2.1. Wholesale markets, price discovery and market integration
2.2. Benefits derived from the physical functions of wholesale markets
2.3. Economic benefits of wholesale markets
2.4. The challenge in promoting wholesale markets in Africa
2.5. Economic development and the role of wholesale markets
Wholesale markets improve efficiency in food distribution by encouraging competition through creating conditions for transparent price discovery at relatively low costs and by enhancing access to market information for various actors. Where multiple equilibrium prices occur for a single commodity because there are no wholesale markets, price transparency is undermined and transaction costs rise (the cost incurred by market participants in obtaining market information). Under such conditions, retailers have to deal directly with a large number of farmers, thus losing any gains from scale economies (Tracey-White, 1994). Wholesale markets therefore play a crucial role in the vertical coordination of food markets, equilibrating supply with demand and facilitating price formation. Their role reduces per unit marketing costs, promotes stable markets for local produce and encourages increased output and productivity.
Wholesale markets basically have to perform the following five functions cost-effectively:
The fundamental objective of wholesale markets is to improve efficiency in the food distribution pipeline. By centralizing transactions at a single location, reducing the period for transactions, and separating wholesale and retail functions in the distribution system, wholesale markets promote greater transparency and better price formation through a clearer interplay of supply and demand. Storage and handling conditions are also enhanced, leading to significant reductions in post-harvest losses (by about 30 percent in European experience), especially in the case of perishable produce.
Case study: Need for information systems in wholesale markets
Competitive market systems require sellers and buyers to be well informed about supply, demand and prices. Large, well-organized wholesale markets facilitate the attainment of this ideal situation by providing information on market trends, prices and quantities marketed. The information system providing this service not only enhances the efficient management of wholesale markets, but also acts as the basis for the sale of similar produce outside the market. The importance of information on market trends and prices is recognized in all countries with well-developed marketing systems.
Establishment of new wholesale markets offers special opportunities for setting up market information systems, with emphasis being placed on full, fast and reliable information. Full information in this context covers the quantities of produce marketed, stored and transported; the range of products, stocks, sources, destinations, varieties, quality and packaging; and market and price trends. The market can be described as truly transparent when such information is available. Reliability of information depends on the training, personal abilities, honesty and experience of reporters. Unqualified personnel with other responsibilities should not be entrusted with collecting and disseminating the information. Frequent cross checking of information should be undertaken, even when collected by qualified and trained staff since inaccurate or distorted information can harm the interests of producers and consumers. Speed in collecting, recording and disseminating data is vital in a competitive economy.
Competitive markets involve a large number of buyers and sellers transacting on the basis of available information. Large-scale operators, however, tend to have comparative advantage over small-scale operators in terms of investing in private networks and systems (formal and informal) that enhance access and capacity to process and store market-sensitive information. Small-scale operators often base their decisions on incomplete or even inaccurate information. The state has a key role in promoting efficient and reliable market information systems because competitive, effectively coordinated markets require that all market participants be perfectly and equally informed since basic information is a public good. This facilitating role of the state should be perceived as an ongoing process and not as a single act. It must also be seen in logical sequence to the fundamental decision to expand the economic role of the private sector and to the commitment to maintain competitive markets.
Source: Goossens, Minten and Tollens, 1994.
The physical infrastructure and facilities at wholesale markets facilitate the reduction of post-harvest losses and promote increased productivity by farmers through:
Wholesale markets also encourage:
In sub-Saharan Africa wholesale traders usually belong to relatively closed communities, united by strong social and ethnic bonds, with little competition among themselves (Wilhelm, 1994). Wholesale markets quite often are simply unplanned urban spaces with virtually no special facilities. It is common to find several such spaces in the same city and often located near retail markets. As a result there is usually no single distribution centre for major staple foods.
In the absence of efficient wholesale markets, price discovery upstream is influenced markedly by the interplay of relative bargaining power and relationships forged in terms of interlocked credit provision and trust between producers and traders. In addition to these factors, the purchasing power of urban consumers also contributes to price discovery downstream between retailers and buyers. The consequence of this situation is that there is no single equilibrium price, and price collusion and other predatory and exploitative practices occur as markets lack transparency.
Another compelling reason for promoting efficient food wholesale marketing systems would be to encourage greater involvement of supermarkets in the distribution of major staples purchased mainly by the poor (cassava, maize, sorghum, millet, rice, plantain, palm oil, dried fish, etc.). Supermarkets generally lack the organizational capacity to engage in collecting good quality staples from rural producers on a regular basis. Consequently, in the absence of efficient wholesale markets, they concentrate on serving the relatively more profitable niche, the rich whose food needs can be met from urban importers and peri-urban fruit and vegetable producers. Wholesale markets for staple foods would encourage large supermarkets to extend their operations into low-income areas. The involvement of supermarkets in food distribution would potentially not only lead to significant cost reduction but also contribute to relieving congestion in retail markets located in city centres.
The type of produce distributed and the level of economic development influence the role of wholesale markets. The greater the extent to which farmers aim at producing surplus, the more crucial the role wholesale markets play in vertical coordination of food marketing. In promoting the commercialization of agricultural production, economic development also tends to encourage farmers (especially large-scale farmers) to enter into contractual relations with traders, thereby being increasingly integrated into the marketing chain. This process begins with farmers adapting produce and sometimes husbandry practices to specifications of customers (supermarket chains) and develops into long-term direct contractual links which bypass wholesale markets. Producer prices are usually agreed or contracted in advance (either fixed or determined on the basis of an agreed formula). In such circumstances, even though the market may account for only a fraction of the total volume of trade of a given product, wholesale market prices usually constitute the reference prices.
The coordinating functions of markets may not be very relevant in two extreme cases. At one extreme is the subsistence farm household where the producer-consumer packages his harvest for household consumption and stores it over a period depending on the shelf-life of the particular produce. At the other extreme is the producer with a production and sale contract specifying terms and conditions for delivery to a specific customer with details including quantity, quality and price. In both cases, the market mechanism has no significant place in coordinating production and consumption, since coordination is already fully assured. A coordinating role of the market, however, is really crucial in situations that lie between these two extremes. Wholesale markets often evolve from general into more specialized markets before gradually declining in significance. In many industrialized countries wholesale markets play a significant role only in the marketing of horticultural produce.
Case study: The need for cassava wholesale markets in Kinshasa, Zaire
Most wholesale markets have been built for perishable produce, especially for fruits and vegetables, since such items have to be marketed quickly and efficiently. Cassava chips, the main source of food in Kinshasa, cannot be stored beyond one month and is therefore considered a semi-perishable commodity. Kinshasa is unique in the scale of its cassava trade and in the clear need for wholesale markets for cassava. The total annual consumption between 1987 and 1989 has been estimated at 1 132 000 tonnes of fresh cassava tubers or 275 000 tonnes of flour (equivalent to 7.1 kg of flour per person per month).
Currently, there are 55 open spaces used as sub-wholesale markets and more than 100 retail markets in Kinshasa but there are no wholesale markets. Sub-wholesalers, whose activities invariably include retail trading, often use sections of some retail markets. While such arrangements pose no major problems on a modest scale, they have become highly inefficient and expensive in light of the rapid growth in the population of Kinshasa from 400 000 to 4 million. The existing system cannot cope with the demands of the growing city.
Since 1984 the real sub-wholesale price of cassava has remained stable or even declined, while the retail price has risen markedly in real terms, primarily as a result of increased distribution margins in Kinshasa. This situation in turn can be attributed to the growing number of retailers and also to increased transport costs owing to rising fuel prices. Many women have entered retail trading to supplement family income leading to lower volume of sales per retailer. At the same time, the demand for such marketing services has fallen because of a fall in real incomes (many consumers form groups which buy from sub-wholesalers, thus excluding retailers). The poorest consumers, however, buy in very small quantities from micro-retailers in their suburbs.
In 1991 the average daily sales of cassava chips per retailer was 1.07 bags. On average, the retailer bought 2.9 bags at a time from a sub-wholesaler, taking 2.7 days to sell. Overheads, such as table rental, taxes and credit charges, increase the cost of each unit sold. An improvement in the economy and increased employment opportunities can lead to a decline in the number of retailers and an increase in the demand for marketing services. The consequent rise in the volume of sales per retailer can contribute to an overall fall in per unit distribution costs. There is no obvious solution to the problem of reducing distribution costs in Kinshasa since it is not easy to improve efficiency in food retail activities. Cost savings by sub-wholesalers can only lower costs when distribution margins, especially at the retail level, remain constant.
Wholesale markets can contribute to lower distribution margins if there is an efficient transport system linking wholesale and various retail markets. State intervention in this regard has to be limited to maintenance of roads and infrastructure since the provision of transport services is clearly the responsibility of the private sector. If the wholesale market handles large volumes of produce, there will be considerable economies of scale, encouraging the involvement of more transporters in the movement of goods between wholesale and retail markets. Competition is expected to improve the efficiency of transport services and lower costs.
Since promoting a cassava wholesale marketing system in Kinshasa would be a novelty in Zaire and sub-Saharan Africa, the process would naturally involve some risks. The biggest question is whether traders would patronize the new wholesale markets or continue to operate within the existing system only. Related to this are issues concerning perceived benefits for both buyers and sellers. Furthermore, would increased turnover and better market services be sufficient to induce transporter-traders and other traders to participate in wholesale markets? Would marketing costs fall sufficiently to encourage lower food prices? Experience from other countries suggests that it takes a good deal of time and effort to convince traders to use new facilities.
Special incentives and support, particularly from the state and metropolitan authorities may therefore be required to encourage traders to use new wholesale markets, however, these can be withdrawn as the markets become established. As the gains from economies of scale and higher turnover become more visible to operators, it will become unthinkable for buyers and sellers to do their business outside the wholesale market.
Wholesale markets offer transporter-traders and retail traders the following advantages:
Source: Goosens, Minten and Tollens, 1994