Main points in Chapter 4
Maize marketing costs
Types of marketing cost
damage in storage
A calculation to help farmers allow for price inflation
Examples of marketing cost calculations
Bagged maize from farmers often contains straw, stones and other foreign matter and must then be cleaned by the trader before it can be sold.
Sometimes farmers even try to defraud traders by putting in large stones or other objects… in the end it is the farmers who suffer as traders will pay them less in the future.
TYPES OF MARKETING COST2
This chapter concentrates on the costs of marketing maize3. The types of costs described are broadly similar to the costs associated with the marketing of other crops and the cost-calculation methodology outlined can also be used for other crops.
In moving produce from farmers to the eventual buyer, in most cases a mill, traders have a large number of costs, some of which may not be immediately obvious to farmers. It is important that farmers understand these costs. Without such an understanding they are likely to look at the large difference between the price the traders offer them and the price that mills pay the traders and conclude that the traders are exploiting them. Extension workers need to understand marketing costs in order to be able to explain to farmers the reasons for differences between traders' buying and selling prices and in order to be able to calculate whether the price a trader is offering is reasonable. Various types of marketing costs are:
The first cost faced is for packaging. If the farmer provides the bags then he will be justified in expecting a higher price. The most important cost is usually for transport and this will be understood by farmers, although they may not always understand that transport costs can be more than for a simple journey from one place to another. A less obvious set of costs are those incurred in handling the bags of maize. Bags may be loaded and unloaded several times before reaching the final buyer, all of which needs to be paid for. Between the farmer and the mill there is likely to be some loss of weight compared with the quantity purchased. The grain may be too damp at the time of purchase and may lose weight through drying out. Maize may be lost through holes in the bags or through theft. If the trader keeps the maize in store for several months then it may be attacked by insects or rodents. Storage incurs other costs too, including the cost of renting the warehouse and disinfestation charges. A cost which will not be obvious to the farmer is the cost of money or capital costs. Even when the trader does not deliberately store maize, the time between paying the farmer and being paid by a mill could be several weeks. In countries where interest rates are high, the cost of money can therefore be significant. There are also lots of other small costs to pay and the marketing cost calculation must, of course, include profit for the trader. Without such profit he will not trade and there will be no one to buy the farmer's maize.
While some large farmers in, for example, Zimbabwe deliver maize in bulk to the mill, this is not a realistic option for traders buying from small farmers. Bags are required. There are many possible arrangements over bags. Some traders expect the farmer to provide the bag, while others will give the farmer a bag in exchange. Others will pay a higher price for bagged maize. Larger traders may supply bags in advance to farmers, although here they run the risk that farmers may sell their maize to other traders.
Whether packaging is a significant cost to the trader will ultimately depend on whether the mill he sells maize to eventually returns the empty bags to him free of charge, or whether he has to purchase bags each time he visits a producing area. In the calculations made later in Figures 4 and 5 it is assumed he is able to recycle bags and thus the cost to him of packaging is small as grain bags can be used many times. However, this will not always be the case.
Maize is transported on the shoulder or head, by bicycle, wheelbarrow, ox-cart, car, pick-up, bus or truck. As most farms are not situated right next to a road, either the farmer or the trader will have to transport the maize to the nearest road without using motorized transport. When the trader does this his costs will be increased and the price to the farmer will be lower.
Small-scale traders may buy too few bags at one go to justify hiring pick-ups or trucks. They will either transport bags of maize by bus or on a passing vehicle. It should be remembered that their costs will include not only the cost of transporting the bags but also the amount they have to pay for their transport to and from the producing area. Smaller traders who move produce in this way often have to take several rides in order to get to their destination. This can both be expensive and time-consuming.
During the maize buying season, there is a lot of produce moving out of producing areas but the volume of produce being transported into these areas is relatively small. Thus trucks travelling to maize growing areas to collect maize will often travel empty. The cost to the trader who hires a truck will invariably be the cost of a two-way journey rather than a one-way trip. This needs to be built into cost calculations. Further, a trader who charters a truck will almost always have to pay a fixed fee for the journey, which takes no account of the quantity he loads onto the truck. If he can fill the truck with maize bags the cost per bag will therefore be significantly lower than if he has spare capacity. Figure 3 on page 46 illustrates this graphically.
Traders delivering to mills often have to wait in line at the mill for some time. Many of the mills in the region were set up without much warehousing capacity, it being assumed that they would receive regular deliveries from marketing board warehouses. With liberalization, mills have often been slow to take over available warehouses and have frequently been processing maize as and when it arrives, both for lack of storage and because of a lack of finance. With limited storage capacity at the mills, traders have had to wait for other maize to be milled before they can unload their trucks. In Zambia, it reportedly took up to five days to unload maize at a mill in the peak season. This adds to costs, both the transport costs and the cost of the trader's time.
Transport costs per ton according to capacity utilization
Note: A fixed charge for the truck is assumed for the first 100 km, with a charge per kilometre thereafter
Maize can be handled on many occasions between the farmer and the buyer. The trader can either do this himself or pay someone to do it. Examples of the occasions when maize is handled for a fee when a collector/trader sells maize in a market are:
A trader selling to a mill may handle the bags in the following ways:
The weight the trader sells is unlikely to be exactly the same as the weight he buys. If the time between buying and selling is only a few days the loss may only be small, say one percent or so. But if the trader stores the maize for some time and carries out activities to improve the quality of the maize, then the difference in weights can be considerable, even as high as ten percent. In the days when all maize was handled by marketing boards and maize was sometimes stored for up to two years, losses on stored maize often reached 30 percent.
Reasons for losses in weight are discussed below. It should be realized that not all of these losses are food losses. For example, a trader may “clean” the maize. Clearly there is no food loss here but the weight the trader sells is not the same as the weight he buys. When post-harvest food losses are calculated the fact that losses in weight are not all losses in food is sometimes overlooked, thereby creating an impression that the post-harvest and marketing systems are inefficient when, in fact, they may be quite efficient.
Spillage. Spillage can be caused by a variety of factors. Using of old bags with small holes in them or failing to close the bags properly leads to maize falling from the bags. Rough handling, for example by throwing bags from trucks, can make the problem worse. Poor roads lead to greater bag movement on the truck, resulting in greater spillage.
Theft. Traders who transport bags on the top of buses cannot guard their bags against theft all the time because they are sitting in the body of the bus. Traders who do not accompany their maize bags on trucks run the risk that small quantities will be pilfered, either by the truck driver or by passengers he picks up. While a handful of maize may be an insignificant amount, many handfuls soon mount up. The potential for such loss by the trader has to be built into the calculations of the price he can afford to pay farmers.
Moisture loss. Maize purchased soon after harvest will probably have a high moisture content and will continue to lose moisture for some time. Depending on the time between purchase and sale this can lead to a fairly noticeable weight loss. Where it is too moist traders may even take steps to dry it. While moisture loss is not a loss of food, it nevertheless represents a cost to the trader and must be built into marketing cost calculations.
Cleaning. Maize bagged by small farmers often contains straw, stones and other “foreign matter”. Traders selling in local markets cannot sell such maize and have to clean it before sale. This therefore represents another weight loss. Some farmers often try to defraud traders by deliberately placing large stones or other objects in a bag of maize. In the final analysis it is the other farmers who suffer from such practices as such fraud will affect the price the trader is willing to pay in the future. The extension officer needs to stress this point to all farmers.
Traders may clean maize before delivery to mills but this is not normal practice. Mills often deduct a certain amount from the gross weight of maize delivered by traders, in expectation that it will contain foreign matter. Traders also sometimes try to compensate for foreign matter by paying farmers for less than the full weight.
Damage in storage. Maize held in storage is vulnerable to attack from insects, rodents and birds, particularly if it is not well fumigated or if it is stored outdoors under tarpaulin. This can lead to significant weight loss when the maize is stored for a long period, for example when the trader is storing in the hope that the price will rise at the end of the marketing year.
The best way of treating weight loss in marketing cost calculations is to ask the question …
This is the method that is adopted in Figures 4 and 5 on pages 52 and 53 which show two calculations. It is a better method than the more common one which involves simply adding the cost of the lost maize at the end of the calculation. This is so because the latter method takes no account of the fact that weight which is purchased, but not sold, nevertheless often has to be transported and stored.
Maize damaged by insects in storage can suffer serious weight losses
Smaller traders may have to store unsold maize in a market overnight. Larger traders may store maize while they put together a truckload for delivery to a distant mill or because they have no immediate buyer for it, for example if the mills are not buying or have insufficient storage. The most common reason for storage in mature private-sector marketing systems is to take advantage of price rises later in the season. This practice is not yet widespread in the region, but it can be expected to grow as traders become more sophisticated.
All storage has a cost. There are four basic types of cost:
A note on inflation
To simplify presentation, the calculations shown in this Guide take no account of inflation. Unfortunately, many countries continue to experience rapid price increases and extension workers must bear this in mind when advising farmers on which crops to grow, on whether to store and on how and when to market. Many farmers have problems in understanding the concept of inflation and in realising that although the price they get for their maize may be going up they are not necessarily better off. To help understand the impact of inflation we use the idea of the “real” price.
Let us first begin with this simple example:
|The maize price in May is:||$||100|
|The maize price in November is:||150|
|The price increase is:||50|
|Farmer's storage cost for six months is:||20|
|Farmer's profit from storage is:||$||30|
Here it looks like storage is a good idea. However, if we now calculate the “real” price then the picture changes dramatically. In some countries of the region inflation has at times been well over 100 percent a year. Let's, for this example, assume it is around 60 percent a year and that in the period May–November prices went up by 30 percent. Then:
|The maize price in May is:||$ 100|
|The maize price in November is:||150|
|The “real”* maize price in November is:||115|
* The “real” price is calculated by dividing the actual price by the percentage prices have gone up plus 100. The result is then multiplied by 100. Hence, with 30 percent inflation, the real price is ($150 ÷ 130%) × 100 or $115.
|The “real” price increase is:||15|
|Farmer's storage cost for six months is:||20|
|Farmer's loss from storage is:||$ 5|
Thus, inflation can turn an apparently profitable activity into a loss-making one.
Considering a different situation, let us assume that the farmer has two choices in selling his maize. He can sell to a trader who will pay him $100 in cash now or he can sell to a trader who will pay him $110 in two months time. However, if inflation is rising by 5 percent per month, the “real” price in two months time is $100. So there is no reason for the farmer to sell to the second trader.**
Since it is somewhat difficult for farmers to understand the idea of inflation, extension workers can help them understand by relating prices to the cost of buying things. For example, if the farmer sells his maize for $100 in May, how many bags of fertilizer will he be able to buy with that money? How many will he be able to buy in November? Inflation means that he will be able to buy less in November than in May.
** This is because the farmer could put the $100 in the bank and earn interest or he could spend the $100 buying household supplies or farm inputs, before prices go up. However, if all he plans to do with the $100 is keep it in his house and do nothing with it then he might be better off accepting the $110 of the second trader. See Chapter 7 for a discussion on encouraging farmers to save.
Capital costs may not be very visible but they are extremely important. To operate, a trader may have to borrow money from a bank, from relatives or from a moneylender. The interest he pays on that money is a cost. If a trader uses his own money it cannot be said that he has no costs because he could have left the money in the bank to earn interest, instead of using it for trading. The cost of using his own funds is thus the interest he is not receiving. Economists call this an opportunity cost.
Several countries in the region have very high interest rates, which can fluctuate rapidly. It is thus in the trader's interest to sell the maize he buys from farmers as quickly as possible, unless, of course, he thinks he can make more money by storing it for a long period. Unfortunately, it is not always easy for the trader to get his money back quickly. Mills may not pay on delivery. They may require a period of credit, which can be as much as a month, and then may not always pay at the end of the agreed period. Sometimes, as already noted, mills may stop buying for a time, leaving the trader with no choice but to store the maize.
Buying from farmers can also take time. A trader may spend several days going from farmer to farmer in order to put together a truckload. If he pays cash, he is paying interest on that cash all the time he is in the rural areas buying.
There are lots of small costs which the trader may face. Individually they may be small but all added together they can be quite significant.
MARKETING COST CALCULATIONS
Figures 4 and 5 give two cost calculations. The first of them refers to maize purchased by a small-scale collector/trader and sold in a local market. The second refers to maize purchased by a large-scale trader, stored in town and then transported to a distant mill. The figures are hypothetical and are used only to show how costs are calculated. They do not represent actual costs in any country.
Calculating marketing costs — Small trader
|Assume an example involving a small trader selling maize in a local market as follows …|
|Purchase of 1.02 tons* of maize at $100 per ton||=||$102.00|
|Transport to roadside of 20.5 bags (50 kg) at $0.50 per bag||=||10.25|
|Transport to town market of 20.5 bags at $1.00 per bag||=||20.50|
|Transport and accommodation for trader||=||15.00|
|21 bags at $1.00 per bag ÷ 10**||=||2.10|
|Overnight storage and handling||=||5.00|
|Market fees and overheads||=||5.00|
|Interest for 1 month at 5% per month||=||8.00|
|Sale of 1 ton at $200 per ton||=||200.00|
* 1.02 tons purchased in order to sell approximately one ton of maize in a local market after 2% loss
** Assume that each bag can be used ten times
Calculating marketing costs — Large trader
|Assume an example involving a small trader selling maize to a large mill as follows …|
|Purchase of 1.05 tons* of maize at $100 per ton||=||$105.00|
|Transport from rural area to town of 21 bags (50 kg) at $1.00 per bag||=||21.00|
|Transport from town to mill of 21 bags at $1.50 per bag||=||31.50|
|Handling costs and accommodation|
(two employees for two weeks)
|21 bags at $1.00 per bag ÷ 10**||=||2.10|
|Minor costs and overheads||=||3.00|
|Storage in town||=||2.00|
|Interest for 1.5 months at 5% per month||=||12.60|
|Sale of 1 ton at $220 per ton||=||220.00|
* 1.05 tons purchased in order to sell approximately one ton of maize in a local market after 5% loss
** Assume that each bag can be used ten times