Economic systems can be broadly defined as either free markets, also known as price systems, or command systems, which are at the other end of the spectrum. In a free market system individual producers and consumers are free to choose what, how, how much and when to produce or consume goods – their financial resources being the only restriction.
This is the type of system South African agricultural producers find themselves in. In the case of a demand system all decisions regarding the what, how and how much to produce are made by a certain planning agency or individual. Both these systems have their own advantages and disadvantages.
Some of the benefits in the case of a free market system are that it allows consumers the freedom to make economic decisions, and that it ensures more effective allocation of production resources since only products that are in demand will be produced. This system, however, also has its shortfalls.
Regarding the ‘for whom’ question, this system does not guarantee equal interest for all consumers and often leads to a situation where the rich get richer and the poor get poorer. There are some resources that will not be effectively allocated, as is the case with a free market. These resources include education, public health care and so forth, which are usually referred to as public goods.
In the case of public goods, a command system is more effective in order to ensure fairer distribution of goods and services. However, the command system also has drawbacks such as the loss of individual freedom and the fundamental inefficiencies accompanying a central planning agency. In economies you usually find that the price system is accepted for general markets while a command system, or even a mixed command/price system, is used for public goods.
What is a market?
For a market to exist you need both potential sellers (supply) and potential buyers (demand). Only when both the sellers and buyers agree on a price will a market clearing price be obtained. The platform where these sellers and buyers interact with one another is referred to as the marketplace. Traditional marketplaces used to be physical spaces, but with the development of technology marketplaces have now become virtual.
With the focus specifically on the livestock industry, auctions can be regarded as the easiest platform on which producers can market their livestock. Auctions are usually hosted by an auctioneering company. The company can either use their own auction house, a privately-owned auction house, or an auction house belonging to a farmers’ union. These auctions are held monthly, every two weeks or even weekly, depending on the supply of the area’s producers.
When this platform is used to market livestock, sellers should keep in mind that auctioneering companies usually receive a commission for their services and that this amount will be deducted from the price obtained at the auction.
In addition, sellers have the right to stop the finalisation of the sale if a certain price is not obtained from the bidders.
Besides auctions, large numbers of livestock are marketed through livestock agents. This is more likely the channel used to market breeding animals as opposed to auctions, which are more frequently used to sell weaner calves or fattened animals ready for slaughter. Producers with animals that are ready to be sold contact the agent and provide information on the available animals, as well as the asking price for the animals.
On the buying side, potential buyers contact the agent to enquire about the availability of the livestock they wish to purchase. Again, commission will be paid by the seller to the agent when animals are purchased through the agent. Livestock buyers should ensure, as far possible, that they only do business with accredited livestock agents. More information on this matter is provided in the legal aspect section.
Advancements in technology caused virtual marketing strategies to adapt – for instance, potential buyers can now visit a website and use search filters to identify the types of livestock they want. General online marketing platforms selling all types of goods were originally used for this purpose, but livestock only and agricultural only marketing websites have been created in recent years.
A small number of cell phone applications have been created for this use, although it might still take some time for producers to become accustomed to it. These applications make it easy for sellers and buyers to view livestock online and enquire as to their availability without making a single phone call.
The Johannesburg Stock Exchange (JSE) and its South African Futures Exchange (SAFEX) subsidiary provide role-players in the livestock industry with risk management tools such as beef carcass contracts, lamb carcass contracts, and Merino wool contracts – contract months for all three are March, June, September and December.
The beef and lamb contracts are operated in partnership with the Red Meat Abattoir Association (RMAA) and contracts are cash-settled. The Merino wool contracts are also cash-settled and are made available to producers via a partnership between the JSE and Cape Wools SA.
A carcass contract for both beef and lamb consists of 1 000kg of chilled class A2/3 carcasses, while a wool contract has a weight of 100kg for clean wool and 150kg for greasy wool. Producers should keep in mind that these contracts are not meant to make larger profits, but should rather be used as a tool to protect themselves against unpredictable price movements in the livestock industry.
Feedlots, abattoirs and butcheries can benefit from the added advantages offered by these carcass contracts – this, however, might not be the case for farmers who produce weaners.
Besides the requirements mentioned, there are also other requirements that interested parties should familiarise themselves with before taking on the markets.
Legal aspects of agents
South Africa has legislation in place with regard to fresh produce, exports and livestock agents and how they should go about their business. Legislation regulating these agents is contained in the Agricultural Produce Agents Act, 1992 (Act 12 of 1992) as amended by the Agricultural Produce Agents Amendment Act, 2003 (Act 47 of 2003).
Livestock agents can register with the South African Federation of Livestock Agents (SAFLA) on a voluntary basis. The Agricultural Produce Agents Council (APAC) has a website (www.apacweb.org.za) that can be consulted for more information regarding the registration process of agents.
Both livestock sellers and buyers can visit the website to determine whether the livestock agent whose services they want to make use of is registered with the appropriate authorities. Making use of a registered livestock agent should provide greater peace of mind that animals sold will be paid for, or that animals paid for will be received. This precaution is one of the simplest steps role-players in the livestock sector can follow to ensure that livestock sales are regulated and that the chances of stock theft is reduced.
While the SAFEX contracts are a relatively new concept among livestock products, grain producers are much more acquainted with contracts for their products. The JSE currently offers futures and options on white maize, yellow maize, wheat, soya beans and sorghum.
Contrary to the contracts mentioned earlier, these contracts can be settled physically at expiry to fulfil a futures contract. Opposed to making use of contracts to reduce the risk of price changes, grain farmers can sell their harvest at the time of harvest and accept the spot market price, or they can keep their harvest in a silo and wait (gamble) for more favourable market prices before selling their crop. When following this concept producers will have to pay the storage cost fee to the silo if they are not making use of their own storage facilities.
Producers of vegetables are probably one of the most vulnerable agricultural groups, due to the short shelf life of some of their products. This industry (along with dairy farmers) is probably the one most affected by the bargaining power of the buyers. Opposed to taking produce to local fresh produce markets, these producers should rather engage in contract farming where the producer and buyer have agreed on a price before production commences.
Increase market power
The majority of agricultural products can be seen as commodities. This implies that the producer is a price taker and his/her willingness to sell depends on the current market price as well as the demand for the product.
If producers want to increase their market power in order to negotiate a higher price for their products, they can consider joint negotiation. This will allow a group (instead of individual) to bargain for a higher price by providing the buyer with a larger quantity of produced goods.
On the purchasing side, the group can negotiate lower prices for inputs when purchasing larger quantities of inputs. If this can be done successfully, producers can realise a larger profit due to lower input costs and higher prices received for products.
Besides forming a group, producers can consider forward market integration – in other words, moving closer to the consumer. This will reduce the bargaining power of the usually small number of large buyers found in the different agricultural commodity markets, and lead to a larger share of the price paid by the consumer ending up in the pockets of the producer.
On the opposite side, forward market integration increases the producers’ risk due to larger investments that are made when, for example, investing in the processing of raw materials.
Producers who want to earn a premium on their produce can consider branding their product. This will allow consumers to associate the brand with a certain quality standard. In addition, if consumers are satisfied with the quality of the brand, they will be more at ease paying a higher price for it.
In the red meat sector, the South African Meat Industry Company (SAMIC) has been assigned the responsibility of auditing the registered quality indication marks. These audits are conducted at farms, abattoirs, feedlots, deboning plants and outlets.
Each of these quality indicating marks, which could be seen as a manner of branding red meat, has its own set of specifications according to which the product must be produced before the mark can be displayed on the product. Branding a product in such a way increases trust, which assures consumers of the quality of the product they are purchasing. Individuals who want to find out more about the existing marks and their specifications can visit the SAMIC website (www.samic.co.za).
A buzzword in modern marketing is niche markets. Catering for a niche market means that you have identified a small market that has specific requirements for the product it demands. Consumers in this market are also willing to pay a premium for the product. These markets are usually found among rich consumers or consumers who have specific dietary or religious requirements.
Nevertheless, it might be safer for producers who wish to enter a niche market to first produce small quantities of the product and to test the sustainability of sales and the preferences among consumers before significantly investing in such a venture.
Food for thought
Producers in the agricultural sector will remain price takers as long as they keep on producing commodities. As an alternative they should rather strive to produce differentiated or branded products. If a producer can only sell the majority of the harvest as commodities rather than products, it should be attempted to market at least a portion of the produce in a higher earning market. This will potentially generate a higher profit on the higher value portion of the harvest sold.
Producers who have acquainted themselves with the available contracts should use them to lower the risk in the market. With the growing middle class in South Africa, more and more niche markets will appear that can provide profitable opportunities for producers who are able to provide unique products. This is due to more consumers seeking a different experience when spending their money. – WA Lombard, University of the Free State
For more information or references, send an email to LombardWA@ufs.ac.za.