1 What are marketing costs and why do they vary?

Getting produce to the consumerinvolves numerous costs

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Produce preparation and packaging costsWe assume that harvesting of produce and the move-ment of that produce to the farm gate or packing shedis part of the production cost. Thus the first marketingcost incurred is produce preparation. This includescleaning, sorting and grading. The second cost thatis usually faced by farmers and/or traders is packaging.Types of packaging used may range from a simplejute bag, which may account for less than one percentof the marketing cost, to sophisticated plastic packag-ing for direct shipment of fruits to consumers in super-markets, which would account for much more.

Handling costsAt all stages in the marketing chain produce will haveto be packed and unpacked, loaded and unloaded,put into store and taken out again. Each individualhandling cost will not amount to much but the sumtotal of all such handling costs can be significant.

Transport costsOnce packed, produce is then transported. In manycountries the initial transportation may be done by thefarmers or their labourers, carrying the produce them-selves or using animal-drawn carts. Alternatively,

traders may send agents around to farmers to collectproduce for assembly in one central area. As notedin the Introduction, costs will vary according to thedistance between the farmer and market. But they willalso depend on the quality of the roads. A farmer livingclose to a main highway will probably face much lowertransport costs than one living at the end of a roughroad, which causes much damage to trucks and isoften impassable. Transport costs will be lower in coun-tries where trucks and fuel are cheap than in countrieswhere import duties are high. Truck owners have tobuy their trucks; costs will be lower where bank interestcharges are low than where they are high.

Sometimes transport costs are a simple matter tocalculate because the farmer or trader pays a set priceper kilogram to the transporter. But what do we do whenproduce is carried on a “per container” basis or whenfarmers or traders hire a complete truck and transporta variety of crops? How do we calculate tradersʼ trans-port costs if they own their own vehicle?

Product lossesLosses are common with agricultural produce market-ing. Even if nothing is actually thrown away productsmay lose weight in storage and transit. Thus onekilogram of a product sold at retail level cannot becompared with one kilogram sold by the farmer. Some-

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Using local materials for packing can be cost-efficient

Produce is handled many times before it reaches the consumer Product losses can be a considerable cost

Transport costs often make up the bulk of marketing costs

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times very high losses can be recorded, particularlyfor a perishable fruits and vegetables. Losses will prob-ably be highest in the main season when “gluts” ofproduce mean that much has to be thrown away un-sold. In general, the longer the distance betweenfarmer and consumer the higher the likely loss.

The treatment of losses in marketing cost calculationscan be fairly complex. In particular, produce which isbought but not sold can still incur costs such as pack-aging, transport and storage. If there are no quantitylosses there can still be quality losses and this isreflected in the price at which produce is sold.

Storage costsStorage is an important cost for many products. Themain purpose of storage is to extend the availabilityof produce over a longer period than if it were soldimmediately after harvest. The assumption behind allcommercial storage is that the price will rise sufficientlywhile the product is in store to cover the costs ofstorage. Such costs will vary, depending on the costsof building and operating the store but also on thecost of capital used to purchase the produce whichis stored. If a store is used to its maximum capacitythroughout the year costs will obviously be much lessthan if it is only used for a few months and is, eventhen, kept half empty.

Processing costsProcessing is often an important marketing cost.Grains such as rice and maize have to be milled. Inworking out total marketing costs we need to considerthe conversion factor from unmilled to milled grain, aswell as the value of any by-products. The price paidto the farmer for one kilogram of paddy cannot bedirectly compared with the price paid by the consumerfor one kilogram of milled rice because they are notthe same product. It is surprising how often somethingas simple as this is overlooked. Similarly, a coffeefarmer can't compare directly the export price for akilogram of green beans with the price he or she re-ceives for cherries or even parchment coffee.

Processing costs can vary according to the efficiencyof the organization doing the processing, the process-ing facility's throughput and the frequency of its oper-ation. It will also vary according to the organization'scosts which can depend on factors such as fuel costs,depreciation costs, import duties, taxes and wages.

Capital costsCapital costs may not be very visible but are extremelyimportant. To operate, traders may have to borrowmoney from the bank. The interest they pay on thatmoney is a cost. If traders use their own money we can-not then say that they have no costs since they could

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Storage extends product availability beyond the harvest– it can be expensive

Much processing takes place in villages

have left the money in the bank to earn interest insteadof using it for trading. The cost of using their own fundsis thus the interest they are not receiving. Economistscall this an opportunity cost.

There are other opportunity costs. For example,traders could perhaps be using their time to do otherwork. For them to want to be involved with marketingthe profit they make from marketing must be more thantheir alternative income opportunities. Often it must besignificantly more, particularly when they run the risk oflosing money.

Other costsThe costs considered above are the major costs thatare faced in marketing agricultural produce. But thereare many others and people involved with measuringcosts need to keep all of them in mind. While theymay be low in one country they may make up a sizeableproportion of costs in another. People using marketshave to pay market fees. Often they will have to payto have their produce weighed. Traders normally haveto be licensed and pay license fees. In some marketswholesalers charge commission. Taxes have to bepaid and, sometimes, bribes are needed, whether atroad blocks when transporting produce or to get per-mission to operate a business. All these costs have tobe built into the calculations.

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and processing for carrying out these functions. Thepercentage share of the final price which is taken upby the marketing function is known as the marketingmargin.

Sometimes the marketing margin can be quite a highpercentage and this may be used to argue that farmersor consumers are being exploited. However, high mar-gins can often be fully justified by the costs involved.Without an understanding of those costs and how theyare made up it is impossible to know whether marginsare reasonable or not.

The final stage of marketing – selling to the consumer

An additional cost is that of obtaining informationabout market prices, market conditions and buyers.When farmers are deciding whether to grow new cropsor to rear animals they will have to investigate how tosell those products. This may require costly visits tomarket towns in order to meet with potential buyers. Itis useful for farmers to be able to monitor marketprices. Where there are government market informa-tion services this can be done by radio; for poorerfarmers both radios and their batteries can representa significant cost. Richer farmers and traders increas-ingly use mobile phones to obtain market information;these also involve costs.

Prices and marginsFinally, costs have to be related to prices received. Ina retail market in the morning tomatoes may be sellingat a high price which appears to give the trader anexcellent profit. By the evening, however, the tradermay be selling them at a far lower price, knowing thatthe next day a supply of fresh tomatoes will be arriv-ing. This must be kept in mind when comparing theselling price with the amount paid to the farmer. Theprice paid by the eventual consumer is thus made upof the amount of money paid to the farmer for his pro-duce plus all of the costs involved in getting it to theconsumer in the form in which he or she purchasesit and a reasonable return to those doing the marketing

2 Produce preparation and packaging costs

Grading to separate produceinto similar sizes

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Packaging servesthree basic purposes ...

... handling and transport convenience ...

Produce preparation costsPreparation of produce for the market can often betime consuming. However, money spent at an earlystage on preparation and packaging should be morethan repaid by higher prices and lower losses. Highercosts can be expected to result in higher returns.Preparation activities, sometimes undertaken by far -mers but more frequently by traders, include:

• cleaning, such as removing soil and foreignmatter;

• trimming, to remove unwanted leaves, stemsor roots;

• sorting, to remove rejects and non-marketableproduce (see Chapter 5);

• curing, for example as with onions, garlic orpotatoes;

• grading, to separate produce into similar sizesand qualities before packaging, thus increasingthe market value of the produce;

• waxing and wrapping, for example as with or-anges in some countries, to preserve the pro-duce and make it more attractive to the con - sumer.

Packaging costsMost produce needs packaging. Exceptions are gener-ally larger fruits and vegetables such as pumpkinsand water melons which may be transported in bulk.Leafy vegetables, such as cabbages, are also oftentransported in bulk. Here the outer leaves themselvesact as a form of packaging by protecting the innerleaves. There is no packaging cost but it should be

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... product protection ...... marketing attractiveness

remembered that the outer leaves are often thrownaway before sale and thus there is a cost in terms ofproduct loss.

Packaging serves three basic purposes. Firstly, itprovides a convenient way of handling and transportingproduce. Costs would certainly be much higher ifeverything had to be carried and moved without anyform of packaging. Secondly, it provides protection forthe produce from damage during transit and handling.

The efforts which are continually being made to im-prove bulk packaging are designed mainly to improvethe protection offered rather than to increase the con-venience of the packaging from a hand ling point ofview. Finally, packaging can be used to divide the pro-duce into convenient units for retail sale and to makethe produce more attractive to the consumer, thus in-creasing the price at which it can be sold. The moresophisticated the packaging, the greater the cost.

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Quite often, the farmer will provide the packaging,such as jute or gunny sacks for maize and paddy, whichis used right through the marketing chain. More com-plex and expensive packaging, such as plastic crates,will, on the other hand, normally be the trader's respon-sibility.

A fruit or vegetable may be packed and repackedseveral times on its way between producer and con-sumer, depending on the length of the marketing chain.The farmer may use one type of packaging (forexample a sack) to take produce to market. At themarket a trader may transfer the produce to a woodenbox or plastic crate for transport to the wholesalemarket. Retailers buying at the wholesale market maythen transfer the produce to their own packaging andthen repack it (for example in plastic bags) for conveni -ent sale. All of these various types of packaging in-volve costs, and need to be taken into account whenworking out total marketing costs.

The simplest packaging cost to calculate is when thebag, box, crate or basket is used only once. All youthen need to know is how much produce the packagecontains in order to work out the packaging cost perkilogram. Often, however, things are not that sim-ple.

With the use of more sophisticated bulk packaging,every effort is made to use the packages over and overagain. In these circumstances you need to make anestimate of how many times the container is used toarrive at a cost per journey. Allowance must also bemade for repairs and for the cost of transporting theempty package back to the beginning of the marketingchain. If a trader owns a vehicle and all his or herbusiness is in one direction (that is from farms to town)then the cost of returning the containers is negligible.If, however, transport costs for the empty containershave to be paid this can increase packaging costs sign -i ficantly. An example of this calculation is shown inFigure 1.

The type of packaging used in a particular country andfor a particular marketing chain will depend on the costsand benefits of using it. Thus, plastic crates are likelyto be used more for produce marketing in a countrywhere they are manufactured than in a country wherea 100 percent import duty is charged on such crates.Sophisticated packaging will be used more when itsignificantly reduce losses; non-perishable producewill not require expensive packaging because thebenefits of using it will be marginal. The possibility ofusing improved packaging made with local materialsshould always be studied carefully.

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Figure 1Calculating packaging costs

Assume that oranges are packed 20 kg at a time in wooden boxeswhich, with occasional repairs, can be used for 10 trips. A box costs$ 10, repairs and cleaning during its life costs $2 and each time thebox is transported back empty to the producing area costs $1.

Then the packaging cost per trip is ...

[(original cost + repairs) ÷ number of trips] + transport when emptyor

($10 + $2) ÷ 10 trips + $1 = $2.20 per 20 kgand

$2.20 ÷ 20 kg = $ 0.11 per kg