7. Producing for the market

ADAPTING PRODUCTION TO MARKET NEEDS

Your main role in marketing is to improve the understanding of your farmers about marketing and how they can become more commercial and profitable by producing crops that are demanded by the market. This chapter considers ways in which farmers can adapt their production to meet the market's needs. Most farmers are naturally conservative and will be reluctant to go into new enterprises, because they involve risk. New crops or the introduction of new technologies or production techniques should, therefore, initially be undertaken on a small-scale trial basis.

Pre-production issues and production planning

Growers need advice on which crops to grow and what market opportunities they can target. While the final decision must always be that of the farmers, you should be able to help them plan their production. Although production issues, such as labour availability and crop rotations, have to be taken into account, the key factor affecting production decisions is that production must be market-oriented. This means producing products for which there is a demand and which farmers can grow profitably.

Individual crop selection. Crop selection should be based on the likely net returns of the major alternative agricultural enterprises (see Table 8). These calculations will establish which products are likely to be the most profitable. They can be discussed with farmers.

Market research should have shown which local products are likely to be most successful in terms of cost, quality or seasonality, compared with products from other areas. The research should also have shown which varieties are favoured and the best time to supply them. These findings need to be converted into practical recommendations for farmers, covering such issues as:

• varieties favoured by the market;

• sowing dates (e.g. whether to extend the period of supply or aim for a particularly high-priced period). Whether to avoid times of oversupply;

• other techniques to extend production into high-priced periods, such as using late or early varieties, transplanting, or using polythene tunnels or irrigation;

• techniques to improve quality, such as optimum fertilization, crop protection, pruning, irrigation, and weather protection.

Table 8 sets out a summary of the comparative costs and returns of three different crops. Although Crop C returns the highest sales, its profitability is less than for

Crops A and B. Farmers should be aware of the difference between gross returns (i.e. the value of sales) and net returns (i.e. the value of sales after deduction of costs). They must consider likely net returns when planning what to produce.

Table 8
Selecting crops to grow

Figure 12 on the next page provides an example of a detailed costing for a crop of cucumbers. In calculating costs it is useful to remember that 80 percent of costs are normally contributed by only 20 percent of the items. You should therefore concentrate on collecting accurate information on the major costs. Individual farmer costs and returns can vary greatly, and calculations such as those shown in Figure 12 are useful to help farmers compare their performance with that of others.

Figure 12
Production costs, gross margin per acre and break-even cost for cucumbers

Gross margin/net return per acre [(a × b) - c] = $657
Break-even price per kg (c ÷ a) = 14.05 cents per kg

Note: This calculation provides a simple example of how farmers can calculate the profitability of growing a particular horticultural crop. To carry out such an analysis, it is important to have accurate information. The calculation can also be made before growing the crop, to see if it will be profitable or not. In this case, a realistic forecast of prices is required. 1 acre = 0.405 hectares

Selection of a range of crops. It is advisable for farmers to achieve a balance between growing a wide range of crops and concentrating on those products where they have the most advantage. Producing a range of crops reduces the impact of a possible production or market failure for one crop. For example, if farmers grow only potatoes and their crops are affected by Potato Blight, they will earn nothing. However, if they grow two or three other crops and have successful harvests they will be less affected by the potato disease.

Growing many different crops can cause problems. This is because the farmer is unlikely to have the necessary expertise in all the crops and the smaller volumes of each produced makes marketing more difficult. Very often, growers will have preferences for crops that they feel comfortable growing and/or that grow well on their land.

As agriculture becomes more developed, farming become more specialized. Individual farmers, such as those supplying supermarkets or agroprocessors, generally have to concentrate on relatively few crops. Although growers may become more skilled, they can rarely be experts in more than three or four crops.

The most profitable crops are often the most risky. It is useful to have a cropping system in which risky crops are balanced against crops that can be relied upon. An example might be to grow one or two large-volume vegetable crops, such as potatoes and onions, together with higher priced products such as capsicum (green or red peppers) and leafy vegetables or salads. Small farms often have more labour available per hectare than do large farms and they can take advantage of this by concentrating on growing labour-intensive crops. These are crops that cannot be harvested mechanically and may also require transplanting, pruning, hand weeding (hoeing) and harvesting on several occasions.

Farm investments

Farmers are often tempted to make investments that are expensive but do not improve significantly the financial viability of their farm. This needs to be avoided. Decisions should have as priorities investments that can: assure an income, through reducing risk; increase incomes by improving prices; improve incomes by increasing yields; reduce production costs; or generate additional income.

Investments that can improve yield stability and hence reduce risks include:

• those that protect against pests and diseases, such as sprays and a sprayer;

• irrigation and other technology that reduces the adverse effects of the weather.

Such investments are particularly important in horticulture because when yields are low as a result of poor weather or pests, prices rise significantly. The grower whose yields are least affected makes the most profit.

Investments that improve prices include:

• technology for 'off-season' production, such as polythene tunnels and improved transplant technology;

• investments made directly in improving marketing, such as grading facilities, on-farm storage, pick-up trucks to transport produce and telephones to improve market communication;

• investments that improve the quality of produce, (e.g. irrigation, crop protection or high-quality planting material).

Investments that increase yields are:

• irrigation equipment;

• scientific fertilizer usage (e.g. correct quantities, optimum timing of application, right amounts of different nutrients);

• high quality planting material.

Investments that save on production costs include:

• herbicides and mechanical hoes, which can cut down on labour for weeding.

Investments that can create additional income are:

• processing equipment to add value to products;

• transport, to take products to new markets.

Input supply

The supply of inputs can have a direct effect on profitability. Planting material is particularly important. Consumers can have strong preferences for particular varieties, colours and tastes. For example, in much of the Middle and Near East there is a preference for plum tomatoes (i.e. Roma types). Product colour can also be important, e.g. red apples are sometimes preferred to green or golden varieties. Growers' returns can be improved by ensuring the supply of the correct planting material, and part of your role can be to discuss with nurseries and seed suppliers the varieties they should stock.

Pest and disease damage will seriously reduce a crop's price and its potential shelf life. Sometimes these problems can be solved by the correct crop protection practices. In India, spray programmes were introduced to control scab disease on apples in Kashmir. A crucial step in the successful introduction of this programme was ensuring that agricultural chemical shops had the recommended materials available.

Finance and credit

Critical production constraints are often shortage of working capital and funds for investment purposes. Potential sources of funds, apart from the farmer's own resources, can be divided into two: formal and informal.

Formal sources. These are mainly banks and other types of financial institutions such as credit unions, savings and credit cooperatives and various types of microfinance organizations. They offer different types of loan products and normally apply market-based interest rates. In the case of banks, they require specific types of collateral in order to grant loans and credits, which, together with often lengthy loan procedures, tend to seriously limit most farmers' access. Providing banks with cost-of-production budgets, detailed information on likely returns and other relevant information about the activity at the time of the loan request will enable them to assess more accurately the risk involved and may shorten the procedures. Credit unions and similar types of member-owned financial institutions are, by their nature, more open to farmers requiring smaller production-oriented loans. But, similar to microfinance institutions, they often face problems in providing large numbers of loans, due to limited funds.

Financial institutions have different rules as to what loan purposes they can cover. Some will only provide input loans whilst others may also offer loans to meet labour costs. In rare cases banks offer marketing loans to farmers. Such loans are needed to cover the cost of harvesting, transport, packaging and even storage of crops. The advantage of such loans is that growers are not restricted in who they sell to, which is the case when they borrow from traders.

In the example given in Table 6, harvesting and marketing costs amount to two-thirds of all costs, and packaging is the single largest cost item. This clearly illustrates the need for loans to cover marketing as well as production costs.

Where growers are under contract to supply produce to an agribusiness (e.g. food processor or exporter), production loans based on the hypothetical value of the crop can be made. These are called hypothecated loans. Under a loan hypothecation scheme the bank, or the processor, advances a proportion of the expected income as production credit (say 50 percent), without seeking any additional security. Loan recovery can be made by the agribusiness, which deducts the outstanding debt from the grower's income. Unfortunately, such arrangements sometimes break down when the farmer decides to sell the crop to someone else who offers a higher price, thus not honouring the initial agreement. In such situations you should discuss with farmers the benefits of long-term reliable outlets for their products, and point out that such benefits may be lost if they seek short-term price advantages in this way.

Informal credit. In many countries the availability of formal funds from financial institutions is very limited and farmers often have to depend on informal sources. Sources of informal credit include moneylenders, family members, friends, traders and input suppliers. Informal loans are often made on the basis of close family links or mutual trust and are free of time-consuming bureaucracy.

In some countries, the most important source of informal credit is often the trader. The role of traders as sources of loans is much misunderstood. Traders provide credit to farmers to secure future supply and, therefore, income. The true costs of such credit to farmers are difficult to determine. Common criticisms are that high interest rates are charged and that growers who have borrowed money are forced into selling their produce at low prices. In some cases this is no doubt true and, in the case of poor prices, farmers cannot switch to another trader or wholesaler. However, the opposite can also apply as farmers, knowing the trader has to buy from them, pay less attention to produce quality. Traders do not normally lend money to farmers in order to exploit them. They lend money in order to ensure that farmers will produce enough of a crop to meet the demand. Loans by traders are recovered simply by deducting the money advanced from value of the sales.

Transport

Without adequate access to transport, farmers are at a disadvantage. They are dependent on visiting buyers. With transport, growers have control over what market the product is transported to and are therefore potentially in a far stronger marketing position. Improved efficiency in transport, e.g. larger loads, quicker turn-around times and better utilization of capacities, are all proven methods of lowering costs and opening new market opportunities.

You can have an important role in helping growers to gain access to transport. This could involve introducing farmers to transporters, planning a collection route and helping organize the initial services.

Growers who do not sell to visiting traders usually have to transport produce to market in hired lorries or pick-ups. The grower generally has to either pay a fixed price for the hire of the truck, no matter how little is transported, or is charged by the box or sack. Both systems can be inefficient.

If the lorry is not fully loaded the costs per unit (e.g. box, bag) go up. Cost savings can be achieved by encouraging farmers to share transport. You could help them to assemble produce on a particular day of the week at specified collection points.

When transport is charged by the unit, transporters will generally overload lorries in order to maximize their income. By assembling produce at one point so as to guarantee full loads, a fixed price for the lorry can be negotiated and the growers can themselves ensure that the transport is not overloaded, and their produce is not damaged. It is difficult to resist the temptation to try to squeeze extra containers into a vehicle and this is often done by traders, as well as by farmers. However, the benefits in terms of reduced transport costs are usually outweighed by losses in terms of damaged produce.

Transporters often overload lorries to maximize their income.

Even the best-packed producecan be damaged

Generally, the larger the individual load (i.e. the larger the truck used) the cheaper the unit cost of transport. For example, in Pakistan, an 8-tonne lorry travelling from northern Punjab to Karachi used to cost 4 000 rupees (i.e. 500 rupees per tonne of produce) while a 20-tonne articulated lorry cost 7 000 rupees for the same trip (i.e. 350 rupees per tonne).

Farmers who are able to make investments in transport mainly buy small pick-up trucks. The unit costs of transport are therefore higher than when hiring space in a larger lorry, but such pick-up trucks do offer farmers the possibility to:

• transport produce to the market immediately after harvest;

• supply transport services to neighbouring growers;

• take produce for sale to farmers' markets;

• make direct sales to retailers and caterers.

Creating market and business linkages

Production possibilities are often underdeveloped because buyers and sellers are unaware of each other's existence. A buyer may be unaware of the products produced by farmers of a particular area or of the products they could produce if a market were available. A group of farmers may sell produce individually to a small-scale local buyer, unaware that a wholesaler is prepared to pay better prices if sufficient volume can be supplied. As noted earlier, you should draw up a list of the buyers, the agribusinesses and the transporters in your area. This list would need to provide contact names and addresses and explain the products they buy or services they provide. It is important that negotiations are carried on directly between the farmers and the buyers. You can help farmers by providing them with some information in advance, such as terms of business of traders, likely range of prices and other companies worth contacting, but you should not be involved in reaching agreements on their behalf. Box 6 sets out ways that you can help with business introductions and in supporting farmers to overcome problems and set up new trading relationships.