Monday, 26 March 2012

The hot potato: Why farmers and consumers need the middleman

By John Humphrey

Potatoes have been in the news in Europe in the last couple of weeks. In the face of economic crisis in Greece, some municipalities had been organising direct sales of potatoes from farmers to citizens. The story is that this cuts out the intermediaries (wholesalers and retailers) gives higher prices to farmers and lower prices to consumers. Many observers have been quick to establish the moral of the story: "bad" wholesalers are ripping off farmers and consumers, and everything is much better when they are eliminated. 

This is a familiar story. It is rare that you hear of a producer of any sort claiming that s/he was receiving a fair price, any more than I have ever heard workers alleging that they are being paid too much or (with one notable exception in Brazil 30 years ago) a company manager admitting that the wage rates in the company were low. A quick glance at how the prices of products increase along the value chain suggests that mark-ups can be very substantial, and presumably unjustified.

Making markets work for the poor
There is no doubt that some markets operate "imperfectly" (in economist-speak). This is why programs aimed at making markets work better for the poor focus on eliminating problems such as information asymmetries – usually where the buyer, the intermediary, has more information than the seller, such as the poor farmer. Facilitating access to market information, particularly via mobile phones, can enable farmers to judge when, where and to whom to sell, and to obtain better deals in the process. In some cases, however, the problems relate to structural problems in markets that are more difficult to solve. Cartels of traders can take control of wholesale markets, driving out competitors by both foul means and fair.

The function of the intermediary 
Nevertheless, recognising that these are serious problems should not lead us to take all criticisms of intermediaries at face value. Intermediaries perform important functions in markets.

  • They bulk together production from scattered producers and transport products to where they are to be sold and consumed;
  • They may grade and pack products, assume quality control functions and assume the risks of price fluctuations between purchase and sale; 
  • In some cases they provide credit, in cash or kind, to farmers in order to facilitate production and gain access to the output. Intermediaries are usually necessary for markets to function efficiently.

The Greek case
So why have sections of the Greek population suddenly discovered that intermediaries are vultures feeding off the victims of Europe's debt-masochistic capitalism? Well, there could be a perfectly good reason. One of the factors that have driven up the cost of food in recent years has been the increase in time-rich, but cash-poor consumers, who value convenience: packaged food, ready-to-eat and ready-to cook food, etc. However, as the Greek economy dramatically contracts wages and benefits have been slashed and people are losing their jobs. Suddenly, convenience at any cost is a luxury that cannot be afforded. The reporters covering the story found people waiting in queues. It may take longer to purchase potatoes this way, but it is saving money that counts now.

So, the availability of cheap potatoes, and other products, may be highly valued by many people in Greece as they struggle to make ends meet and look to keep their spending down. But it doesn't mean that intermediaries don't play an important role in ensuring that both farmers and consumers get what they need.


Prachi Salve said...

Firstly, congrats on a well written blog post. I was wondering if the its healthy to have intermediaries functioning as lenders. As this was highlighted as one of the reasons for farmer suicides in India.

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