Farm Prices and Agro Industries

For many processed agricultural products the domestic market is characterized by a concentration of buying power - monopsony or oligopsony - either nationally or in regions within the country. Invariably, these are products that are milled or otherwise processed before reaching the consumer. A few of the most common examples include cotton, sugar, milk, rice, wheat, coffee, rubber, palm oil, tea and jute. The high unit cost of transportation, relative to the value of the raw product, makes it impractical for farmers to deliver their harvests to processing facilities located in distant parts of the country - much less to destinations abroad. Therefore, the local facilities frequently enjoy a quasi-monopsonistic position which gives them considerable power over prices of raw products.

This kind of issue is worthy of the attention of policy makers, given the importance of agricultural incentives for development, but it represents a difficult challenge. A free trade policy can help

85. See Octavio Damiani, 'Small Farmers and Organic Agriculture: Lessons Learned from Latin America', Office of Evaluation and Studies, International Fund for Agricultural Development (IFAD), Rome, 2002.

87. Luz Amparo Fonseca, 'Los mercados de frutas y hortalizas: Colombia frente al ALCA', mimeo, Bogotá, Colombia, 2002.

place an effective cap on the prices which processors charge to consumers, but it has no effect on the prices that they pay their suppliers. There are three approaches to this problem which can improve the situation to a degree, although none is a panacea:

(1) Producers' ownership of selected processing facilities. Facilities owned by the primary producers can offer a better price for the raw material, subject to the limits imposed by profitability considerations, and they can set an example in pricing policy for other facilities. Ownership can take the form of cooperatives, corporations or other types of proprietorship. Dairy co-operatives have had an illustrious history in countries such as the Netherlands, Canada and the United States, and they also have been formed in many lower-income countries. Producer ownership of some rice mills has been found to be effective also, in Peru, Guyana and other countries. In El Salvador, State-owned sugar mills were privatized in the early 1990s under the requirement that 55 % of the shares be transferred to cane growers.

(2) Anti-monopoly legislation. Legal remedies for cases of abuse of the power of monopolies and oligopolies, and monopsonies and oligopsonies, can be made available, and should be. Nevertheless, proving abuse is likely to be a cumbersome, uncertain process, and the difficulties of doing so should not be underestimated, especially in circumstances where judiciaries are relatively weak.

(3) Pricing agreements endorsed by the government. In particularly difficult cases, it may be necessary for the government to apply 'moral suasion' and broker price agreements between associations of farmers and of co-operatives. There are political costs associated with risking the government's prestige in this way, and there also is a risk of introducing addi tional distortions in the market, and so it is not a step to be undertaken lightly, but if there appear to be clear-cut cases of abuse and no other solution is in sight, then such an approach may be useful.

In sub-sectors with multiple processing facilities, it would be justified to provide credit, through rediscount lines, to assist producers to buy one of them or construct a new facility of their own, to help change the market structure to one in which pricing more closely follows competitive patterns.

For the approach of tripartite price negotiations between producers, processors and the government, it is useful to have objective reference points concerning prices, such as international data on the relationships between prices of raw materials and processed products. Obviously, such relationships depend on many factors in each country, including the technical and economic efficiency of processing industries. Nevertheless, international norms may provide helpful points of reference. For example, a survey of all major sugar producing countries in the world conducted in the 1980s found an average ratio of 53.1% between the price of the sugar content of cane and the price of processed sugar.88 It may be argued that the most relevant ratio is that which applies to the more efficient producers, i.e. a given country's policy should not emulate that of the more costly producers. The above mentioned ratio was recalculated as 54.8 % for the 26 most efficient producing countries in the sample.

To illustrate how such information might be used, if a country's field costs were less than the international average (which was $193/mt in 1982, according to the cited study), and if the ratio between field costs and total costs were less than 54.8%, then an agreement might be reached to raise that percentage by a full or half percentage point per year, until the target level of 54.8 % were

88. William McNally, Wilfred David and David Flood, Sugar Study, prepared for the Agriculture and Rural Development Department of The World Bank, Washington, DC, USA, July 1984. In calculating this average from their study, a sample of 53 countries was used, leaving out three extreme outliers that may have been the result of numerical errors.

reached. Such increases would cease if the field cost of sugar rose to the international average. This is only an example; more up-to-date data should be utilized. International organizations such as the FAO could assist in disseminating international information on this kind of price relationship.

There is a third approach which indirectly may assist producers to receive a better price from processors, and that is the previously mentioned policy of implementing product grading standards and a system of price differentials by grade. At first, some producers may receive lower or unchanged prices under such a system, but improvements in the quality of their product would eventually bring them better returns.

While producers and agro-processors may be opposed on price, co-operation among them can bring benefits in the form of lower transaction costs, higher quality of raw produce, and consensus on areas in the production and marketing chain that most need improvement and policy assistance. The approach of 'agricultural product chains' (cadenas agropecuarias) has yielded these kinds of benefits in Colombia.

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