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If a trader buys one kilogram of produce from a farmer, how much of that one kilogram will he actually end up selling? And what will be the average price of what he sells? Post-harvest losses of produce, particularly fresh produce, can be quite considerable, both in terms of quantity and quality (which will affect the selling price).
The causes of losses are many and varied and will not be considered in detail here.2 One of the biggest causes is often the fact that the farmer produces more than the traders want to buy or the traders buy more than they can sell to the consumers. When there is a surplus, physical losses will be high and/or farmers and traders will have to sell at a loss.
Poor harvesting techniques and bad handling on the farm (bruising, exposure to the sun) can mean that much damage has been done even before the produce is sold to the trader.
Poor handling by the trader and his employees can make the situation worse. When truckers are paid on a "per piece" basis, farmers and traders try to squeeze as much as possible into the package. This can be a false economy as the loss resulting from the damage caused can exceed the savings in transport costs. Produce can be damaged in transit, by the constant shaking on bumpy roads, by exposure to sun on top of a bus, by high temperatures inside a truck or other vehicle (if a truck breaks down and has to sit at the side of the road for two or three days the entire consignment could be lost). Delays and bad handling at the wholesale market can make things worse. Sometimes, for example, produce which has been well packed by the farmer or the trader is simply thrown onto a heap on the floor of the wholesaler's premises, causing further bruising and damage.
At all stages of the marketing chain some produce will be thrown away. This may be planned, as in the case of cabbage leaves discussed earlier, but in most cases it will be the result of losses caused by bad handling. Sorting should occur at all stages of the marketing chain to separate damaged from good produce.
Losses in weight can occur even if produce is not thrown away. Most crops lose weight during transit and storage as the result of moisture loss. This is not necessarily a bad thing. For example, grain stores better when dry. But it does mean that a kilogram of produce purchased from a farmer is not equal to a kilogram sold to a consumer by the trader.
Therefore, try to estimate the losses. This will not be easy unless you are able to follow consignments all the way through the marketing chain. Also, losses will vary according to the season; poor quality fruits which are unsaleable during a glut when prices are low may well be saleable when there is a shortage. Most Ministries of Agriculture have assessments of losses and these can be used as a starting point for estimates. However, there is often a tendency to exaggerate losses, so official figures should be treated with caution.
The best way to treat losses is one that enables you to compare the quantity eventually sold with the quantity bought from the farmer. It gives the most accurate calculation and also means that the costs involved in packing, transporting, handling and storing produce which is eventually lost are included. An example of this calculation is shown in Figure 3 together with the more usual, and wrong, method of calculation.
Figure 3
Calculating the cost of product losses
Assume that, at 10 percent loss levels, 1 kg of tomatoes purchased by the trader from the farmer results in 900 grams (0.9 kg.) available for sale to consumers. The trader buys tomatoes from the farmer at $5 per kilogram and marketing costs are $2 per kilogram for the tomatoes originally purchased. The selling price of tomatoes is $8 per kilogram.
Then the costs are ...
1 kg purchased at $5 per kg =
$5.00
1 kg packed and transported at $2 per kg
= 2.00
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Total Costs = $7.00
Sales Revenue or $8 x 0.9 kg = 7.20
Thus the margin to the trader = $0.20
Below is an example of the more usual, and wrong, method of calculation.
1 kg purchased at $5 per kg =
$5.00
1 kg packed and transported at $2 per kg
= 2.00
10 percent losses or $5 x 0.1 =
0.50
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Total Costs = $7.50
Sales Revenue or $8 x 1 kg = 8.00
Thus the margin to the trader = $0.50
The second calculation is clearly wrong because here the trader is seen to be obtaining revenue from produce which has already been "lost".
Note: We will return to the correct methodology in Chapter 9 where a worked example of a marketing cost calculation is given.
There are quality as well as quantity losses. Quality losses reveal themselves when the trader has to sell part of a consignment at a lower price than the rest. This could be because some produce is damaged in transit, because produce deteriorates over the period it is being sold or because the trader expects that it will deteriorate before he has another opportunity to sell it. In many countries perishable fruits and vegetables are sold at low prices on Saturday evenings because markets are closed on Sundays. Such produce may be unsaleable on the Monday morning because it has to compete with fresh produce.
In estimating the price the trader receives for produce he or she has probably purchased from the farmer at a fixed price per kilogram, you must therefore take account of the fact that all of the consignment is unlikely to be sold at one price. Not only will there be price variations due to quality differences but prices will vary according to supply and demand in the market. To calculate the average price the trader receives you must therefore calculate a weighted average price. An example of this calculation is shown in Figure 4.
Figure 4 shows a very different picture of trader revenue than if we had followed him or her to the market and taken the price of his or her first sale, which would probably have been at $2 per kilogram.
Figure 4
Calculating weighted average selling price
Assume an example involving a consignment of 100 kg of tomatoes as follows ...
50 kg sold at $2.00 = $100
20 kg sold at $1.40 = 28
20 kg sold at $1.00 = 20
5 kg sold at $0.40 = 2
(5 kg which cannot be sold)
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Total Revenue = $150
Then the average selling price per kilogram is ...
$150 ÷ 100 kg = $1.50