This paper studies the phase difference between supply and demand for agricultural products and posits an alleviating means assessing its implications on income distribution throughout the food production chain.
Food is our fuel, crucial to our survival, the genesis of food production; a farmer, is ironically still scoring sorry wage rates and drowns below the poverty line. We dismantle the food production chain to study the distribution of the 9 trillion dollar income in this industry across participants in the agricultural supply chain which employs 30%¹ of the workforce.
To begin with: We examine the journey of food from the spot on earth where it grows to the grocery store we shop from on a weekend. We are calling this ‘garden to shelf’.
Farmers grow products based on conduciveness of their climates and time planting and subsequent farming processes based on anticipated weather.
On harvesting, the available market are bulk buyers, who give them offers based on the available supply. The economics is biased since the buyers have perfect information of the amount of supply and can therefore assess the willingness to sell, while farmers have no knowledge of the demand ergo no means to assess willingness to buy.
The wholesale market occurs in 2 steps between bulk buyers/exporters, who correspond with foreign traders and between them and demand participants such as grocery stores, processing industries.
Domestic traders have access to information of surpluses when the products are in season but foreign traders often do not, similarly foreign trader have information on product shortages which increased demand, but often do not extend the information into the wholesale market.
This creates an effect of damped prices, as the the traders only extend information that causes loses to them over to the supply/demand, but retain information which creates abnormal profits for them.
Welfare is lost by the existence of these two information silos.
Demand participants usually find suppliers on a tender basis. hough this is based on the premise of reliable supply, it constricts competition since it creates a silo market with one buyer and one seller and the lack of competition inside this silo avails to loss of the buyer’s welfare since the seller only supplies on demand, so there can only be a shortage.
Farm to retail price spread
We wish to understand the percentage share of the farm-gate price on the retail price of the commodities. How much does the farmer earn on the retail price we pay at the grocery store. We found farmers to only score an average of 6% on the retail price² for select commodities³.
Selective price changes
In addition, positive price changes in the market are often damped by the intermediaries.
There’s a better way
What happens in the Tillage dome?
With perfect information, where famers trade with buyers, farmers’ income increases by 283%. This can be asserted from the difference* in farm-gate price in high demand countries, such as the US and vs the ones in tropical countries, with higher quality products.
Positive price changes can also be propagated to increase the farmer’s surplus and improve the collective welfare of the economy.
Seeing that the demand and supply participants at both ends are operating inefficiently. Most affected being the farmer, we understand their main challenges to be:
- Lack of market information
- Ill-timed production
- No information of prevailing demand trends
- Absence of decision making in choice of produce due to lack of data
- Low offers because of ignorance of prevailing market prices
For the farmer:
- Availing farmers with direct access to demand
- Constant updates on prevailing market conditions such that positive price changes propagates to benefit the farmer.
- Market intelligence for production decisions.
To eliminate intermediaries, we need to substitute their role, since farmers do not possess the information about logistics export processes, and may not have facilities for storage or transport.
With an online service that can connect farmers to the respective companies, and automate the pricing and logistics, a farmer can supply demand 5000 miles away without leaving their farm.
Demand participants remain with a problem of reliability of supply, which an online service that has a myriad of suppliers to select from, fixes. Security of supply comes from the assurance that there’s always going to be enough suppliers on the platform to select from and create no cause to enter a tender with one supplier.
The economy also benefits from improved welfare with the perfect competition environment that comes with numerous buyers and sellers and prompt flow of information.
Tillage is reconstructing the agricultural supply chain on foundations of blockchain, IoT, and Data Science to build this direct link. You can find out more.
- ¹ Visualizing the Importance of Agriculture in the World’s Economy (Raul Editor et al.)
- ² Price spreads and Food Markets. (USDA ERS)
- ³ Apples, Bread, Broccoli, Cheddar cheese, Flour, Grapefruit, Grapes, Ice cream, Lemons, Lettuce, Oranges, Peaches, Potatoes, Strawberries, Sugar, Tomatoes, Whole milk
*Some precise data elements have been redacted from the research for publication as they’ve been deemed commercial secrets, interested parties may seek access to internal publication from Tillage.