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What are marketing costs and why do they vary?
Produce preparation and packaging costs
We assume that harvesting of produce and the movement of that produce to the farm gate or packing shed is part of the production cost. Thus the first marketing cost incurred is produce preparation. This includes cleaning, sorting and grading. The second cost that is usually faced by farmers and/or traders is packaging. Types of packaging used may range from a simple jute bag which may account for less than one percent of the marketing cost to sophisticated plastic packaging for direct shipment of fruits to consumers in supermarkets, which would account for much more.
Handling costs
At all stages in the marketing chain produce will have to be packed and unpacked, loaded and unloaded, put into store and taken out again. Each individual handling cost will not amount to much but the sum total of all such handling costs can be significant.
Transport costs
Once packed, produce is then transported. In many countries the initial transportation may be done by the farmer or his labourer, carrying the produce themselves or using animal-drawn carts. Alternatively, traders may send agents around to farmers to collect produce for assembly in one central area. As noted in the Introduction, costs will vary according to the distance between farmer and market. But they will also depend on the quality of the roads. A farmer living close to a main highway will probably face much lower transport costs than one living at the end of a rough road which causes much damage to trucks and is often impassable. Transport costs will be lower in countries where trucks and fuel are cheap than in countries where import duties are high. Truck owners have to buy their trucks; costs will be lower where bank interest charges are low than where they are high.
Sometimes transport costs are a simple matter to calculate because the farmer or trader pays a set price per kilogram to the transporter. But what do we do when produce is carried on a "per container" basis or when farmers or traders hire a complete truck and transport a variety of crops? How do we calculate a trader's transport costs if he owns his own vehicle?
Product losses
Losses are common with agricultural produce marketing. Even if nothing is actually thrown away products may lose weight in storage and transit. Thus one kilogram of a product sold at retail level cannot be compared with one kilogram sold by the farmer. Sometimes very high losses can be recorded, particularly for perishable fruits and vegetables. Losses will probably be highest in the main season when "gluts" of produce mean that much has to be thrown away unsold. In general, the longer the distance between farmer and consumer the higher the likely loss.
The treatment of losses in marketing cost calculations can be fairly complex. In particular, produce which is bought but not sold can still incur costs such as packaging, transport and storage. If there are no quantity losses there can still be quality losses and this is reflected in the price at which produce is sold.
Storage costs
Storage is an important cost for many products. The main purpose of storage is to extend the availability of produce over a longer period than if it were sold immediately after harvest. The assumption behind all commercial storage is that the price will rise sufficiently while the product is in store to cover the costs of storage. Such costs will vary, depending on the costs of building and operating the store but also on the cost of capital used to purchase the produce which is stored. If a store is used to its maximum capacity throughout the year costs will obviously be much less than if it is only used for a few months and is, even then, kept half empty.
Processing costs
Processing is often an important marketing cost. Grains such as rice and maize have to be milled. In working out total marketing costs we need to consider the conversion factor from unmilled to milled grain, as well as the value of any by-products. The price paid to the farmer for one kilogram of paddy cannot be directly compared with the price paid by the consumer for one kilogram of milled rice because they are not the same product. It is surprising how often something as simple as this is overlooked. Similarly, a coffee farmer can't compare directly the export price for a kilogram of green beans with the price he receives for cherries or even parchment coffee.
Processing costs can vary according to the efficiency of the organization doing the processing, the processing facility's throughput and the frequency of its operation. It will also vary according to the organization's costs which can depend on factors such as fuel costs, depreciation costs, import duties, taxes and wages.
Capital costs
Capital costs may not be very visible but are extremely important. To operate, a trader may have to borrow money from the bank. The interest he pays on that money is a cost. If a trader uses his own money we cannot then say that he has no costs since he could have left the money in the bank to earn interest instead of using it for trading. The cost of using his own funds is thus the interest he is not receiving. Economists call this an opportunity cost.
There are other opportunity costs. For example, a trader could perhaps be using his time to do other work. For him to want to be involved with marketing the profit he makes from marketing must be more than his alternative income opportunities. Often it must be significantly more, particularly when he runs the risk of losing money.
Fees, commissions and unofficial payments
The costs considered above are the major costs which are faced in marketing agricultural produce. But there are many others and people involved with measuring costs need to keep all of them in mind. While they may be low in one country they may make up a sizeable proportion of costs in another. People using markets have to pay market fees. Often they will have to pay to have their produce weighed. Traders normally have to be licensed and pay licence fees. In some markets wholesalers charge commissions. Taxes have to be paid and, sometimes, bribes are needed whether at road blocks when transporting produce or to get permission to operate a business. All these costs have to be built into the calculations.
Prices and margins
Finally, costs have to be related to prices received. In a retail market in the morning tomatoes may be selling at a high price which appears to give the trader an excellent profit. By the evening, however, the trader may be selling them at a far lower price as he knows that the next day a supply of fresh tomatoes will be arriving. This must be kept in mind when comparing the selling price with the amount paid to the farmer. The price paid by the eventual consumer is thus made up of the amount of money paid to the farmer for his produce plus all of the costs involved in getting it to the consumer in the form in which he or she purchases it and a reasonable return to those doing the marketing and processing for carrying out these functions. The percentage share of the final price which is taken up by the marketing function is known as the marketing margin.
Sometimes the marketing margin can be quite a high percentage and this may be used to argue that farmers or consumers are being exploited. However, high margins can often be fully justified by the costs involved. Without an understanding of those costs and how they are made up it is impossible to know whether margins are reasonable or not.