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Glut or glory?

Matching on-farm production to market demand

By Andrew W. Shepherd

Piles of rotting produce clogging wholesale markets, mouldy fruit getting mouldier by the day in cool stores, inadequately covered maize stored outside in the rainy season, distraught farmers dumping mountains of tomatoes-such sights are all too familiar in the developing world.

The technical reasons for losses are well known, and since 197X have been the focus of FAO's program on Prevention of Food Losses (PFL): waste can be avoided by improving handling and packaging to minimize damage to produce, designing shops to lengthen shelf life and storing foodgrains to reduce pest damage.

But all this is pointless if people don't want-or more likely can't afford-to buy the food that's being so well handled, skillfully packaged and correctly stored. Governments, civil servants and even donors too often overlook the fact that food losses result not so much from poor handling or storage, as from the fact that too much is produced at one time for the actual demands of the market

Why does this happen?

The simplest answer is that surpluses occur because farmers-whether sophisticated, mechanized farmers in the wealthy countries or poor smallholders in developing nations-tend to do what other farmers are doing. This “terd instinct” is often a response to market price fluctuations. High prices in one year encourage farmers to plant the crop in the next. With over-abundance prices collapse and few farmers plant the crop in the following year causing prices to rise again.

The cycle begins anew. Eastern European farmers freed from the restrictions of central planning are already discovering that private enterprise farming can be frustrating. In Bulgaria, it was zucchini. High prices for the popular vegetable encouraged lots of farmers to plant it-with disastrous financial consequences.

A glut of limes

Poorly planned crop development-especially failing to relate development targets to effective market demand-can also cause surpluses. In Sri Lanka some years ago a horticulture project distributed lime tree seedlings to farmers. Unfortunately, these farmers lived in areas that already produced seasonal gluts of limes, so much of the fruit was left to rot on the tree or remained unsold in the market. Farmers in areas that produced limes outside the main, glut season were not receiving any seedlings, yet they could have harvested limes when there was a shortage. The visit of a marketing specialist talking about production planning for the market was resented. The attitude seemed to be, “It's our job to grow the stuff and your job to sell it.”

A market opportunity may encourage several development activities in one country or region when only one program is needed to meet demand. Where schemes are large, the potential impact of project area output on total market supply may not be considered until it's too late. That happened in the Middle East with projects to plant fruit trees in several countries. The agency involved only began to be concerned about possible market saturation more than half-way through the planting program.

A related problem is that development projects frequently target particular areas of a country to promote crop production. This is often for the best of reasons. Perhaps the farmers are poor and could benefit from income-generation activities, and the soils and environment are suitable for a particular crop. But the farmers may be poor because inadequate communications restrict their market outlets, and under these circumstances it makes little sense to promote increased production unless roads are also improved and a functioning marketing system is in place. A project in a West African country encouraged potato production in a remote inland area, but most of the potatoes were left to rot because of poor roads and no transport. Meanwhile, the Central Bank was reportedly granting foreign exchange to importers to supply the capital with potatoes.

The problem with onions

While mistakes at the project level can cause waste and dishearten farmers, mistakes in government policy, particularly pricing policy, can create significant food and financial losses. Faced with a glut of onions, the former South Yemen asked for advice on storage. An FAO consultant concluded that the problem wasn’t storage but the practice of offering farmers the same price for onions throughout the year. This provided no incentive for off-season production. The pricing policy was reviewed, and farmers started to produce year-round, significantly reducing the need for storage.

Some years ago, a West African country had a disastrous experience with onions. A scheme to promote production both for the local market and for export foundered when the Marketing Board was left with large quantities on its hands. It had undertaken to buy all onions produced, with no stated quality requirements. Farmers responded enthusiastically to over-generous buying prices, but there was no outlet for the onions because they were the wrong varieties for the world market. Meanwhile importers continued to import onions because no one had told them of the plans to expand production. Cd'Ivoire take heed (see FAO in Action, p. 15).

Onions seem particularly vulnerable to overproduction. Alfred Scherer, a former chief of FAO's Marketing and Credit Service. recalls that when he was working in Uganda in the 1960s an FAO irrigation project promoted yellow and white onion varieties because they produced the best yields in field trials. Production results were just as impressive, but most of the crop was left to rot because consumers had always used red onions and were not prepared to change their taste.

Businesses can be ruined when enthusiasm for production is so great that marketing aspects are ignored. In the FAO publication “Marketing Improvement in the Developing World,” John Abbott, former chief of FAO's Marketing and Credit Service, writes about “Uncooperative Melons.” In Chad, a successful melon exporting business was ruined in the early 1970s by a politician, who set up a cooperative to take over from a private trader. The cooperative attracted foreign aid and technical assistance to promote production but paid no attention to marketing. The business collapsed, leaving farmers with tons of unsold melons.

Too many melons

A South Pacific island also had a not very positive experience with melons, this time watermelons grown for export to New Zealand. So great was the enthusiasm among farmers that production and exports increased without any regard to market demand. The produce did not go to waste because consumers in Auckland and elsewhere snapped up the melons at bargain prices, but the farmers suffered. The returns from exporting were so low growers could not cover transport costs, let alone the costs of production.

Governments often offer technical solutions to market surpluses instead of trying to relate production more closely to demand. One favorite-and usually mistaken “solution” is to set up a processing factory to absorb the surplus. Frequently factories are planned without fully considering demand for the processed product they will turn out. Surpluses of raw material can be vulnerable to price changes and often last for just a few weeks. These are just two reasons why there are so many white elephant factories in the developing world.

To be successful, a factory needs a market that will pay enough so it can pay farmers good prices to provide raw material on a regular basis. If these conditions are not met from the outset, the factory will almost certainly fail.

Storage is another often mistaken solution to surpluses. The idea is that in times of oversupply, produce can be held in store and marketed when prices rise. Yet only a relative few crops are suitable for long-term storage-potatoes, carrots, onions, citrus and apples. Much horticultural produce can be stored only for short periods, which are rarely long enough for prices to rise. And, when produce is brought out of store, it may have lost freshness and quality and suffer from competition with fresh produce. As a result, produce stored so that it will not be sold at a loss sometimes ends up being sold at an even greater loss.

What can be done?

But the situation is not hopeless. Much can be done to try to bring production more into line with market demand and so help reduce postharvest losses.

· Farmers extension workers, development experts and research scientists all need to know! market requirements. They need to understand not only the quantities that can be sold but also the varieties consumers prefer and the ranges of quality for which various classes of consumer can pay. Production specialists need to base their recommendations more on what is most profitable for the farmer than on what grows best in a particular area. To be profitable, farmers have to supply consumers with what they want, and consumers don't necessarily want the variety that gives the best results on a research station.

· Small investments of time and money to research market requirements and the capacity of the marketing system to handle increased quantities help to avoid expensive mistakes. That such research is rarely undertaken may be because of the production orientation of government officials and development specialists, who are responsible for promoting new crops or expanding production of existing crops. This suggests a need for a more multidisciplinary approach when planning development projects. Marketing specialists should be brought in at the beginning to advise on what crops to grow, not at the end to try to sell what has been produced.

· Governments can promote awareness of market needs. Some countries operate market information services, which report on price movements in the major markets of their country. These help farmers decide when to harvest and to which markets they should send their produce. Gluts are minimized and farmers are paid higher prices. Traders can also use the information to divert produce from markets where there is a surplus and prices are low to those where higher prices indicate a shortage.

· Long-term price information can help extension workers advise farmers which crops to plant and when. Using this information, farmers can experiment with early and late varieties to extend the harvesting and marketing seasons. More sophisticated farmers can use plastic tunnels and greenhouses to stagger planting and harvesting dates. Out-of-season production can bring in very high returns and is often more economical than long-term storage, and farmers in developing countries are becoming increasingly aware of these opportunities.

· Governments can encourage production of important crops in areas with the right microclimates. Extending the harvest period is usually more effective than constructing cool stores. In one of Asia's centrally planned economies, the government wanted to reduce storage losses of the country's staple vegetable. Each province was required to be self-sufficient in this staple and interprovincial movement of the crop was not permitted. Although the crop would only grow for a few months of the year in each province, it was growing in one part of the country at any time of year. FAO recommended lifting restrictions on produce movement and placing less emphasis on expensive Improvements to long-term storage.

· Government policy should not encourage overproduction. This applies to grains such as rice and maize in particular. Because these crops can be stored, excess production is not as important a problem as it is with horticultural crops. But long-term storage will cause physical loss as well as quality loss, especially where storage facilities are inadequate. This happened in several African countries in the 1970s and 1980s when government-controlled marketing parastatals subsidized farmers. The result was annual surpluses, which could not be marketed and for which there were no storage facilities. Many governments impose controls on grain movements within their countries. The controls are meant to safeguard regional food security but can often have the opposite effect. If traders cannot legally move produce from one area to another, grain will lose quality in storage where there is a glut, while people go hungry where there is a shortage.

Marketing extension

Extension workers ought to be able to advise farmers not only on how to plant and harvest, but also on what and when to plant and when to harvest. To do this, they need an appreciation of the market for produce. FAO's Marketing Group promotes the concept of “marketing extension,” encouraging extension services to train extension workers in marketing and to appoint a core group of so-called subject-matter marketing specialists within the extension service.

Advice on how to match production to market needs will be extremely important for farmers in Eastern Europe and the former Soviet Union as their countries move from command economies to economies based on free market principles. Where huge state farms produced to pre-set targets, the transition to a market economy will be far from easy.

The challenge will he to develop a clear understanding, at the outset. among farmers and their governments of what is really meant by producing for the market.