Traders: The favorite bogeyman (Part 1)

WHEN most media commentators, politicians, vested interest groups and even Agriculture department officials account for the major reason why retail prices of agricultural or food commodities are exorbitantly higher than farmgate prices, the simple explanation given is the presence of unscrupulous traders. It is claimed that their monopsonistic power enables them to dictate prices at both the farmgate and retail levels.

What is weird is that ever since I was pursuing my graduate studies in the 1980s, this has been the convenient explanation, or better an excuse, for the failure of the government to tame agricultural and food prices. Note that up to now (or 40 years later), the government or those who complain about traders as the ultimate opportunists have yet to identify them so that appropriate legal cases can be filed.

Economic sabotage is equivalent to plunder, which requires the immediate incarceration of the offender. Hence, identification of these unscrupulous traders and their immediate arrest would have stopped the practice.

Nothing of the sort has been done, however, which leads me to conclude that the traders are just being used as bogeymen to account for things beyond the understanding of the indolent or pseudo analysts.

To understand why there is a huge wedge between farmgate and retail prices in the country, a better grasp of the dynamics of the Philippine agricultural economy is needed. When we talk about the agricultural economy, this refers to the entire agricultural value chain (i.e., production, processing, transport/logistics and marketing), a far cry from the Metro Manilan’s view of a gentleman’s farm located in a bucolic setting with a nipa hut surrounded by all sort of plants.

Traders’ vital role

Let us be clear at the outset that

traders engage in the trading activity not for charity but to earn a living. In a market economy, each one will try to maximize his own profit because that will serve his best interest. If traders take advantage of a supply shortage situation, that should be expected because they are just maximizing profits. The task of regulating so that traders behave properly falls with the state.

Secondly, traders perform an indispensable function in the market: They facilitate the movement of goods and services. In fact, if that role is assigned to the state, there will surely be severe supply shortfall

of basic commodities, particularly in hard to reach areas of the country.

Accounting for the discrepancy

There are structural, institutional and cultural reasons why there is a substantial difference between farmgate and retail prices. I will no longer cite specific authors and publication dates of the works I will be using in the subsequent discussion as this opinion piece is not an academic paper. The discussion below summarizes a number of findings though the reasons given are not in the order of priority in terms of accounting for the huge price differences.

At the structural level, there is the problem of absent, poor or inadequate

infrastructure. In a farming area where infrastructure is poor, it is quite difficult to move harvested commodities. Those who own tractors, jeepneys or similar cargo vehicles will be able to access and move commodities, particularly perishable ones, and hence have the power to dictate buying prices to farmers. In the countryside, such vehicles are owned by traders because they have the capital to buy them.

In a study of Mindanao’s agriculture we conducted a few years ago with former Socioeconomic secretary Karl Kendrick Chua, we found out that poor infrastructure was the major bottleneck, besides low farm productivity, faced by Mindanao tillers.

Then there is the problem of inadequate access to capital. Since small farmers have difficulty in obtaining loans from formal financial institutions, it is usually the traders that extend working capital. In payment for the loan plus interest, the farmers are forced to sell their produce at a lower price than the prevailing market price. The traders then justify the low buying price by claiming that they take a higher risk in extending the loan since there is no collateral involved and that the transaction cost for the farmers is minimal. Only trust is at play.

The study of so-called inter-linked markets argues otherwise. It notes that traders are not actually engaged in usury because the interest they charge is legally acceptable. What makes their operation very profitable is that they control various aspects

of the value chain. Fair profits are derived from extending loans, collecting the harvest from the farm using their vehicle, drying and milling, etc. Assuming that one derives a profit of 5 to 10 percent for each of these transactions, the “interlinked” nature of the markets allow the traders to gain handsome profit toward the end of the production cycle.

A third, and part of the absence of infrastructure, is that we have more than enough layers of traders in the Philippines compared to Thailand as cited by my esteemed friend and colleague Cielito Habito. For instance, a study conducted by the United States Agency for International Development observed that we have few wholesale markets in operation. One such example is Divisoria. The place was built in the early 20th century to serve the market needs of the urban consumers then and still serves as the country’s main wholesale market.

After small-time consolidators purchase goods from the farm, these will be brought to a wholesaler in the province (say in Mindoro), who in turn will transport the goods via a Ro-Ro (roll on, roll off) vessel to Divisoria where other wholesalers are waiting to buy. These Divisoria wholesalers will then sell said commodities to various traders in the market. Wholesale buyers from adjoining towns will flock to Divisoria to buy the goods from these traders and for resale to vendors in their towns.

At the minimum, there are already five layers of traders involved in the transaction who incur transport and labor costs. Each one will necessarily add their transport or logistical costs, including toll fees and payoffs to ubiquitous check points by police or military authorities. Adding all these additional costs inevitably jacks up the retail price for the hapless consumer.

Going back to the farm, the minuscule land owned by our farmers means they have little bargaining power vis-a-vis traders given their need to earn their family’s subsistence. They have no economies of scale, which leaves no room to leverage during the price negotiation stage.

More of these institutional-related issues in the next column.