketing environment includes, required infrastructure for efficient handling of the commodity, such as covered auction platform, tested and trusted weighing machines, cleaning, grading and storage / cold storage facility, loading and unloading facilities, internal roads to decongest the vehicular movement, pledge finance availability, banking, postal services, cattle-shade, farmer's rest house and link road from farm to the market.
The traditional marketing system of farm produce has paved way for other alternative marketing system, which is more need based and sometimes suits the individual partners in the trade. The need for alternative marketing of farm produce is to reduce the distributive system. Another reason is to explore the possibility of bringing the buyer to the production place that is, bringing the market at farm. The role of middlemen in the marketing of farm produce may be optimized by adopting the following systems.
a) GROUP MARKETING: Group marketing includes, joint planning, funding, implementation, pricing, sharing risk equally in the marketing and reaping the benefit of collective bargaining. This indirectly results into more returns and economizes the marketing cost. Group marketing is specifically designed to develop entrepreneurial skill, improve bargaining power, reducing the risks involved due to price uncertainty, making available bulk supply and reduce the marketing cost.
b) COOPERATIVE MARKETING: Cooperative marketing system may be pursued through cooperative societies. This system is pursued on the principle of "self help" i.e. one for all and all for one. It reduces the marketing cost, enhances bargaining power and ensures equitable distribution of the proceeds. Presence of marketing cooperatives makes the market more competitive and ensures better returns to the producer. This system is owned and managed by the farmers themselves for their own economic betterment and enhancing marketing efficiency. The basic purposes of Cooperative Marketing is to improve bargaining power of the farmer members, to get quality input, to enhance profit, to have backward and forward linkage for collective ownership of marketing infrastructure such as cleaning, grading, storage, processing, etc., for collective distribution and credit accessibility.
c) DIRECT MARKETING: Government should encourage the concept of direct marketing in the country by facilitating the farmers by arranging farmer's market enabling them to come into direct contact with consumers and receive payment directly from consumers. Direct Marketing is performed to make the marketing channel shortest, to reduce marketing cost and maximizes farmer's share in consumer rupee by direct communication with consumer / buyer. It requires minimum infrastructure, Understanding of consumer requirement and for the availability of fresh and quality produce within the shortest reach of consumer.
d) CONTRACT FARMING: Contract farming is another option that needs special attention of policy makers. Contract farming is a type of farming wherein the industry or perspective buyer enters into a contract with the farmer and promises to buy the farmer's produce at a pre-negotiated price under pre-negotiated conditions. Besides, the buyer agrees to supply the required farm inputs at the required time. In this process farmers are assured of an established market and a fixed price for their produce. The buyers would be able to procure the produce of a specified quality at much cheaper rate. In Pakistan, the new wholesaling and retailing concepts are also taking root. Metro and Makro companies have started their business. Other investors particularly sugar mills, maize and tobacco processors should be encouraged to step into this business that in turn shall encourage contract farming culture in the country.
Although, some changes in the existing agriculture marketing system are required yet there is pressing need to provide training in agricultural marketing operations to the farmers, market intermediaries and staff of market committees. Training will enable farmers to get better economic return for their produce and save them from exploitation at the hands of the middleman as they would be aware of the means and methods by which intermediaries try to under-weigh and pay less to farmers. Secondly, by knowing economic significance of every bit of their product farmers will endeavour their best to lower down post harvest losses. Market intermediaries will be able to handle the produce properly and provide necessary services to the resellers and buyers. The staff of the market committees will be able to properly regulate the markets.