Shortening the value chain

The government has just announced plans to import 64,050 metric tons of refined sugar in a bid to force retail prices to drop.

Refined sugar is selling at P90 to over P100 per kilogram despite the arrival of 150,000 metric tons of imported sugar and the start of the harvest and milling season. It is expected that prices will start to go down only in the first quarter of next year.

Government’s sugar imports are not going to come in cheap since under the minimum access volume or MAV mechanism, the tariff rate is 50 percent if under the MAV and 65 percent in excess of the MAV. Neither is it going to come in now, so such imports are not expected to make a dent in the market.

But news of such imports can force hoarders to release their sugar.

As pointed out by Confederation of Sugarcane Farmers adviser and former Sugar Regulatory Administration chief Lito Coscolluela, sugar bought at millgate prices of around P3000 per bag should retail for P80 per kilo.

What government should do, he said, is to trace the value chain as he pointed out that what happens from the mill to retail outlets, producers have nothing to do with it. After the refined sugar leaves the sugar mills, there is of course the matter of handling cost, transport, traders’ margin, repacking, packers’ margin, which all add to the final cost of sugar to the consumer.

This, of course, is not peculiar to sugar. This huge gap between what the farmers get for their produce and what the final consumers pay is something that the government, in particular, the Department of Agriculture and the Department of Trade and Industry, has tried for decades to narrow to no avail.

Inspite of the high price of agricultural commodities, our farmers remain as the poorest sector in the country. They have no bargaining power whatsoever against those who buy the commodities from them. Middlemen who operate in certain areas uniformly dictate the farmgate prices and this system has persisted since time immemorial. Traders and retailers are the ones who make the biggest bucks when they bring such produce from the farms to our tables.

Middlemen are not going to allow our agricultural system to change. Once our farmers have the ability to bring their produce to the end-users, then middleman would no longer have a role to play.

The huge role of middlemen in the agricultural system happens all over the world. One article in the African Journals Online noted that farmers encounter high production costs in their efforts to boost production, but hardly get fair pricing from middlemen or the bulk farmgate buyers.

It said that the real profit goes to the middlemen who buy up the farm products at almost give away prices and sell at outrageous prices to the consumers. This attitude of middlemen have discouraged genuine investors from going into agriculture because of the marginal profit associated with it. It added that the activities of middlemen seem to be a threat to food security.

Earlier this year, local agricultural industry leaders have also urged the government to fix and revamp the value chain by reducing the number of middlemen in agricultural trade to ensure that food prices are affordable to consumers.

They emphasized that the problem in the country has always been the huge gap between the farmgate price and the retail price, adding that if there is anything to learn from the past, it is that imports do not bring down retail prices, nor is importation the solution.

Federation of Free Farmers (FFF) chairman and former agriculture secretary Leonardo Montemayor pointed out that there are too many layers in the value chain, causing food prices to rise, with both the farmers and consumers suffering in the process.

For his part, Philippine Association of Fish Producers chairman David Villaluz noted that the retail price of bangus is nearly twice its farmgate price because of the five to six layers of middlemen in its value chain.

Meanwhile, the League of Associations at the La Trinidad Vegetable Trading Post said that the vegetable value chain has seven to eight layers of middlemen.

President Marcos earlier bared plans to reconstruct the country’s agricultural value chains, starting from the scientists and researchers, all the way to the kadiwa stores.

Maybe the government should also take a look at the role of cooperatives in this value chain.

Farmers cooperatives are supposed to have been empowered to take the place of middlemen. According to a study by the USAID and OCDC International Cooperative Research Group, the Philippines is a cooperative leader in the Asia Pacific. Cooperatives and their members even enjoy significant tax benefits under our laws.

But another USAID study noted that while the Philippine government has historically recognized the value of cooperatives and has sought to accelerate the expansion of cooperativism, these efforts have often proved counter-productive and at times have served only political interests.

In an article in Edge Malaysia, it was emphasized that middlemen can be eliminated, but not their functions. Marketing involves the transfer of a product from the point of production to consumption and in between these two points, there exist numerous functions, including buying and selling, physical functions such as storing, packaging, transporting, financing, pricing, risk-taking, and then market information.

It noted that middlemen are still the major source of credit for farmers despite the existence of options from the formal sector. Farmers, it said, are usually aware of the exploitation, but circumstances force them to be dependent on middlemen for marketing and credit services at whatever cost set by the middlemen. Farmers, unable to repay the loans from middlemen, are oftentimes forced to sell their harvests to them to repay the loans, sometimes for life.

But why does this relationship persist despite the exploitative behavior of the middlemen?

The article pointed out that small farmers are mainly poor and need credit to sustain their livelihood. Distance and the lack of an alternative cause them to be dependent on the middlemen to help market their produce. Farmers also have very little access to market information compared with the dealers who have wide business networks.

The same article emphasized that to address the asymmetric market power situation between farmers and middlemen, farmer cooperatives are the best solution for the small farmers. Through cooperatives, small farmers can gather strength through a bigger voice to bargain with big-time dealers or millers. By having a cooperative vehicle, farmers can be middlemen themselves and sell directly to retailers and consumers.

It added that a new-generation cooperative should be embraced – a forward integrated cooperative to encourage value-added activities such as milling and processing. But this should be supported with innovations such as information and communications technology, machines or mills, as well as incentives to jumpstart their business.

Harnessing our cooperative system should shorten the supply chain faster.

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