Fresh produce: Ripe for change

SA's leading fresh produce farmers have formed an online trading exchange for fruit and vegetables that could circumvent the country's 19 city-based markets.

Farm Gate Exchange, with offices in Meyersdal, near Alberton, was started three years ago and is now enjoying average monthly turnover of more than R10m as farmers trade produce directly.

MD Theo Botha says the idea is a "new business model" that has drawn interest from producers, buyers and agents all over the world. In the past financial year the company conducted more than 3,000 trades worth about R125m.

"It is going well," he says. "It was prompted by the high costs of selling produce through the markets as well as the changing nature of fresh produce trading in SA.

"Markets such as the Joburg Market take 5% of the selling price and the agents take another 7,5%. That's 12,5% in total and some farmers don't even make that much net profit on their fresh produce sales.

"With farming input costs very high and increasing all the time, it is a big chunk that the farmers pay."

Dealing direct

Botha says many retailers, especially big supermarkets, are dealing directly with farmers, or have farmers contracted to produce for them. Though the turnover of the traditional physical markets is increasing, he says, the proportion of the total fresh produce grown in SA being sold through these markets is falling.

Last year the total fresh produce market in SA, according to Nielsen statistics, was worth R31,2bn. Of this, R10,6bn (34%) was traded through fresh produce markets, R9,4bn (30%) was exported and R11,2bn (36%) was sold through other channels, including retailers and wholesalers.

Farm Gate Exchange wants to grow its market share in the latter segment, and aid the industry in establishing reference prices.

"Increasing volumes are going directly from farmers to retailers," Botha says. The falling proportion of produce traded through the markets, he says, is causing concern about the credibility and relevance of the reference prices that are established there.

He notes that in 2010 less than 45% of SA's total potato harvest was sold at the country's fresh produce markets, compared to almost 62% in 1981.

Through the negotiations between producers and buyers, facilitated by agents, fresh produce markets are ostensibly the primary price determinant for produce.

Reference prices could become irrelevant

"If the downward trend continues, at some stage those reference prices are going to become irrelevant. It is why the decision was taken by leading produce farmers to create a virtual market for direct trades. It creates a secondary reference price which we believe will become the primary reference price in time."

The exchange's shareholders are leading producers, producer organisations, fresh produce agents and others (see table).

Tommie van Zyl, CEO of producer group ZZ2, says a trend is for supermarkets to take the best produce off farms, leaving the poorest quality to the fresh produce markets - "but the price is based on what goes to the market".

He says the main aim of the exchange is to set prices that "everybody, from producers to consumers, can relate to and trust".

"Farmers will be able to see that if the prices they are getting are too low they have to take action to improve their production. In the current system they waste resources by implementing baseless plans to survive."

He says though Farm Gate Exchange is currently charging 3% commission to cover its costs, when volumes grow this will be reduced. He envisages a stage where the exchange's commission on trades can drop as low as 0,1%.

"There is a need for a low-cost distribution centre for fresh produce. I believe there will always be a place for physical markets, but perhaps we don't need 19 of them in SA."

Society pays the cost

A "functional market that discovers prices", he says, is in the best interests of producers as well as consumers.

"With the present situation, society pays the cost. I don't want to portray myself as an angel, but this is in reality an attempt to keep prices down for consumers while cutting out the costs that eat away at farmers' profits."

Those costs, says Botha, include transport and the 12,5% slice lost to the market and agents.

"There is simplification of administration and predictability of farmers' income because of transparency.

"With produce delivered directly from sellers to buyers there is no scope for third parties to take possession of the goods and become involved in any underhand business."

In practice the system operates through "supply push and demand pull", Botha says.

"The farmer uploads the produce he has available and the agent then markets it to prospective buyers. Or the buyers upload their produce requirements and the agent then matches it with what he can procure, and negotiates the prices."

He says in the physical markets produce is often wasted, or the last few boxes are let go at a lower price.

"It all affects what the farmer gets out. It doesn't happen with us."

He admits that grading of produce is the "biggest risk" with goods unseen by buyers, but says individual farmers' reputations are at stake and this works well as a safeguard for quality.

"So far we haven't had an issue over grading and quality that the Farm Gate Exchange agent couldn't resolve. We have a quality inspection partner, Sitco, which can be utilised to settle disputes should the need arise."

Insurance for the buyer

Botha points out that the big retailers never pay cash for produce, so they still have their money if they are dissatisfied with the quality.

"And in cash deals the money is held in trust by the agent until delivery is taken of the goods. It is some insurance for the buyer."

Joburg Market COO Jan Mocke says it is "highly unlikely" that virtual trading platforms will put physical markets out of business.

"Virtual platforms work well when a single farmer can send a full truckload to a single buyer. However, it is impractical and costly for a farmer to deliver smaller loads to a number of buyers. By far most of the buyers prefer to buy smaller quantities. Only the very big buyers, like supermarket groups, have the capacity to buy a full truckload of a product."

He says "no impact is visible on Joburg Market figures" from Farm Gate Exchange's operations.

Physical platforms also provide services such as cold rooms and ripening facilities that a virtual trading platform cannot, he says. "A virtual platform provides only an IT system. A physical platform provides much better value."

Mocke says Joburg Market has floor inspectors and managers who constantly monitor fresh produce agents "to prevent dishonesty".

Source: Financial Mail, via I-Net Bridge