Price rises: middleman conundrum

What causes prices to rise in Bangladesh remains a moot question, especially as all well-meant efforts now virtually go in vain. From economists to common people, there is a common view-it has to be either a syndicate or a middleman. Why? There exist three to four different hands through which a product shifts from farm to fork. Each of these hands marks up the price. Therefore, the more hands involved, the higher the price.Thus, we assume that we end up paying a higher price due to these intermediaries. But the truth is, if not for the middlemen, we would have ended up paying an even higher price. Surprised? Don't be. The question is not whether middlemen should exist. The question is how they should be empowered in favour of the overall value-chain efficiency.
Middlemen are at the heart of the value chain. All products reach from farm to fork through a value chain. The value chain involves a range of actors who supply the input, transform the input into a raw product, process the raw product into a value-added product, and then further add value by grading, packaging, and storing. Then there are Farias (local traders) who aggregate the raw output from small-scale farmers and sell to the wholesalers or processors. Sometimes, the Farias also do the grading and storing.
They connect the producers to the processors or buyers. The processors and wholesalers then sell to a range of buyers in local, regional, national and export markets. During this transfer process, we have transportation and logistics service providers, refrigeration service providers, and labourers. Some of the buyers are institutional. They use the output to produce some other products- for example, tomatoes become ketchup. Some institutional buyers sell the products at scale through their retail brands.
As you see, every time the product changes hands a value is added. Every player has a role. But there are ways to reduce the hands to improve efficiency. Bear in mind that you can reduce the number of intermediaries, but you cannot eliminate the value-creation activities.
If not for middlemen, you would have paid more and farmers would have left the market: There is a complex system through which the product reaches our kitchen or our table. You can of course go to Narsingdi and buy vegetables. What about the cost of your time, fuel, and transportation? Consumers have to pay an opportunity cost. They cannot directly procure from the producers. Producers too have opportunity costs. They are producing. If they now want to sell to your doorstep, they will have to do the grading, sorting, packaging, transportation, marketing and then come to your doorstep.
A middleman does these activities for hundreds of farmers. If now each farmer does it on his own, what happens? Cost of marketing goes up due to reduced economies of scale. You will now pay more because the farmer has incurred all the costs that a middleman bears for 100 farmers. Besides, the farmer will also have to go back to his farm and he will charge you for that cost too.
According to BBS Agriculture and Rural Statistics (2019), a household in Bangladesh owns 0.80 acres of land. They lease out 0.23 acre and lease in 0.25 acre. This means the farm operates on 0.80 ha of land. Permanent crops are produced on 0.04 acres while temporary crops on 0.64 acres.
The BBS 2023 accounts show our farmers produce 6.0 tonnes of tomatoes per acre. That means an average farmer is producing 3.84 tonnes of tomatoes. That is 3840kg tomato which can serve around 3840 households if they are each buying 1.0kg tomato a day. Suppose in a village there are 10 tomato producers who are all producing the same amount of tomato. They will now need 38400 customers around the same days to sell this produce. Since they will not be able to do so, they will need aggregators.
So here comes the Farias who gather the tomato, and transport it to the wholesale market. From there it passes through all the channels to reach your house. This massive operation takes place at such a speed that a tomato harvested at 5:30 am in Mymensingh reaches your table for lunch by noon. Bottom line is the middleman is not a problem. They are rather solutions to your problems.
Middlemen solve the problem of aggregation.The first and foremost challenge that the middlemen solve is the problem of aggregation. They create the economies of scale required to distribute products from production clusters across the nation. They may also solve the problem of product grading, sorting, and packaging depending on the type of crop.
They also solve the problem of logistics and information. The middlemen solve the problem of logistics by arranging transport and packaging the products. They solve the problem of information. Even if the farmers know how much price the wholesalers are paying in Karwanbazar, imagine what happens when all farmers want to sell at the same place. The supply increases and the price falls. Eventually, the wholesalers gain. The customer will never gain as the wholesalers will never bring the price down if not for market forces or if not regulated. Also, when all products go to one centre, prices in other market centres rise. So, the middlemen ensure price stability by ensuring that products reach all markets instead of a few.
Middlemen solve the problem of unmet credit need: Middlemen also solve the issue of credits. Farmers often do not have the working capital. Even though there are MFIs which provide seasonal loans, sometimes, the farmer needs working capital even for a small tenure. Also, a farming household cannot have multiple credits from an MFI at the same time. The middlemen at times pre-purchase at a fixed price and the farmers are forced to sell at that price. If the farmers fail to sell, then the middlemen usually exert a series of social pressures which in many cases send farmers into chronic poverty.
But do also know that in Bangladesh most of our attempts to formal contract farming in sectors like maize, oilseeds, and seeds struggled because farmers would side-sell whenever there was an opportunity to sell for a higher price than what was agreed in the contract. The contractual terms usually mean that the farmers will have to sell at an agreed price even if the price in the market is high.
Middlemen help spread knowledge: Middlemen solve the issue of production knowledge. For decades, the middlemen have been trained by NGOs and the private sector in Bangladesh as major extension service agents as the government's sub-assistant agricultural network is not enough. Farmers gather information on quality seeds, fertiliser, production methods and harvesting practices.
Middlemen play a role in setting price, too. As you now understand, the middlemen solve a range of issues. These services do not come for free. The go-betweens take a margin that accounts for the value. Here, our consumers and, to a certain degree, analysts miserably fail to understand the difference between value and margin. Value is the difference between two prices. Farmers buy inputs at Tk 10. They sell produce at Tk 100. This means they have added a Tk 90 as value. But to add this value, they have used water, labour, fertiliser, pesticides, insecticides, land, and electricity. These are costs. If you add these costs and deduct them from Tk 100, then the farmer probably has made around 30-35 per cent, provided the conditions are right.
The middleman does the same. He buys it for Tk 100 and sells it for Tk 115. His value added is Tk 15. But he might have spent Tk 10 to create the value of Tk 15. The margin is Tk 5.00.
Innovision Consulting conducted a detailed value- chain analysis of rice markets in 2016. Even though the data are old, it should help you to understand the price and value issues in practical terms. Our assessment showed that in 2016, the average cost for BINA Dhan 7 was Tk 75,200 per hectare. The sale price was Tk 15,000 per ton. The average yield was 6 tonnes/ hectare. The farmer earned a profit of Tk 14,570 per hectare. The trader sold it to miller for Tk 15,375 per tonne. Therefore, the value added for the trader is Tk 375 per tonne. The miller sold to wholesalers for Tk 36,600. The miller's value added is Tk 21,225. The wholesalers sold for Tk 37,600 a tonne--their value added is Tk 1000 per tonne. At the consumer level, the final retail price was Tk 39,600 for BINA Dhan in 2016. .
This means the farmer received Tk 15 per kg. The consumer paid Tk 39 per kg.
BINA Dhan is currently being replaced with improved varieties like BINA 17. As per market information, BINA-17 paddy is sold by farmers in Rangpur for Tk 35/kg or Tk 1400 per mound. At the retail market the price for BINA-17 rice is Tk 63-65 per kg. If prices are rising, it is because the value chain functions have been disrupted.
If the farmer is now producing less than the target, he will still have to pay to those from whom he borrowed. The middlemen, too, have borrowed. He will have to pay back.
Say there is a sudden decline in the supply of onions from India. This is an opportunity for the full value chain to take leverage and earn a bit more because when there is more supply of onion from India, the price will plummet. The actors in the value chain make money in one season and lose in the other. The more volatile and uncertain the market conditions are, the more it becomes easy for powerful syndicates to play. As they hold the majority of the commodity in the value chain, they are able to dictate prices, especially for non-perishable goods.
The question is not about letting go of middlemen, but leveraging them for common gains. I believe this discussion helps us a bit to understand the position of middlemen. Middlemen are not a problem. But there can be a problem if they are too many of them, if they are creating a coalition to bring down prices at the farm gate and increase at the retail market. These happen when we fail to regulate the market. We do not need to get rid of middlemen. We need to make the value chains more efficient with middlemen who are formally registered, trained and capacitated to serve the forward and backward linkages of the value chains.
However, there are even greater challenges to address to ensure that commodity prices in Bangladesh are stable. To make value chains more efficient and stabilise prices, we need to address issues like land fragmentation, information asymmetry, farmers' short-term credit needs, concentrated market centres, packaging, storage, transportation, and illegal toll collection at each stage from production to transportation. We will need to increase the supply of quality inputs, reduce the cost of production, and expand the capacity of the government's extension services. Instead, if we just condemn the middlemen, we will only exacerbate the woe as this gives the chance to the real offenders to hide and play!

The author is the Managing Director of Innovision Consulting.
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